Financing the Energy Transition in Emerging Markets and Developing Economies

By Luz Martinez Head of Sustainability, ILX

Sofia Vega Communications, ILX

The scientific consensus is unequivocal: to avoid the most severe consequences of climate change and safeguard a liveable planet, global temperature rise must be limited to 1.5°C above pre-industrial levels.

Yet, the 2023 Synthesis Report from the Intergovernmental Panel on Climate Change (IPCC) makes it clear that current climate government pledges – known as Nationally Determined Contributions (NDCs) – fall significantly short. Based on existing commitments, global emissions are projected to exceed the 1.5°C threshold, potentially triggering irreversible damage to ecosystems, economies, and communities. At present, Global Greenhouse Gas (GHG) emissions stand at approximately 50 GtCO₂e. To achieve net-zero emissions by 2050, these must decline to below 10 GtCO₂e annually. The scale of transformation required is unprecedented, and the energy sector, responsible for nearly three-quarters of today’s emissions, is central to this challenge.

The Critical Role of Emerging Markets and Developing Economies in Driving the Energy Transition

Emerging Markets and Developing Economies (EMDEs) are critical to this transformation. Despite possessing 70% of the world’s solar and wind potential and over half of the essential minerals needed for renewable technologies, these regions receive only a modest share of the global clean energy investment. According to BloombergNEF, clean energy investment reached a record $2 trillion in 2024, yet the majority of this capital was concentrated in developed economies.

Development Banks as Strategic Conduits for Energy Transition Financing in EMDEs

Multilateral Development Banks (MDBs) – such as the Asian Development Bank (ADB), African Development Bank (AfDB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB), and the International Finance Corporation (IFC) – and Development Finance Institutions (DFIs) play a central role in financing the energy transition in EMDEs. Historically, MDBs and DFIs have accounted for the largest share of international climate finance, contributing over 50% (40% from their own books, and 10% mobilised) to the previous USD 100 billion target set in 2009 in COP15. This goal was ultimately met in 2022. These institutions are also expected to play a central role in achieving the New Collective Quantified Goal (NCQG), adopted at COP29 in Baku, which raises the global ambition to USD 300 billion annually to support climate action in developing countries.

MDBs and DFIs not only have the mission and ambition to scale up investments to support the energy transition in EMDEs, but historical data from the Global Emerging Markets (GEMs) database also demonstrates the strength of their credit performance. Credit assets structured and arranged by MDBs and DFIs exhibit low default rates and high recovery rates. Moreover, the correlation between GEMs default rates and those of S&P-rated firms is relatively low at 0.46, underscoring the distinct risk profile of MDB/DFI portfolios.

These favourable outcomes reflect the unique capabilities of MDBs and DFIs, including their deep local presence, sector-specific expertise, and country-level experience. Their robust credit processes incorporate rigorous credit and ESG due diligence, conservative loan structuring, active project monitoring, in-house legal support, and dedicated restructuring teams. Furthermore, the preferred creditor treatment (PCT) often granted to MDBs and DFIs enhances their ability to recover value in distress situations.

Additionally, MDBs are increasingly adopting an “originate-to-share” model, a strategic approach in which they originate and structure development projects and subsequently share the associated risks with private sector investors. This model enables MDBs to leverage their capital more effectively, thereby mobilising greater volumes of private finance to support sustainable development goals.

Innovative Vehicles to Mobilise Energy Transition Capital to EMDEs

Involvement of MDBs and DFIs in the projects can increase investors’ confidence when investing in EMDEs. However, innovative vehicles to effectively connect the public and private spheres are still necessary. In response to the challenges above, ILX Management B.V., with incubation support from the German, Dutch and UK governments, launched ILX Fund I in early 2022. This $1.05 billion SDG-focused private credit fund targets EMs and co-invests alongside MDBs and DFIs through B-loans syndicated loan participations in sustainable development projects on behalf of leading Dutch pension funds. After a successful deployment and with over 60 investments in 23+ emerging markets, ILX launched ILX Fund II with commitments from Danish pension fund investors, bringing the total assets under management to $1.7 billion. The funds aim to unlock large-scale pension fund capital, focusing on sectors aligned with the SDGs, including climate mitigation and clean energy.

The ILX model addresses several challenges that have traditionally hindered institutional investments in development finance. First, it builds on the origination and due diligence capacity of MDBs and DFIs, thereby mitigating credit and political risks. Second, by focusing on debt co-investments, ILX offers institutional investors access to diversified, fixed-income products that align with their return requirements and fiduciary mandates. Third, the fund prioritises additionality — investing in markets and sectors where private capital would not typically venture, ensuring both developmental impact and commercial viability.

Use of Proceeds in EMDE Transition Finance

Loan agreements from MDBs and DFIs typically incorporate well-defined Use of Proceeds (UoP) clauses, ensuring that funds are dedicated to clearly specified environmental or social projects. This becomes instrumental when financing companies operating in high-emitting sectors within the energy industry or in other hard-to-abate manufacturing sectors, such as steel, aluminium, and cement, when the objective is to support companies in their shift toward a lower-carbon future1. Contractual arrangements explicitly outline how proceeds will be allocated to finance (or refinance) low-carbon technologies or other emission reduction solutions to support companies in their decarbonisation efforts.

Equally important is the broader assessment of a company’s overall commitment, capacity, and incentives to meet the goals of the Paris Agreement, extending beyond the specific UoP project supported by the facility. These expectations are calibrated according to the counterparty’s transition stage. Moreover, in sectors where the risk of workforce retrenchment is significant, supporting a Just Transition and striving for fair social and economic outcomes is another vital consideration.

1. Notably, if the UoP are not contributing to climate finance solutions because the objective of the investment is, for instance, social and/or there are no readily available or cost effective solutions for this sector, the activities being financed are required to be aligned with the mitigation goals of the Paris Agreement.

Transition Finance Case

With over USD 600 million invested in climate finance solutions across sectors, including renewable energy, sustainable transportation, green buildings, and energy efficiency, ILX has financed more than 40 projects that help companies and financial institutions in EMDEs advance their climate objectives. Notably, a number of these projects have involved supporting companies that continue to generate revenue from high-emission activities and are committed to transitioning away from carbon-intensive operations.

One prominent example of transition finance is ILX’s support to a utility company in Chile, through participation in a USD 400 million green and Sustainability-Linked Loan (SLL). The facility was used to re-leverage two solar energy projects in northern Chile, with a combined capacity of 268 MW, and to finance associated battery energy storage systems. As a green and sustainability-linked loan, interest payments are tied to the achievement of three predefined key performance indicators (KPIs):

Decommissioning or conversion of the company’s remaining 1 GW of coal-fired power plants by the end of 2026;
Addition of at least 500 MW of renewable energy capacity by the same date;
Increasing the proportion of women in management from 24% in 2022 to 31% by 2026.

Beyond the specific Use of Proceeds outlined in the facility, this energy company also committed to phasing out 1.5 GW of coal capacity by 2025 and developing 2 GW of renewable energy. ILX assessed the credibility of the company’s transition plan using criteria such as carbon performance, management quality, financial robustness, and alignment with the Transition Pathway Initiative.

Importantly, the company also adopted a proactive approach to the Just Transition, engaging senior management, labour unions, and both local and national governments over several years. The development of new renewable energy assets enabled the redeployment of staff from coal plants to other facilities, helping to ensure a fair and inclusive transition for the workforce.