Authors: Royston Brockman (Triple Line),  Michael Lindfield (Triple Line), Jessie Press-Williams (CCFLA)

Urban climate finance must increase by more than fivefold to reach USD 4.3 trillion per year by 2030 for cities to achieve climate mitigation targets. Private finance will be key to closing this gap, but cities face legal, fiscal, and market constraints in accessing this investment (CCFLA 2025). The low-carbon urban transition is a global imperative, given that cities are responsible for 70% of energy-related emissions (CCFLA 2024). However, cities and municipal agencies usually have limited statutory powers to issue debt or to develop financing structures for climate-related projects. Guarantees, financial instruments that transfer specific risks from investors to a guarantor, could help to unlock this finance

Guarantees can help address market distortions and unlock investment where risks are perceived to be high. They can lower borrowing costs, extend loan tenors, and broaden the lender base—particularly where sovereign rating ceilings, unrated municipal issuers, or foreign exchange constraints limit cities’ access to capital markets. Guarantees can also facilitate demand aggregation by managing real and perceived risks and enabling multiple project off-takers (such as power consumers) to participate under a single financing structure. Analysis suggests that guarantees outperform loans and credit lines in mobilizing private finance (Blended Finance Taskforce 2023). Over time, guarantees should also help markets better understand and price these risks, gradually reducing the need for such support as financial markets mature.

Review of urban infrastructure guarantee

A CCLFA survey of 34 guarantee facilities available to urban-level entities in emerging markets and developing economies (EMDEs) found many entities to have potential to issue guarantees to cities, but few cases of this were identified. We find:

• Targets: over 90% can also support private borrowers and financial institutions. Primary targeting by the facilities is balanced across public sector and private actors, as well as financial institutions acting as intermediaries.
• Type: Partial credit guarantees are the most widely available offering, provided by almost 80% of facilities assessed. Less common are political guarantees (provided by 32%), equity (29%), and FX guarantees (18%).
• Structure: offered by 38% of facilities. Transaction-by-transaction coverage is common but less frequent, offered by 27%.
• Sector coverage: Energy investments are covered by 88% of facilities, followed by transport (71%), buildings (62%), and water (62%). Most documented municipal guarantees support revenue-backed projects (e.g., energy efficiency, transport, and water).
• Funding source: Most guarantee facilities are publicly funded through development banks (62%), though some are public-private hybrids (27%), and a smaller set operate under private models (12%).

Barriers to increasing uptake

Guarantee facilities targeted to municipalities are limited, and those that do exist are not being utilized to their full potential. Available guarantees are often costly and complex, and offer limited market additionality.

Guarantees are underused largely due to financial, legal, and policy constraints. On the supply side, guarantee providers face several

• Mismatch between complexity and scale. Guarantee structures are often too complex and resource-intensive relative to the scale of the transactions they cover, unless pooling a portfolio of loans. Existing instruments lack standardization and common templates, and institutions may lack the technical expertise to design, monitor, and enforce them.
• Pricing and fee misalignment. Guarantees are only economically attractive if they are priced below the borrowing-cost reduction they achieve. While OECD countries are able to offer guarantees for urban infrastructure at below-market rates, higher pricing limits their viability in EMDEs.
• Political and governance risks. Similar to loans, once a guarantee is issued, any disruption in implementation or cost overruns can prompt issuers to change the terms of the guarantee or trigger payment. Governance barriers at the city level can involve challenges on policymaking and capacity constraints, which can impact a city’s ability to deliver climate action and attract private investment (CCFLA 2023).
• Regulatory and incentive constraints. historically received limited official development assistance (ODA) credit for guarantees, and banks’ capital rules can raise the cost of contingent liabilities.

On the demand side, urban institutions and their regulators face several barriers in taking guarantees:

• Legal and policy constraints. Municipalities may lack clear statutory power or internal authority to apply for guarantees.
• Awareness and capacity constraints. Municipalities may not be aware of the potential urban infrastructure guarantees available. Limited technical capacity may also prevent municipalities from identifying and deploying the most appropriate products.
• Enabling environment gaps. An appropriate enabling environment is essential to taking up guarantees, including legal borrowing powers, tariff frameworks, public-private partnership (PPP) rules, dependable monitoring, reporting, and verification (MRV), and bankable standard contracts.

Well-structured guarantees could catalyze urban climate finance under the right conditions. With careful design, cities can access longer-term capital at greater volume and lower cost without overburdening sovereign or municipal fiscal space. However, guarantees would be more strategically deployed when they unlock financing that would otherwise be unavailable, either because borrowing costs are prohibitively high or because private capital is not accessible for the relevant projects or issuers. There is little strategic value in using scarce public resources for guarantees that only marginally reduce project costs.

Potential solutions

For guarantee providers:

1. Strengthen governance of guarantee facilities, with independent boards/steering committees, facility managers, risk management frameworks, and legal and financial controls.
2. Adjust pricing to be more economically attractive for cities. Reducing guarantee costs may require additional public subsidies
3. Consider designing blended structures. Combining guarantees with concessional finance, first-loss layers, and performance incentives, including partial unfunded guarantees (~80% coverage), could increase coverage.
4. Prioritize pooled, sector-specific programs to aggregate small city projects. This will require financial products tailored to specific, replicable solutions with an attractive pricing structure. Working with entities such as pooled municipal financing vehicles can help to aggregate projects and provide professional management, credit ratings, and risk underwriting.
5. Learn from and scale what works. Where possible, learn from experience to inform replications and standardize terms and formats of guarantee products.

For CCFLA members, policymakers, and enablers:

1. Offer technical training and potentially targeted subsidy or concessional support to build capacity where there are bottlenecks. Technical support is needed for both municipalities, in areas such as project preparation and monitoring, and for lenders, on topics such as underwriting climate projects and guarantee design.
2. Leverage for policy dialogue: Build on platforms for convenings–such as those led by CCFLA–to strengthen dialogue and knowledge sharing around the use of guarantees in urban climate finance. Publish comparable performance data, benchmarking guarantee structures and performance.

Expanding cross-border and regional facilities supporting national guarantees could also increase uptake. These facilities can overcome sovereign rating ceilings by allowing sub-sovereign borrowers to access broader markets beyond domestic constraints. They also provide greater risk coverage, including political, regulatory, and foreign exchange protections. standards enhance confidence, transparency, and supervision. Regional platforms integrate sectoral and cross-border pipelines, which are crucial for climate adaptation and cross-border corridors.

[1] See https://www.climatepolicyinitiative.org/publication/landscape-of-guarantees-for-climate-finance-in-emdes/ for more information on the use of guarantees for climate finance.