The article was first published on OMFIF on  December 19th, 2025

This was originally published in OMFIF’s Transition finance working group report: ‘The next frontier in transition finance’.

As climate finance becomes politicised, multilateral development banks aim to avoid confrontation

The world’s multilateral development banks have been in the vanguard of both financing the global response to climate change and in developing and funding blended finance vehicles that aim to overcome market failures and structural barriers to that response. Those efforts are at risk from a US government that is hostile to the energy transition and is a major shareholder in some of the largest MDBs.

To better understand how these institutions are responding to the new climate, and what this means for their approaches to blended finance, OMFIF spoke with leading MDBs during New York Climate Week in September 2025.

The participants agreed that raising funds from their government shareholders had got harder – but noted that this trend pre-dated President Donald Trump’s re-election and is the case across developed economies. ‘We were already seeing a tightening in the fiscal space, and the concessional financing pool was already dwindling. This has just made the trend clearer.’

One European MDB noted that the Trump administration’s unwillingness to fund overseas development has its echoes across the Atlantic. ‘There’s a political debate about development finance and concessional finance all over the world, including in Europe. It’s understandable – governments are accountable to their own electorates.’

This means that MDBs and other advocates of development finance have to work harder to sell the benefits to politicians and the general public in donor countries. ‘We have to be clearer in our communication and explain why this is in the best interests of Europe, or in the best interests of the US,’ they added.

Reframing the narrative

The MDBs noted that part of the answer lies in reframing narratives around financing to align with priorities that are closer to those of the US administration. Several gave the example of the Mission 300 initiative, which seeks to provide 300m people in Sub-Saharan Africa with electricity by 2030, aiming to promote clean energy, economic growth and job creation through infrastructure investment, sector reform and public-private partnerships, including blended finance vehicles.

‘This is not only about climate, it’s about access to energy,’ one MDB said. ‘It’s not ideological, it’s good for energy resilience and economic growth.’ They added that, in many parts of the world, renewables can provide the cheapest source of energy, meaning that economic development and climate priorities remain aligned.

However, given the constraints on government funding for MDBs, they are also looking elsewhere for sources of finance for their priorities. For one MDB, government subsidies are a big focus. ‘We are having a big push on subsidy repurposing. We’re not against subsidies – that’s how governments signal investment priorities. But they aren’t necessarily helping where they are needed.’ The speaker noted that Nigeria has been successful in redirecting subsidies away from fossil fuels, and that the MDB is also making good progress supporting agricultural subsidy reform.

Moving away from perceptions of risk

Several MDBs noted that they are looking to switch from predominantly providing debt financing and guarantees to offering risk taking equity. ‘What we’re hearing from lower middle-income countries, particularly, is that the de-risking is helpful, but it’s not enough without a serious equity play,’ said one.

Another MDB observed there has been an assumption that the problem facing developing countries was not a lack of liquidity, but a specific risk preventing that capital being deployed. ‘We’ve learned that there isn’t excess liquidity, by and large.’ To overcome this, there needs to be ‘liquidity injected as more patient capital to signal which sectors we believe have long-term upside potential.’

This is also about encouraging co-investors – particularly in the private sector – to think about the climate transition in terms of investment opportunity. ‘We’ve been so focused on de-risking. We need to stop talking about risk all the time in the transition space and start talking about opportunity.’

Numerous sectors within the climate transition are already profitable, and MDBs’ equity investments provide a means of encouraging private sector co-financing. ‘It’s about signalling and catalysing’ coinvestment, one MDB noted.

Crowding in private capital

MDBs are well-positioned to do much of the heavy lifting in terms of due diligence and providing a stamp of approval that helps to bring in private sector investors. ‘We have entire teams just doing sustainability checks, which these private sector investors can benefit from,’ said one. ’We can absorb the transaction costs to give a check mark on an investment’s broader ESG. That reputational rigour is really important. And, in these transition sectors, particularly those in the early stages of development, it does help to bring in the private sector,’ another said.

MDBs are focusing efforts on developing country transition platforms that promise to bring in a wide range of host country stakeholders – government, the energy sector, industrial companies and local financiers – with a range of providers of various types of development and concessional finance.

‘There is a problem around the fragmentation of these concessional funds and it can be very difficult to combine different instruments to achieve impact,’ noted one MDB, given that they often have different eligibility constraints, tenors and risk tolerances. By developing programmatic country platforms, MDBs can bring this financing together with pipelines of projects and investments that require different types of capital.

In one example, the MDB directed grant funding to decommissioning coal-fired power plants, concessional finance to electricity grid development, while the renewable energy investment was left entirely to the commercial sector. ‘This combination worked very well.’

But despite finding innovative mechanisms, new sources of funding and common ground with sceptical donors, MDBs will inevitably have to be less ambitious when it comes to funding climate solutions that are further from commercialisation. ‘Those technologies that clearly require a “green premium” to become economically viable – sustainable aviation fuel, green cement, green steel – have become more difficult,’ one MDB said.

And, undoubtedly, it’s a much more difficult environment to navigate. ‘I’m not pessimistic, but the degree of complexity has increased dramatically.’