Strategies to mobilise private capital at the subnational level
Financing the transition to a climate-neutral economy requires a significantly higher investments, from both public and, crucially, private sources, to decarbonise and adapt at the speed science demands. Global estimates 1 put the annual finance needs at around US $5 trillion to 2030 - far beyond what public budgets can cover.
Subnational governments already cover around 40% of public spending, and over half of public investment in OECD countries - and they own the buildings, transport networks and urban systems where most emission reductions will need to happen.
At the same time, states and regions face increased pressure because of competing priorities such as rising healthcare and social care costs, declining capital transfers and rising debt-repayments. These realities are straining the political and financial sustainability of local budgets.
As the world looks ahead to COP30 in Brazil, the role of subnational governments is gaining traction. States, regions and cities are not only where climate impacts are felt hardest, they’re also the places where solutions are being deployed and investment needs are greatest.
As climate change accelerates, so are the costs of its impacts. According to a recent report by the European Environmental Agency, weather and climate-related extremes cost Europe around € 44.5 billion in economic losses per year, between 2021 and 2023.
With costs and investment needs rising, private capital will have to play a significant role in financing the green transition, also at the subnational level. That’s why state and regional authorities are rapidly experimenting with financing models such as green bonds, public-private partnerships, energy-performance contracting and blended-finance solutions to crowd in private investment.
This article explores strategies for mobilizing private finance to support local climate initiatives, based on discussions that states and regions had in the Under2 Coalition’s Next Generation Budgets project. The project is led by Climate Group, in partnership with the Government of North Rhine Westphalia and funded by Stiftung Mercator.
Role of institutional investors
One of the conclusions was the key role of institutional investors, such as investment funds, insurance companies, and pension funds, who manage money on behalf of others. As climate risks also pose a huge financial risk to their clients, investors have both a fiduciary duty and a strategic incentive to manage these risks and seize emerging sustainable – and finically viable – opportunities. By financially backing the decarbonization of the global economy, they safeguard their investments while contributing to a more resilient and sustainable future.
Arianna Griffa, Senior Policy Manager at the Institutional Investors Group on Climate Change (IIGCC) joined one of the Next Generation Budgets online sessions, part of our Community of Practice series. She said: "The transition to a decarbonised and resilient economy offers significant opportunities for institutional investors to support local green investments. From affordable housing to infrastructure and clean energy, a dialogue between subnational governments and investors is essential to develop financing strategies that align policy objectives with investor confidence and long-term value creation. Connecting regional priorities with institutional capital can unlock the scale of investment needed to deliver local benefits - creating jobs, strengthening resilience, and accelerating progress towards national climate goals."
Other examples brought up by investors of projects that are attracting institutional finance are large-scale energy storage developments in Scotland, and solar investments across the UK - with a focus on co-locating energy storage where possible. There’s also a commitment among investors to build energy efficient affordable housing and retrofit existing buildings. By understanding what drives investor confidence and how to structure investable projects, subnational governments are set up better to attract private capital and accelerate progress towards their climate objectives.
Approaching private investors
And it’s already happening. Several governments are building partnerships with private and institutional investors to support their climate objectives, tackling barriers along the way. Some of these barriers are the small size of projects, uncertainty around carbon pricing in the UK, and a lack of intermediaries to connect project developers with buyers.
To tackle these issues, some regions are developing blended finance approaches, they’re grouping smaller projects into larger investment opportunities. In Scotland for example, the Government and NatureScot are developing an ‘Ecosystem Restoration Code’ (ERC) to attract private investment in nature restoration and biodiversity projects. Once implemented, it may be possible to combine private nature finance with existing government funding for land use and nature-based projects.
Other regional governments are using supervised regional development agencies to manage funds and support initiatives. Strategic tools like territorial plans are being used to include funding models between municipalities and the private sector. For example, Finlombarda, the regional development agency of Lombardy, has a mini bond initiative to invest, with other financial intermediaries and institutional investors, in minibonds issued by companies from the region. These funds help finance investment plans, cover working capital needs, or refinance existing debt.
Another example of subnational governments engaging with private investors is the Hawai’i Green Infrastructure Authority (HGIA). HGIA manages the issuance of Green Energy Market Securitization (GEMS) bonds, to raise financing for clean energy projects, including renewable energy and energy efficiency upgrades.
Just last month, discussions at the IMF–World Bank Annual Meetings and the UN Climate Ambition Summit underscored the urgent need to mobilize trillions, not billions, to meet global climate goals—calling for stronger collaboration between governments, development banks, and private capital.
Subnational governments have a critical opportunity to position themselves as credible partners, by designing investable projects that merge climate ambition with financial viability. By building strong and lasting partnerships with institutional investors, regions can turn today’s climate pledges into tangible, localized investments that power the net zero emission transition from the ground up.