Green infrastructure in developing economies: a unique target for risk reduction and financial investment

Tate Lavitt and Holli Sargeant

Climate Policy, 2025, vol. 25, issue 5, 792-805

Abstract: Financing green infrastructure provides a unique opportunity for long-term investment with multiple benefits, including financial returns, reduced income inequality, and addressing high-impact areas. However, a dearth of suitable financial instruments in developing economies hampers the realization of these advantages due to high risks and costs for investors. We propose the Floating Green Carbon Credit Infrastructure (FGCCI) bond to catalyze green infrastructure investment in developing countries. The theoretical structure of the FGCCI bond leverages green bonds with floating rates, carbon credits, and other risk mitigation tools to bridge the investment gap. By aligning investor returns with sustainability outcomes, generating new revenue streams, and reducing risk exposures, FGCCI bonds have the potential to unlock significant private capital for green infrastructure projects that advance climate goals and sustainable development. Through analysis of funding challenges in developing economies and comparative assessment of financial instruments, this study elucidates the FGCCI bond’s potential to mitigate investment risks, enhance returns, and achieve sustainability and conservation goals. The FGCCI bond could significantly reshape sustainable finance in developing economies, offering a robust model for innovative green investments.Innovative financial instruments that align investor returns with sustainability outcomes and reduce risk exposures could catalyze much-needed private capital for green infrastructure in developing economies.Various financial instruments like green bonds, carbon credits, and debt-for-nature swaps are underutilized in developing economies due to currency risks, political instability, negative surplus projects, and greenwashing concerns.Risk reduction tools, such as floating rate structures, performance-linked returns, and asset backing, can be applied to green infrastructure projects to reduce risk exposure and enhance returns for investors.The proposed FGCCI bond combines green bonds with carbon credit and nature asset backing, floating rates tied to project milestones, biodiversity outcomes, and economic spillover effects.The FGCCI structure reduces investor risk and offers a more transparent approach by linking returns to measurable environmental and financial indicators, making green infrastructure projects in developing countries more attractive and viable for private capital.

Date: 2025
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DOI: 10.1080/14693062.2024.2409805

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