Municipal climate finance in emerging economies: Roles of cities, states, and financial institutions in scaling resilient urban investment

The current landscape

Emerging markets and developing economies (EMDEs) sit at the centre of the global urban climate challenge. Nearly 68% of the world’s population will live in cities by 2050, with close to 90% of that growth concentrated in Asia and Africa, precisely where fiscal space is tightest. Cities already generate more than 80% of global GDP, yet they require US $4.5 trillion a year through 2030 to finance climate mitigation and adaptation. Mayors and urban leaders are calling for at least US $800 billion a year in public investment from national governments and development finance institutions (DFIs) to help unlock this capital. The financing gap is widest where the need is greatest. In EMDEs especially, adaptation finance meets only 4% of annual needs, while their cities account for just 27% of the climate finance pipeline currently visible to DFIs.

Centrally routed climate finance has struggled to translate pledges into resilient infrastructure because funds rarely reach the municipal and state entities that deliver projects. The World Bank’s City Creditworthiness Initiative estimates that every US $1 invested in a city’s creditworthiness can mobilise more than US $100 in private capital, demonstrating that subnational ownership is key to unlocking finance at scale. It also creates stronger accountability, improving revenue collection and project delivery while aligning investment with local priorities such as flood management, public transport and water infrastructure.

Gaps holding back subnational climate finance

Despite this, subnational climate finance in EMDEs remains structurally constrained. Of the 500 largest cities in the developing world, only about 4% are creditworthy in international capital markets and just 20% in local markets, leaving most without a credible route to borrow at all. Central governments often compound the problem. In China, the ongoing US $1.39 trillion clean up of Local Government Financing Vehicles (LGFVs), the off-balance-sheet entities long used by provinces to fund infrastructure, has constrained local spending. It has also delayed infrastructure investment, leaving behind what has been described as a “growth mess”. Even where cities are free to borrow, a shortage of investable projects remains a major constraint. Many pipelines are too small, too early in development, or lack the technical preparation needed to attract capital. Nearly half of the climate projects disclosed by EMDE cities to CDP in 2024 were still at an early stage, while 40% relied entirely on external funding, compared with 25% in developed economies.

The result is a mismatch hiding in plain sight. Less than 10% of international climate finance reaches subnational governments, even though they deliver close to 90% of climate adaptation and mitigation activities. DFIs and private lenders are structured to deploy capital in large transactions, making smaller municipal projects too costly to underwrite individually. Even where municipal credit exists, institutional investors struggle to access it. Pension funds and insurers lack standardised instruments, consistent disclosure and liquid secondary markets, leaving capital with few viable routes into subnational climate projects.

Financing instruments that can help close this gap

Closing the subnational climate finance gap requires instruments that respond to the specific constraints facing cities and states. The right approach will vary by the borrower’s credit profile, project maturity and ability to generate revenues. Three instruments that are particularly relevant are:

Municipal green bonds: Enable creditworthy cities and states to raise capital directly from investors for eligible climate projects, backed by defined revenue streams
Pooled financing with credit enhancement: Aggregates borrowing across smaller municipalities and uses guarantees or other credit enhancement to improve access to institutional capital
Project preparation facilities: Use grant-funded technical assistance to develop early-stage projects into bankable opportunities that can attract public and private finance

Case studies

While these challenges continue to persist, several subnational financing models and examples already show how innovative real transactions/deals could be:

Municipal green bonds in India: In February 2023, the Indore Municipal Corporation raised Rs 244 crore (about US $30 million) through India’s first publicly issued municipal green bond, at 8.25% interest with maturities of three to nine years, to fund a 60 MW solar plant powering its water treatment operations. The issue was oversubscribed 5.9 times. Ghaziabad (Rs 150 crore) and Pimpri Chinchwad (Rs 200 crore) followed in 2025 with similarly oversubscribed bonds for sewage infrastructure. What made this work was sequencing. Each city first built a documented credit rating and ring-fenced project revenue to service the bond, rather than waiting for a national subsidy programme to make the case for it, proving that municipal creditworthiness is buildable in-house
Lagos subnational green bond: In 2020, Lagos State issued Africa’s first subnational green bond, raising ₦14.815 billion through a five-year, 16% fixed-rate issuance due in 2030. The bond was oversubscribed 1.9 times by pension funds, insurers and asset managers, with proceeds earmarked for renewable energy, climate adaptation, and sustainable water and wastewater management. Unlike an individual city, Lagos State could draw on a larger balance sheet and established relationships with institutional investors. This enabled it to absorb the fixed costs of a first-of-its-kind issuance that individual municipalities could not have justified, demonstrating how states can aggregate and de-risk climate finance on behalf of their cities
Bogota’s C40 cities finance facility-backed cycle highway: With technical support from the C40 Cities Finance Facility, the Inter-American Development Bank and the World Resources Institute, Bogota is developing the 25km Quinto Centenario cycle highway. CFF provided up to US $1 million in grant-funded technical assistance to prepare the project for investment. Advisers worked with the city to establish governance arrangements, conduct feasibility and financial viability studies, and develop a financing strategy. This preparation helped turn an early-stage idea into a bankable project, now expected to avoid at least 67,000 tonnes of CO₂ emissions by 2030

Way forward

Scaling these models will require more than just capital. Cities need stronger creditworthiness and better-prepared projects. States and regional development banks must aggregate smaller pipelines and reduce risk. Multilateral institutions and guarantee providers should absorb early risks until domestic capital markets can take over.

Layering concessional capital, guarantees and private debt, alongside standardised disclosure, will matter more than any single new pledge. The policy momentum is already building. The G20 Sustainable Finance Working Group has called for a greater role for national and subnational development banks in financing green investment, while multilateral development banks face growing pressure to reform. The emerging economies that build this financing architecture first will be better placed to shape resilient urban growth, rather than retrofit it later at a far higher cost.

References

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Municipal climate finance in emerging economies: Roles of cities, states, and financial institutions in scaling resilient urban investment

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