The 2015 Addis Ababa Action Agenda (AAAA) on financing for development called for a broader mobilisation of resources, including private funds. It was initially estimated that an additional mobilisation of USD 2.5 trillion annually was needed to meet the sustainable development goals (SDGs) by 2030 (UNCTAD, 2014[1]). This figure was updated in 2022 to USD 3.9 trillion (OECD, 2022[2]). The AAAA intended to provide a new global framework for financing sustainable development by aligning all financing flows and policies with economic, social and environmental priorities, and by providing commitments to develop integrated national frameworks to finance the SDGs at the national level. Nearly a decade later, achievements have fallen short. More than half of the SDGs are off track due to recent crises including the COVID-19 pandemic, which had a considerable effect on Latin America and the Caribbean (LAC), in what ECLAC has called the most lost decade (OECD, 2022[3]).

As the international community prepares for the Fourth International Conference on Financing for Development (FfD4) in 2025, Latin America and the Caribbean is at a crossroads. The region finds itself in a privileged position to support global efforts on energy transition, climate change, biodiversity preservation and the reconfiguration of supply chains. The region also enjoys higher ratios of private finance mobilisation and official development interventions than other developing regions, although unequal among LAC countries, and it continues to be an important destination for private financing flows. LAC is also at the forefront of sustainable debt financing tools, including green, social, sustainability, and sustainability-linked (GSSS) bonds (including blue bonds), catastrophe bonds, natural disaster clauses, debt-for-nature swaps and addressing the financial impacts of loss and damage caused by climate change. Such initiatives have received significant support, showcasing the region’s proactive approach to climate resilience. LAC countries have also begun developing and enhancing their sustainable finance frameworks to align with international best practices. At the same time, the region is grappling with longstanding challenges such as low growth, informality, high poverty and inequality rates, significant levels of debt and an unprecedented need to mobilise additional finance to advance the green and digital transitions.

The FfD4 Conference provides a unique opportunity to commit to reforms of financing frameworks at all levels in order to close the financing gap and tap into all sources of funding in an effective and efficient manner. Innovative tools for risk sharing and risk assessment, along with blending instruments and enhanced regulations and standards have great potential to improve LAC’s financial landscape in the medium term. This 17^th edition of the Latin American Economic Outlook contributes to these objectives with a series of policy options to enhance the potential of financing tools, based on co-ordinated actions between policy makers, the private sector and their international partners. The region needs to seize the opportunity of the FfD4 Conference by bringing to the table, in a unified voice, demands to build an enabling international environment that incentivises financing to flow to the region with the aim of boosting the needed development outcomes. Following their initial inputs sent to the FfD4 Elements Paper, LAC countries should continue advocating for a better management of domestic public resources; domestic and international private business and finance; international development co-operation; international trade; debt and debt sustainability; systemic issues of the global financial system; science, technology, innovation and capacity building and data and monitoring.

This chapter begins by analysing the current international financial context. It presents the evolution of multilateral commitments and examines key factors shaping the financing agenda for LAC countries, including debt sustainability and risk assessments. It then presents the potential of key international financial flows that LAC countries could tap into. The chapter then explores novel forms of co-operation between LAC countries, multilateral partners, and the private sector in mobilising new sources of financing towards sustainable development. These include the role of official development assistance (ODA) in mobilising private finance, other official development flows, remittances, and international philanthropy. The chapter next presents the potential of sustainable debt financing tools, including green, social, sustainable and sustainability-linked (GSSS) bonds, as well as new green and sustainable taxonomies. It concludes with key policy messages aiming at boosting the debate ahead of the 2025 conference on financing for development.

The international financing context has changed considerably over the past few decades. International conferences on financing sustainable development, from the Monterrey Consensus in 2002 to the AAAA in 2015, reflect a shifting global development and financing agenda, with profound consequences for the development of the LAC region. The global landscape presents a complex environment with challenges that include economic disparities between and within countries, financial instability exacerbated by events like the 2008 financial crisis and the COVID-19 pandemic, the need for sustainable development amid environmental concerns like climate change and evolving geopolitical dynamics. The emergence of new players, including emerging economies and non-traditional creditors, adds further complexity to the international financing domain.

The global development and financing agenda has profoundly evolved since the Monterrey Consensus in 2002. Monterrey declared the need to address the challenges of financing for development globally, particularly in developing countries. It reaffirmed that achieving the internationally agreed development goals demanded a new partnership between developed and developing countries, and therefore gave a prominent role to ODA to complement other sources of financing – especially in those countries with weaker capacity to attract private direct investment (Orliange and Granja e Barros, 2020[4]). It recognised the critical importance of the mobilisation and effective use of financial resources as well as of improving national and international economic conditions to eradicate poverty and achieve sustainable development. It anchored discussions on financing and international financial architecture in the development agenda.

The Second Global Conference on Financing for Development took place in Doha in 2008 with the aim of solidifying the objectives of the Monterrey Consensus into more concrete commitments. In the wake of the 2008 financial crisis, the conference recognised the impacts of such crises on developing countries, and it urged all countries to make the world’s global financial system more equitable, sustainable and stable (UNDESA, 2024[5]).

In 2015, the AAAA brought another angle to the global framework for financing sustainable development. This was also the year of major multilateral initiatives, such as Agenda 2030, the Sustainable Development Goals (SDGs) and the Paris Agreement on climate change. The AAAA offered a broader picture of international financing by stating that international public finance and the private sector had an important role to play in complementing the efforts of countries to mobilise public resources domestically. It referred to establishing an enhanced and revitalised partnership for sustainable development. The global nature of the AAAA echoed the SDGs and the Paris Agreement of that same year.

International co-operation has increased since the adoption of the Monterrey Consensus in 2002. But while it has played a critical role in addressing successive crises, it has not kept pace with rising demands. The multilateral finance architecture is under growing pressure to meet today’s complex and overlapping challenges more effectively (OECD, 2023[6]). In 2023, France hosted the Summit for a New Global Financing Pact with the aim of laying the groundwork for a renewed financial system suited to the common challenges of the 21^st century, such as fighting inequalities, addressing climate change and protecting biodiversity. The summit concluded with the Paris Pact for People and Planet (4P) (France Diplomacy, 2023[7]). In the United Nations General Assembly high-level week in September 2024, world leaders reaffirmed their commitment to the 4P agenda for reforming the international financial architecture and supporting developing countries’ enhanced representation in the governance of international financial institutions. More specifically, they supported the Brazilian G20 Presidency’s objective of a fairer global governance system, particularly in reforming the international financial architecture (Elysée, 2024[8]).

This historic evolution shows the progression of adapting international financing to a multiplicity of global challenges as well as the rise of new actors, with emerging economies and non-traditional creditors playing a more important role in financing for development. However, this landscape was shaken by the COVID‑19 pandemic, which has triggered a renewed and accelerated process of reflection on how best to adapt international financing in an interconnected world with global asymmetries. As LAC prepares for the fourth edition of the conference, the region’s countries are putting forward a series of proposals that aim to address the main concerns on financing sustainable development in the region. These proposals show the diversity and variety of positions within LAC (Table 4.1).

The pursuit of financing for sustainable development of the LAC region takes place in the context of a world with unequal access to resources and asymmetric opportunities for growth. The region faces challenges in the international financing sphere in relation to borrowing costs, debt management, global governance and beyond (Chapters 1 and 2). Identifying these obstacles informs policy solutions and supports the development of strategic positioning on these issues for the LAC region.

There have been some notable international initiatives to address debt management, such as the Debt Service Suspension Initiative (DSSI). In an effort to help developing countries cope with the financial burden of the COVID-19 pandemic, the Group of 20 (G20) and the Paris Club launched the DSSI in May 2020. The initiative suspended USD 12.9 billion in public debt-service payments between May 2020 and December 2021 for 48 participating countries (World Bank, 2022[10]). The DSSI enabled a fast and co‑ordinated release of additional resources to beneficiary countries that were severely affected by the pandemic, and the negative net resource transfer – which occurs when countries pay more to their creditors than they receive in fresh funding – did decrease in 2020. However, private creditors did not participate in the initiative (or only on a voluntary basis), and countries feared a credit rating downgrade as domestic credit to the private sector is significant , standing at 56.3% of GDP for the region in 2022 (OSR, 2022[11]; World Bank, 2024[12]).

Another initiative was the Common Framework for debt treatment beyond the DSSI, endorsed by the G20 and the Paris Club, which aims to support low-income countries holding unsustainable debt through a co‑ordinated, case-by-case approach involving both official and private creditors, underpinned by International Monetary Fund (IMF) and World Bank (WB) analysis, to ensure long-term debt sustainability (Ministero dell'Economia e delle Finanze, 2021[13]). The new IMF/WB approach to vulnerable countries’ financing needs aims at supporting low-income countries and vulnerable emerging economies to address debt vulnerabilities and create fiscal space to finance development and build resilience. The approach includes three pillars: i) structural reforms and domestic resource mobilisation; ii) external financing support, including from IFIS; and iii) country specific actions to reduce the debt burden on a case-by-case basis.

However, so far, the initiatives have proven insufficient to address the need for immediate liquidity in many developing economies, and the negative net resource transfer has continued to deteriorate in LAC. However, there is recognition that repeated cycles of sovereign debt distress over time underline the need for a more effective sovereign debt architecture to help prevent debt crises, support the provision of affordable financing for investment in the SDGs and facilitate more effective and fair restructurings when needed (UN, 2023[14]).

Moreover, global governance asymmetries underlie the significant disparities in countries’ access to liquidity during times of crisis, as evidenced by the uneven distribution of special drawing rights (SDRs) allocated to developing nations, as SDRs are allocated to countries in proportion to their quotas in the IMF. SDRs are international reserve assets. SDRs have several advantages over other credit facilities and financing lines, including the fact that they do not generate debt, have a very low cost of use and can reduce the risk premium for highly indebted countries. However, while SDRs are intended to provide liquidity to all IMF member nations, the distribution of SDR allocations favours wealthier countries. Africa, Asia, developing Europe and LAC received respectively 5.2%, 21.5%, 1.1% and 7.9% of the total SDR allocation of August 2021 (ECA/ECLAC, 2022[15]). As a result, developing countries, which may be most in need of liquidity during crises, find themselves at a disadvantage, facing challenges in accessing sufficient SDR resources to address their pressing financial needs.

In its capacity as the current rotating chair of the Heads of Multilateral Development Banks (MDB) group, the Inter-American Development Bank (IDB), in co‑operation with the African Development Bank (AfDB), has led a proposal to re-channel SDRs to MDBs building on the issuance of a SDR loan structured as a hybrid capital instrument. Channelling SDRs to MDBs could be explored by countries that are willing and legally able to do so, while respecting the reserve asset status of the resulting SDR-denominated claims and ensuring their liquidity. This could expand the financing options for LAC countries and is projected to leverage up to four times the value of the SDRs, enabling countries to finance social and climate projects that may be challenging through other financial routes (IDB, 2024[16]). This progress comes within the IDB’s broader efforts and its key role in increasing co-operation between development actors and in enhancing their mobilisation. Through its position as rotating chair, and as part of the recently approved IDB Impact+ programme, the IDB has led efforts to increase collective effectiveness and a strategic approach to the co‑ordination of development partners (IDB, 2024[17]). In the context of limited finance and with an increased number of development actors in the region, the need for greater co‑ordination is clear. Increased co‑operation by MDBs and the expansion of the use of SDRs increase opportunities for MDBs and necessitate even greater co‑ordination of development actors.

Furthermore, 4P leaders at the September 2024 United Nations General Assembly high-level week highlighted the need for solutions to reduce developing countries’ debt burdens, including innovative instruments like debt-for-climate, and rechannelling special drawing rights to provide additional fiscal space to emerging economies. They also committed to increasing concessional funding for vulnerable nations and emphasised collaboration to enable multilateral development banks and international financial institutions to achieve a “1 to 1” ratio of private finance mobilised through public resources. Additionally, the leaders recognised the importance of improving the transparency of risk ratings to foster private financial flows and increasing public financing through targeted global levies while supporting domestic resource mobilisation efforts (Elysée, 2024[8]).

Risk perceptions are more volatile in developing countries and tend to be pro-cyclical, causing economic downturns to develop into even more serious financing issues (ECLAC, 2023[18]; IMF, 2023[19]). This raises the questions of investors’ considerations when making investment decisions, and of how these considerations impact development.

The world’s few existing credit rating agencies (CRAs) have an important effect on perceptions of risk in the countries in the region. Three CRAs account for more than 90% of the credit rating market (Hung et al., 2022[20]; OECD, 2023[6]). Ratings, which are widely used by all investors in investment decisions, tend to be pro-cyclical, downgrading LAC economies more quickly than developed economies. Downgrade phases tend to be deeper and faster than upgrade phases, and domestic variables could be helpful in smoothing the path of downgrades, whereas this outcome does not hold true during upgrade phases (Broto and Molina, 2016[21]). Negative warnings by CRAs (“reviews”, “watches”, “outlooks”) have a harsher impact on the bond spreads of developing countries than advanced economies (160 basis points vs 100 basis points) and developing countries receive 95% of credit rating downgrades despite milder economic contractions (UNDESA, 2022[22]). When developing countries receive a low credit score, below “investment grade”, they have to borrow at greater cost to finance sustainable development (Sachs, 2023[23]). This often leaves LAC countries forced to choose between investing in their long-term sustainable development goals or pursuing short-term credit score improvements (OECD, 2023[6]).

Sovereign credit quality has an important role in determining how costly the access to private external financing will be, with credit rating downgrades having a much bigger impact than upgrades (ECLAC, 2018[24]). This becomes particularly relevant as private financing grows more important in the context of the 2030 Agenda for Sustainable Development and the need to increase the mobilisation of resources for its implementation. Some analyses have highlighted the need to improve the functioning of credit rating agencies through practical measures that could include separating rating from advisory functions, imposing legal liabilities and removing the regulatory reliance on ratings (Portes, 2008[25]).

Improving the availability of information is also crucial. An accurate appraisal of vulnerabilities of developing countries is needed with improved accounting for the compounding impact of climate vulnerability on other structural and economic vulnerabilities. There is the risk of a “climate-financial trap” in which climate disasters or deterioration exacerbate a poor fiscal situation, worsening a country’s ability to access international resources to finance sustainable development and prepare for a smooth low-carbon transition (AFD, 2023[26]; AFD, 2023[27]). Efforts such as the Global Emerging Markets (GEMs) risk database consortium attempt to support more accurate risk assessments of LAC countries. The GEMs database offers a comprehensive and transparent repository of risk data, enabling a more holistic view of economic and financial risks. The database, which has put together almost 30 years of anonymised data from around 25 institutions, can help to reduce the gap between perceived and real risks (GEMs, 2024[28]; IFC, 2024[29]). By utilising such tools, investors, policy makers and other stakeholders can access diverse and detailed information, fostering a more informed and resilient financial system. This helps to mitigate the shortcomings of traditional credit rating agencies, promoting better-informed decisions based on a clearer understanding of underlying risks.

In the context of constrained financing for sustainable development, the coherence of existing financing is essential, as is co‑operation among old and new development actors engaging in the region. Although few actors represent the majority of multilateral financing for the region, an increasing number of development groups have entered LAC in the past two decades. There remains a high concentration in the multilateral financing sphere, with the Inter-American Development Bank, the Development Bank of Latin America and the Caribbean (CAF), the Central American Bank for Economic Integration (CABEI), the World Bank and the European Union (EU) accounting for more than 95% of multilateral finance in 2022 (Figure 4.1). However, the number of multilateral actors in the region has grown from 8 in 2002 to 40 in 2022, while the number of non-development assistance committee countries, regional banks and private philanthropic organisations providing financing for sustainable development has also grown in the region (OECD, 2024[30]).

The growth in the number of organisations has arisen from the increase in highly specialised funds, primarily United Nations funds and programmes, as a response to specific crises such as COVID-19. This higher degree of specialisation of smaller funds contrasts with the EU and its Member States, which spreads its financing across a much wider range of sectors. The increased involvement of new actors and funds holds potential to be positive, in particular for large Latin American economies. For example, there has been an increase in the number of specific climate funds active in the LAC region. These funds play an important role in channelling private finance for specific climate goals (see further below for the section on sustainable finance instruments). However, while their activities are relevant, they are not a substitute for governance reform. Efforts are needed to ensure that the increased number of actors enables effective specialisation while maintaining a degree of co-ordination.

More collaboration across development actors could improve the impact of development co-operation. These entities bring different strengths to the table, with MDBs offering financial resources and technical expertise, bilateral agencies providing direct aid, including loans and guarantees, and partners like the EU contributing through grants, loans, guarantees and bonds (Chapter 3). These actors also provide ODA commitments to different sectors, with the United States committed mostly to social infrastructure (42.2%) and humanitarian aid (31.9%). ODA from the EU institutions is more dispersed across sectors (OECD, 2024[31]). More specifically, the EU has made significant commitments to the education, energy, finance and health sectors, which indicates a focus on holistic sustainable development (OECD, 2024[31]).

Collaboration among development actors is crucial for LAC. Collaboration enables pooling resources, leveraging complementary capacities and scaling up financing efforts to meet the diverse development challenges faced by LAC countries. This can ensure a co‑ordinated approach to project implementation, maximise the impact of development finance and drive progress towards sustainable development goals. More coherent, co-operative and targeted financing is required by all providers to maximise their respective benefits as, to date, development actions have been too siloed (CGD, 2022[32]). Agreements across financing actors – including national and local development banks as well as global and regional development finance institutions (DFIs) – are a step in this direction.

Recent agreements exemplifying this collaborative approach have been adopted across development banks. In March 2023, an agreement signed at the EU level included the association of European Development Finance Institutions, the Joint European Financiers for International Co-operation and the Practitioners’ Network for European Development Co‑operation. These groups agreed to build on their existing expertise and collaborate in strategic efforts to promote the EU’s Global Gateway strategy and Team Europe initiatives and to leverage their comparative strengths towards transformational impact and valuable contributions to the policy goals of the EU and its partner countries (Practitioners' Network for European Development Co-operation, 2023[33]).

The collaborative approach can also be seen in a financial operation between CAF and the French Development Agency (AFD) in May 2024. The banks launched a new strategic financial instrument to support medium- and long-term collaboration, incorporating non-dedicated funds to achieve green strategy objectives. This mechanism supports CAF’s goal to become the region’s green bank by addressing climate change and biodiversity, channelling a loan of EUR 200 million to Latin America and the Caribbean combined with technical assistance, alongside expert technical exchanges (CAF, 2024[34]).

By building on existing frameworks – such as those in the Organisation of American States with the Inter-American Council for Integral Development and its Inter-American Agency for Co-operation and Development – the LAC region can work more cohesively to: i) strengthen governance of development co‑operation; ii) boost co-operation and policy coherence; and iii) ensure the effective leveraging of national efforts at the regional level. Through improved co-operation, the region can strive to ensure effective collaboration among existing development providers while also establishing new development pathways, leveraging both South-South co-operation and triangular co-operation.

Finally, partnerships between development banks from developed countries and national development banks can provide targeted project financing at lower financial costs. For example, the AFD signed a Tier 2 agreement with the Banco Nacional de Costa Rica (BNCR) in 2021 to finance climate change-related projects, with a particular focus on electric mobility (AFD, 2024[35]). Consisting of two lines of credit, a senior unsecured loan of USD 50 million and a subordinated Tier 2 loan of USD 15 million, the financing programme seeks to provide long-term liquidity while maximising the leveraging effect of the AFD commitment through additional BNCR financial commitments. This is complemented by a four-year EU grant of EUR 3 million for technical assistance to assist the BNCR in aligning its project financing with Costa Rica’s climate objectives. This mezzanine operation ensures alignment with the country’s sustainable development agenda and helps reduce the cost of financing for the national development bank.

Public and private international financial flows are critical for the development of the LAC region. Even if these flows are relatively small compared to levels in other developing regions, official development assistance remains crucial in LAC as it could be a catalyst to attract and “derisk” the private sector investments to address development needs. Given the lower levels of concessionality, there is a need to further mobilise private finance and other international development flows in an integrated manner to address development needs more effectively.

Access to grants and concessional loans is essential to support the financing of sustainable development in the region. However, this has come under increasing strain. As a share of gross national income (GNI), ODA for Latin America is the lowest in the world, at close to 1% – and it is declining. This decrease is expected, given that as countries develop, so does ODA as a share of GNI (Piemonté, Kim and Cattaneo, 2024[36]). Indeed, as LAC develops and countries graduate to lower-middle-income status, the ODA share of GNI gradually decreases (Cattaneo, Piemonté and Poensgen, 2020[37]). In contrast, ODA for small island developing countries (SIDS) averaged almost 10% of GNI in 2022, being a crucial means of external financing, as they are mostly still classified as low-income nations (Figure 4.2).

Despite low levels in LAC, ODA remains relevant to addressing the region’s critical development needs and plays a crucial role mainly related to capacity building for upper-middle-income countries in the region. Beyond direct financial support, ODA – particularly through technical assistance (TA) and blending finance – can act as a catalyst for mobilising additional resources, such as loans or private sector investments. By providing technical expertise, supporting project preparation, and mitigating risks, TA and blending finance are first steps in unlocking larger funding from international financial institutions and private investors (EIB, 2024[38]; World Bank, 2024[39]). However, recent geopolitical turmoil is impacting international finance and development assistance, as evidenced by announcements of relative decreases in aid from some high-income countries (Gavas and Pleeck, 2024[40]; Bollag, 2024[41]; DEVEX, 2024[42]). ODA has also come under increased demand for specific crises. In 2022, for example, Ukraine received aid of USD 26 billion from Development Assistance Committee (DAC) countries and EU institutions, nearly double the USD 13.52 billion received by LAC in the same year (Carey, Desai and Ahmad, 2023[43]).

Even if all commitments were met – including the commitment of dedicating 0.7% of GNI to ODA, or the USD 100 billion dedicated to climate finance per year – most of LAC’s financing shortfall would remain, with slight differences across the region. Estimates show that for every dollar of development finance invested, the LAC region would need to mobilise USD 5-6 from other sources to meet an SDG financing gap of USD 650 billion (IDB, 2019[46]). The amount of concessional finance available is therefore very limited relative to the size of the region’s economies, and there is no indication that ODA to the region will increase in the years to come. However, the limited ODA received can better used. The United Nations’ Multidimensional Vulnerability Index is a tool that can help perform more effective resource allocations and help nations gain access to the concessional financing needed (OECD, 2024[47]).

As more LAC countries continue to graduate as their GNI per capita rises, and as per current ODA eligibility criteria, they will benefit less from ODA inflows. These countries continue to face a steep development financing gap. The limited access to ODA concessional finance creates sustainable development financing issues that can also have an impact on debt. Discussions are ongoing regarding a shift from graduation to “gradation” to enable recently graduated countries to continue to access concessional finance and allow for a balance between ODA and transition finance (ECLAC/OECD, 2018[48]; Cattaneo and Piemonté, 2021[49]).

Further efforts to analyse development finance and how it relates to generating sufficient development flows are taking place. The Total Official Support for Sustainable Development (TOSSD) is an example (Box 4.1). Additional flows accounted relate to activities undertaken by countries that do not consider themselves to be ODA providers, such as Brazil, Chile or Indonesia for instance. Projects tracked within the TOSSD array include, for instance, a standard loan for the multi-dimensional development of popular areas in the city of Guayaquil (Ecuador) provided by the Development Bank of Latin America and the Caribbean (CAF) in 2022. This kind of a cross-cutting project contributes to the achievement of multiple SDGs (3, 9, 11 and 17) by providing access to running water, reducing travel times and transportation costs, reducing the incidence of flooding in certain sectors and the propensity to disease due to exposure to dust and sewage.

In 2022, Brazil facilitated, through in-kind technical co-operation experts, the development of a methodology for irrigated rice planting in the Dominican Republic, contributing to three SDGs (2, 6 and 12). The aim of the project is to develop production systems with efficient use of irrigation water, using high-yielding varieties and environmentally friendly technologies for rice cultivation. Rice is one of the main crops in the Dominican Republic, with rice production done mainly under irrigation (98% of the production) by about 30 000 producers (IICA, n.d.[52]).

In 2023, the Chilean Government and the EU launched the Global Gateway Renewable Hydrogen Funding Platform in Chile worth EUR 225 million. With a grant component of EUR 16 million provided by the EU (LACIF), KfW and EIB mobilised together EUR 200 million of investments. The fund will be managed by CORFO and will focus on the development of concrete renewable hydrogen production and application projects in Chile. This support contributes to Chile’s plan to become the most competitive green hydrogen producer on the planet by 2030". Concrete projects will build local capacity and knowledge for Chile and the world.

In 2018, EIB provided a loan to Fonplata, a multilateral financial institution owned by Argentina, Bolivia, Brazil, Paraguay and Uruguay. Fonplata’s portfolio comprises projects in urban development, renewable energy, drinking water provision, social infrastructure, cultural heritage and rural accessibility in remote areas. This project has already facilitated access to basic services for 1 500 vulnerable homes in rural communities in Bolivia. This pilot project facilitates access to public equipment and services and improves social inclusion through the financing of urban infrastructure, housing, recreational services and transport in the Municipality of Corumbá, Brazil. 107 000 inhabitants benefit now from new paved roads, the development of Parque Jaguatiricas, the restoration of ten historic buildings, improvements in the coastal area of the Paraguay River, the construction of a citizen centre and the revitalisation of Eco Parque Cacimba da Saúde.

Beyond these examples, discussions are ongoing on measuring the full array of development finance. Development banks, including the AFD, and recipient countries have called to go yet one step further to improve the tracking of the impact of development flows. This call reflects the need to better evaluate the development impact of ODA and to increase its integration with other investment flows to align with the SDGs (AFD, 2022[53]). Other analyses suggest that a simplified dual measure of international public financing, reflecting both solidarity efforts and financial impacts, could effectively gauge the contributions of international development institutions to the SDGs, as a complement to ODA and TOSSD (AFD, forthcoming[54]).

More comprehensive and harmonised measures of development finance could contribute not only to provide a clearer picture of the full array of finance devoted to development but also of the partners in the region. For instance, development finance in LAC has diversified beyond DAC donors, with China emerging as a significant player in past decades. The number of projects and amount of China's loans to LAC countries have decreased in recent years. Between 2019-23, the LAC region received an average of just over USD 1.3 billion per year, as compared to peak lending in 2010, when the China Development Bank (CDB) alone issued nearly USD 25 billion to the region (Figure 4.3). Chinese finance to LAC remains concentrated in a few countries. Brazil continues to feature as an occasional recipient of recent Chinese DFI loans (Mayers and Ray, 2024[55]). However, despite being an important player that do not consider themselves to be ODA provider, China is not yet reporting to TOSSD.

Private finance is by far the largest external financial flow to LAC. Private investors are the most important external creditor for Latin American governments, and this share has grown over time (ECLAC, 2023[18]) (Figure 4.4). This points to the increasing economic development of the region and a relative decrease in the size of public financing. With ODA flows below the levels observed at the beginning of the 2000s, and the expected continued decreasing trend, other flows need to be better integrated through a sustainable development framework to ensure quality investment and to enable a more coherent development environment.

Stronger FDI regulatory frameworks are needed to ensure that foreign direct investment can better flow towards production transformation and sustainable development in LAC, including into renewable energy, green technologies, and digital innovation, which have great potential in LAC (ECLAC, 2023[58]). Currently, FDI primarily targets larger economies like Brazil and Mexico (OECD, 2023[59]).

Establishing favourable conditions and frameworks can encourage both domestic and foreign investors to allocate their resources to a particular country or region. This includes adopting policies and regulations that promote transparency, predictability and legal protection for investors. It also entails adhering to international standards and best practices in areas such as governance, environmental protection and labour rights (OECD et al., 2023[60]) (Chapter 1).

International co-operation – through initiatives such as the Common Framework of Sustainable Finance Taxonomies and the OECD Blue Dot Network – supports the region in developing and integrating new policies to channel private finance towards achieving the SDGs.

Mobilising private-sector finance for sustainable development is increasingly seen as a key instrument to meet the SDG financing gap. Mobilisation of private capital could involve the use of official development interventions to reduce the risks for the operation and bring in private-sector finance. The LAC region is better positioned than other regions to trigger private investors for several reasons. First, approximately 87% of private finance mobilised in 2018-20 went to middle-income countries, which is the categorisation of most countries in LAC (OECD, 2023[61]; World Bank, 2024[62]). In addition, the region’s increasing institutional capacity, growing capital markets and relative socio-economic similarities position LAC to benefit from innovative sustainable financing tools (IDB, 2019[46]).

In 2022, LAC registered the highest level of private mobilised finance for development at the global level. It totalled USD 21.2 billion, a sharp increase since 2017 (the year that mobilised private finance was introduced to the regular Credit Reporting System) (Figure 4.5) (OECD, 2024[63]). Similar to FDI trends, this was mainly driven by large increases in the largest economies in the region, including Colombia, Brazil, Mexico and Peru (OECD, 2024[63]). The transport sector drove significant increases in Colombia and Peru; the industrial and energy sectors boosted the increase in Brazil, and the communications sector accounted for most of the growth in Mexico (OECD, 2024[63]). This marks a significant improvement since the start of the 2010s, when the region received the least amount of mobilised private finance across regions. It also indicates increased engagement with public-private partnerships within LAC. Furthermore, LAC has the highest private capital mobilisation rate for infrastructure, at an average of USD 4.7 per dollar of public money compared to USD 1.9 per dollar in Asia and the Pacific (Global Infrastructure Hub, 2023[64]). These figures demonstrate the strong position that LAC is holding and a great momentum for even greater mobilisation rates.

International co-operation can have a strategic role in incentivising the flow of private finance to key development sectors that yield profits in the longer term. Development co‑operation can help lower economic barriers but also perceived risks, by offering access to “de‑risking instruments” that aim to share risks among multilateral, public and private actors, such as blended finance or guarantees offered at concessional or competitive terms to unlock private finance (OECD et al., 2023[60]).

The sectoral distribution of the private finance mobilised to the region by official development interventions shows that there are many opportunities to be explored. In 2022, mobilised private finance was primarily directed towards traditional, economically relevant sectors, with 77.2% allocated to economic infrastructure and services, and 16.4% to production sectors (Figure 4.6). The former includes banking and financial services, transport and storage, energy, and communications. Meanwhile, social infrastructure sectors only received around 4.9% of total mobilised finance in 2022, of which only 0.5% was devoted to education and health. International co-operation can be better focused by providing public financing and by crowding in private financing for sectors that generate significant social and environmental gains but do not attract sufficient private flows.

Multilateral development providers are the LAC’s largest source of mobilised private finance and therefore have a key role in improving mobilisation outcomes. In the period 2020-22, multilateral providers accounted for almost 83% of mobilised finance, with bilateral providers accounting for just over 17% (OECD, 2024[63]). Multilateral providers include MDBs as well as EU institutions and other funds. Beyond their large share of mobilisation, multilaterals, and particularly MDBs, also mobilise additional bilateral participation (Avellán et al., 2024[65]). MDBs therefore act as a key investor for sustainable development (OECD, 2024[63]).

MDBs have made concerted efforts to boost co-operation and collective lending. In 2023, the largest MDBs made a commitment to increase collaboration towards an acceleration in inclusive sustainable development through improved private-sector mobilisation (World Bank, 2023[66]). This commitment includes a capital adequacy framework measure that could potentially increase their collective lending capacity by around USD 300‑400 billion over the next decade. However, without the required large scaling up of financing, these alterations will be insufficient to address the pressing financing needs of developing economies. MDBs will need to provide an annual increment of USD 260 billion in lending to respond to the mounting development challenges (CGD, 2023[67]).

Lending by MDBs has grown significantly in LAC. Annual disbursements increased from USD 30 billion in 2000 to USD 96 billion in 2022, with MDBs providing vital countercyclical support during crises, sharply increasing disbursements in 2009 and after the COVID-19 pandemic. Development banks are in a unique position to accelerate investments in sustainable development, but the size of the paid-in capital bases of MDBs has not increased in line with the expansion of the global economy or with growing investment needs. Scaling up MDB resources has become a key priority for the international community, and the MDBs have begun to undertake a range of reforms to expand their financial capacity.

Bilateral providers can fulfil distinct and complementary development needs. The primary vehicles for bilateral mobilisation are development finance institutions, mostly national and subnational public development banks (PDBs), which play a key role in expanding access to financial markets for micro, small and medium-sized enterprises (MSMEs) by providing technical support and innovative financial services that drive employment (OECD et al., 2023[60]) (Chapter 3). This can be seen in part by the distinct financing tools they offer, with higher usage rates of credit lines (22%) and simple co-financing (11%) than multilaterals (Figure 4.7) (OECD, 2024[63]). These more tailored services are essential at the local level, where local knowledge boosts the effectiveness of mobilisation. Between 2020 and 2022, EU member states were the second largest bilateral providers of mobilisation (35%) after the United States (54%) (OECD, 2024[63]). Hence, there is a particular role here for the EU and its Member States in the promotion of private finance mobilisation projects.

Bilateral partners are also innovating in the mechanisms to mobilise private finance. Spain, for instance, launched the Huruma Fund, the country’s first social impact fund, aiming at addressing the funding gap for smallholder and marginalised farmers, primarily in Latin America, sub-Saharan Africa, and Asia. Over its 10-year lifespan, the fund aims to support 45 000 farmers globally by increasing cultivation areas, boosting farmer turnover, enhancing access to finance, and creating sustainable jobs. The fund, which successfully mobilised over EUR 120 million, including significant private investments, highlights the potential of combining public and private resources to achieve large-scale poverty reduction and development goals in high-risk areas (OECD, 2022[68]).

Multilaterals provide more financing to governments, play a key role in climate agenda-related development projects and lead in promoting private-sector financing in infrastructure development (OECD, 2018[69]). This large-scale infrastructure focus is evidenced by the fact that multilaterals utilise syndicated loans (33,7%) and direct investment in companies and special purpose vehicles (30,4%) at a much higher level than bilateral providers (8,8% and 22,3% respectively) (Figure 4.7) (OECD, 2024[63]). Multilaterals are also found to promote investments in global public goods (GPGs) impacting positively on poverty alleviation through developing regional infrastructure and improving sustainable development conditions, though these GPGs remains undervalued and undersupplied (Gulrajani, 2016[70]).

Innovative public-private partnerships include funds with several multilateral institutions as investors. For instance, the Central American Mezzanine Infrastructure Fund II LP (CAMIF II) is a 12-year mezzanine Fund that invested in existing and new (brownfield and greenfield) medium-sized companies or projects in infrastructure and related sectors in Central America, Colombia, the Caribbean, and Mexico. Investors include the IDB, the CABEI, Finnfund, Obviam, and Proparco. The fund aimed at reducing infrastructure bottlenecks, improving private sector development, strengthening investees from a financial and governance perspective and helping them scale up their operations It also helped to demonstrate the business case for private infrastructure projects and encouraged more private investors to enter the sector in the target region (IFC, 2024[71]). There are many examples as well for purely private funds that aim to attract private capital for sustainable development in LAC.

Greater co-operation between multilateral and bilateral providers is necessary to ensure their complementarity. Bilateral providers are found to have clearer chains of accountability, while multilaterals have greater financial capacities (Gulrajani, 2016[70]). By combining co-operation across the respective investment sectors and by increasing the level of project co-operation between providers, there are opportunities for increasing the overall mobilisation rate and improving sustainable development outcomes. Bilateral co-operation partners and providers of aid are increasingly focusing efforts on mobilising the private sector through diverse types of initiatives. Recent efforts have been undertaken to innovatively mobilise private sector financing and deepen international partnerships.

LAC partners such as the EU have developed innovative partnership schemes as part of its development strategy for the region. With the Global Gateway Strategy, the EU has put forward a holistic approach to international partnerships and sustainable development with integrated financing structures that bring together investment, trade and co‑operation actors aiming to raise environmental, social, governance (ESG) standards. Under the EU-LAC Global Gateway Investment Agenda (GGIA), the EU pledged to mobilise EUR 45 billion in LAC by 2027 through an agenda which is composed of more than 130 projects. This agenda, developed jointly with the region, and presented during the III EU-CELAC Summit in 2023 aims to exemplify how to narrow the global investment gap and support economic recovery while advancing the twin green and digital transitions (European Commission, 2023[72]). The monitoring of the Global Gateway development finance flows will follow, to the extent possible, the TOSSD measure.

Disbursements of TOSSD from EU institutions (and not individual EU countries) to LAC have increased from a total of USD 766 million in 2019 to USD 1 841 million in 2022 (Figure 4.8). The reduction in standard grants throughout this period confirms the decrease in share of concessionality, as grants do not need to be repaid. While grants accounted for 98% of TOSSD in 2019, they only accounted for 34% of it in 2022, the rest being standard loans (65% of the TOSSD received) and shares in collective investment vehicles (1%). The COVID-19 pandemic partly explains the larger share of standard grants in the 2019/20 period, as the EU disbursed more grants to support LAC countries to address the crisis, these being atypical years. However, standard loan disbursements, both concessional and non-concessional, have increased from USD 551 million in 2020 to USD 1 192 million in 2022. Further, TOSSD from the EU institutions benefit most of the LAC countries. In terms of volumes, Brazil the highest recipient.

The GGIA thereby fosters the mobilisation of quality investments that create local added value and promote growth, jobs, and social cohesion. The EU’s offer includes not only capital but also proven technology, regulation, and environmental and social standards. Implemented in a Team Europe Approach, the GGIA provides a platform that brings together the LAC partners, the EU and its Member States, development finance institutions, export credit agencies and the private sector.

The main financial tool to mobilise investments under the GGIA is the European Fund for Sustainable Development Plus (EFSD+). The EFSD+ Guarantee programme provides financing on favourable competitive terms and is implemented through two main paths aiming to mobilise private investments in support of achieving the SDGs. Firstly, the EU provides a EUR 26.7 billion guarantee cover at the global level in a partnership with the European Investment Bank (EIB) to support investments in partner countries where sovereign and other public sector risks are still a major bottleneck. Concretely, EIB signed in 2023 a total of EUR 969 million in loans for LAC, of which 71% relate to climate action and environmental sustainability (EIB, 2024[73]).

Secondly, the EU will provide a guarantee cover of up to EUR 13 billion until 2027 globally under the EFSD+ open architecture. The open architecture window targets private sector investments and is deployed by a range of implementing partners, including international financial institutions and European Development Finance Institutions. These guarantees are often supported by additional tools such as technical assistance and grants through blending (European Commission, 2023[74]) (Box 4.2).

The EU is also undertaking consultations on the integration of export credits to enhance co-ordination of its external development finance tools as part of the GGIA (European Commission, 2024[75]). Between 2016 and 2020, EUR 14.1 billion of export credits were provided to LAC, compared to EUR 32.3 billion of other EU development flows (Council of the EU, 2023[76]). Incorporating sustainable development taxonomy into export credits as planned would improve alignment of financial flows with the development agenda of LAC.

Beyond these private flows, there are other significant financial flows, such as remittances and philanthropy, that can help to support the financing of sustainable development by improving the investment environment and through additional facilitatory roles.

Remittances are a major and stable financial flow for LAC given the region’s high outward migration level. (IMF, 2017[81]). However, there is disparity in remittance inflows as the majority are concentrated in a few LAC countries, with the top six recipients – El Salvador, Guatemala, Haiti, Honduras, Jamaica and Nicaragua – receiving significantly higher amounts than the rest (Figure 4.9). Remittances are a key source of finance for those households at the lower end of the income scale (IDB, 2023[82]). Remittances have been found to have a positive influence on growth and poverty reduction in the destination country through increased finance for private households, which can spend the money in the local economy and increase bank deposits, which in turn can boost business lending (Fajnzylber and López, 2008[83]).

Turning to the diaspora in Latin America can be a source of much sought after green finance. After years of emigration, many Latin American countries have established large diasporas. Countries like El Salvador (12.7%), Paraguay (5.8%), Nicaragua (5.2%), and Mexico (4.7%) have substantial diaspora populations as a percentage of their home population (UNDESA, 2020[84]; UNDESA, 2024[85]). Diaspora bonds have been developed to target diasporas to raise funds for specific sectors and infrastructural projects. These are financial instruments issued by a country seeking collaboration with its diaspora, based on the premise of a patriotic dividend, thus offering financing at a lower cost than borrowing from institutional investors.

Diaspora bonds date back to 1951 when Israel first issued them. To date, few diaspora bond projects have been successful, although India and Israel have raised a combined USD 35 billion, and projects in Kenya, Nigeria, Pakistan and the Philippines have yielded positive results (World Bank, 2023[86]; CABEI, 2021[87]; Gevorkyan, 2021[88]). Years of trial and error on diaspora bonds reveal that challenges stem from scarce knowledge about the financial instrument, a lack of knowledge of preferences of the diaspora, and limited planning when issued. For these bonds to be successful, trust between diaspora and diaspora-emitting countries must be firm (OECD, 2007[89]). One way to achieve this is through a dedicated institutional framework for issuing and managing the bonds, while maintaining open dialogue between diasporas and authorities back home (World Bank, 2020[90]).

At the regional level, remittances as a share of GDP have remained steady over recent years, at 2.5% in 2023 (IDB, 2023[82]). However, when looking at subregions, the relative size of remittances varies considerably. In Central America, remittances accounted for 12.7% of GDP, compared to 9.4% in the Caribbean and only 0.7% in South America. There has been significant growth in absolute terms per subregion, with 13.2% growth in Central America, 7.9% in South America and 2.6% in the Caribbean in 2023 (IDB, 2023[82]). This has been driven by several countries in particular, with high growth in Nicaragua (45%), Argentina (26%), and Peru (14%) (KNOMAD-World Bank, 2023[92]).

These flows can better support some areas of development needs than other flows such as private mobilisation. First, remittances lower income volatility in the LAC region and therefore provide a barrier against poverty (IMF, 2017[81]). Second, remittances can be an important source of financing for MSMEs, although evidence is still limited for LAC (Catrinescu et al., 2009[93]). Between 70% and 80% of remittances are spent on household expenses associated with food, health, housing, and education, among others, and the remaining 20% to 30% are dedicated to business development or savings (OECD, 2024[47]; ECLAC, 2020[94]).

However, the benefits of remittances for the economy can only be fully realised with adequate institutional structures and specific policies that facilitate their complementary development role. For instance, reducing transaction costs could incentivise the flow of remittances to LAC countries. Currently, transaction costs in LAC are higher than in regions such as East Asia and the Pacific, South Asia, and the Middle East and North Africa. On average, sending USD 200 in remittances costs 6.1% in LAC, compared to 4.3% in South Asia (KNOMAD-World Bank, 2023[92]). Under SDG 10, the United Nations aims to reduce transaction costs to below 3% and eliminate corridors with costs exceeding 5% by 2030 (UN, 2015[95]). Reducing these costs, through digitalisation and other improvements, could bolster financial flows.

Next, improvements could be made to ensure that especially lower-income households have easier access to digital banking for receiving remittances, as a significant share of remittances are transferred via cash transactions (IMF, 2017[81]). Financial policy as well as health and stability of the financial sector will ultimately determine the impact of remittances in the country of origin (OECD, 2017[96]). Finally, the regulatory environment significantly impacts the benefits of remittances. Stable formalised remittance channels can be facilitated by: i) enhancing anti-money-laundering and combating the financing of terrorism (AML/CFT) frameworks; ii) integrating the OECD’s Illicit Financial Flows toolkit; and iii) engaging in regional-based regulatory environment solutions (IMF, 2017[81]; OECD, 2016[97]). In addition, financial regulations could provide greater recognition for remittances as collateral for small business loans (CABEI, 2021[87]).

International philanthropy provides LAC with substantive funding for sectors often overlooked by the private sector. Since 2017, 40 large international donors based in OECD countries have disbursed USD 71.5 billion in philanthropy for development, or about USD 12 billion a year, of which only around 6% (USD 700 million) went to LAC countries (OECD, 2021[98]; OECD, 2023[99]). Domestic foundations based in the region also provide significant capital for development objectives, for example providing more private capital than international organisations to Mexico as of 2019 (OECD, 2021[98]).

While international philanthropic flows are highly concentrated by donor and destination, this has begun to diversify. Close to 75% of funding received from large donors in LAC comes from the top ten international philanthropic donors (OECD, 2023[99]). Yet, other donors are stepping in. Geographically, a few countries benefit from the bulk of the international philanthropic financing. There are two groups of countries: Brazil, Colombia, El Salvador and Mexico, which each received USD 90-100 million per year from philanthropic foundations, and Ecuador, Guatemala, Haiti and Peru, which each received USD 10-20 million per year.

Unlike philanthropy for development at the global level, which focuses predominately on health and education, philanthropic funding for LAC is heavily concentrated in financing civil society (close to USD 2 billion), in particular non-governmental organisations (NGOs), followed by environmental protection (USD 500 000) (Figure 4.10). For some of these large donors, most of their programmatic work related to the environment and climate change is focused on the LAC region. For instance, the focus of the Ford Foundation in the Andean region is mostly on natural resource conservation and the inclusion of marginalised communities (Ford Foundation, 2024[100]).

Philanthropic foundations can also play a role in boosting collaboration across providers of international co-operation, given their unique convening power as a non-state actor and their focused mission objectives. Taking a neutral stance, they can collaborate with different government administrations, private-sector players, NGOs and local communities to address specific challenges. Foundations often provide resources for promising pilot projects that can later be scaled and expanded through collaboration. By leveraging both financial assets and in-house expertise, philanthropic organisations can nudge the co‑operation needed to tackle problems that other actors cannot solve independently. The operating flexibility of foundations often allows them to seed investors in new initiatives or innovations, which can solve collective action problems in international collaboration.

This sort of partnership can serve as a model for how philanthropic foundations based in LAC can work in tandem with international organisations to foster sustainable development, highlighting the critical role of regional actors in addressing local challenges.

Improving and scaling up debt tools such as green, social, sustainability, and sustainability-linked (GSSS) bonds (including blue bonds), catastrophe (CAT) bonds, climate or nature swaps, and natural disaster clauses are key to financing the sustainable development agenda. GSSS bonds can mobilise direct investment into sustainable activities while supporting the development of sustainable capital markets. CAT bonds can increase the external borrowing capacity of governments by transferring the financial risk of catastrophic events to investors, while natural disaster clauses can help to align debt servicing obligations with a country's ability to manage and recover from catastrophic events. For biodiverse and highly indebted countries, climate or nature swaps can serve as important sustainable financing instruments. As these instruments take hold in the region, enhanced regulation and oversight are essential to ensure their effectiveness and mitigate risks.

The GSSS bond market represents only a small fraction of the global bond market to date. It is still considered a niche sector, representing only 1% of total assets outstanding and around 2% of new issuances globally (OECD, 2022[101]; OECD, 2024[102]). In the LAC region, however, GSSS bonds are proving to be an attractive financing mechanism, increasing from 9.3% of total LAC bond issuance in international markets in 2020 to almost 35% in 2023 (ECLAC, 2024[103]; OECD, 2024[102]). For issuers in LAC, raising funds through these assets instead of traditional bonds has become an attractive option for increasing returns on liquid global capital, diversifying the investor base, mobilising direct capital into sustainable activities and acquiring financial support for creating sustainable capital markets. Between 2014 and 2023, the GSSS international bond market in LAC reached a cumulative value of USD 131 billion (Box 4.3). Total green bond issuance in LAC nearly doubled over four years, from USD 18.8 billion in 2019 to USD 36 billion in 2023. This includes funds such as the Green Climate Fund (GCF) with funding for projects involving LAC countries at USD 3.4 billion (GCF, 2024[104]).

Building on the success of green bond issuance in Europe, the EU is preparing to launch its Global Green Bond Initiative (GGBI), an investment vehicle aimed at promoting the development of green bond markets in LMICs (Box 4.3). The GGBI aims to mobilise EUR 15-20 billion for sustainable investments (Présidence de la République, 2023[105]). Another example is the LAGreen Fund, which was the first green bonds fund in the region established in 2021 with support from the LACIF blending facility. By investing in green bonds and supporting new issuers with technical assistance, LAGreen facilitates access to this innovative instrument for financing green initiatives in the region. The fund promotes best practices and high impact standards, with the aim of consolidating green bonds as an instrument to mobilise funding from international capital markets, financing the transition to more sustainable economic models. At end-2023, LA Green had already subscribed to nine GSSS bonds across seven countries, having mobilised a total investment of EUR 620 million for green investments (LAGreen, 2023[106]).

Social, sustainability and sustainability-linked bonds have also grown significantly, reaching a cumulative issuance of USD 95.1 billion in 2023 since the inception of this market segment in 2016. This growth highlights the potential of these diverse financial instruments to tackle the region’s multi-dimensional structural challenges, which can involve both social and environmental dimensions.

Within the broader category of GSSS bonds, blue bonds are emerging as a powerful tool in the region for financing initiatives aimed at safeguarding oceans and fostering sustainable “blue economies” – economic activities that depend on or impact the use of coastal and marine resources (OECD/IDB, 2024[108]). Blue bonds present a promising opportunity to unlock the financial potential of blue economies in the LAC region, especially in the Caribbean, by providing avenues for substantial and long-term investment (OECD/IDB, 2024[108]). In 2021, BB Blue, a special purpose vehicle (SPV) created to manage Barbados’ debt-for-nature swap, issued two blue bonds worth USD 71.6 million. This allowed Barbados to buy back USD 77.6 million in Eurobonds due in 2029 at a discount. Backed by Credit Suisse and guaranteed by the IDB and The Nature Conservancy (TNC), these bonds received better credit ratings than conventional sovereign bonds issued by Barbados (OECD/IDB, 2024[108]). This deal showcased a blended finance approach, facilitated by financial institutions like CIBC FirstCaribbean and Credit Suisse (The Nature Conservancy, 2023[109]). In the same year, a subsidiary of The Nature Conservancy, Belize Blue Investment Company, LLC (BZBIC), backed by Credit Suisse, arranged blue bonds that funded a USD 364 million loan to Belize to repurchase a USD 553 million “superbond” (OECD/IDB, 2024[108]). This superbond represented the government's entire external commercial debt, equivalent to 30% of GDP (Owen, 2022[110]). In 2022, the Bahamas issued two blue bonds totalling USD 385 million, which attracted high demand in the international debt market (ECLAC, 2023[111]).

International financial co-operation will be essential to prevent fragmentation of the GSSS bond market in LAC. It will help harmonise bond standards, taxonomies, and regulatory frameworks across countries while also building capacity in LAC countries that need support for issuance, certification, monitoring, and framework development (see below on sustainable finance frameworks). Aligning bond standards and taxonomies to international standards is important to further boost investors’ confidence and streamline the different reporting requirements.

The gradual shift towards sustainable debt securities over conventional bonds indicates a growing investor appetite in sustainable projects. This trend can support both private and public issuers in meeting their sustainability goals. The share of GSSS bond issuance as a proportion of total bond issuance in international markets has risen in the LAC region, reducing the market share of conventional bonds (OECD, 2024[102]) (Figure 4.12, Panel A). Specifically, the share of GSSS sovereign bonds in total sovereign bond issuance in international markets has significantly increased, from 36% in 2022 to 50% by 2023. Consequently, the proportion of conventional sovereign bonds dropped from 64% in 2022 to just 50% in 2023. In the corporate sector, the peak share of GSSS bonds reached 39% of total corporate bond issuance in 2022. However, this share experienced a notable decline in 2023, attributed mainly to increased risk aversion among investors and rising borrowing costs. Similarly, for supranational and quasi-sovereign issuers, the percentage of GSSS bonds in total bond issuance saw a sharp decrease, from 40% in 2022 to 15% in 2023. In 2023, sovereign issuances accounted for the largest share of GSSS issuances, at 74%, followed by corporate issuances at 18% and supranational and quasi-sovereign issuances at 9% (Figure 4.12, Panel B). An example of how green bonds support sustainable development in LAC is their use in advancing the circular economy. Corporate green bond issuances in countries such as Brazil, Colombia, Chile, and Mexico have primarily targeted the pulp and paper industry (UNEP, 2023[112]). In addition to green bonds, other financial instruments—such as hybrid tools like mezzanine and convertible structures, and non-reimbursable funds, including grants and blended finance schemes—have been used in recent years to promote the circular transition in LAC (Chapter 3).

Compared to green, social and sustainability (GSS) bonds, sustainability-linked bonds (SLBs) are distinguished by financial characteristics that are contingent on the issuers’ meeting pre-determined key performance indicators (KPIs) and sustainability performance targets (SPTs). These are linked, for instance, to the issuer's commitment to reducing greenhouse gas (GHG) emissions or adopting cleaner technologies (OECD, 2024[115]; OECD et al., 2023[60]). SLBs can feature an innovative structure, offering potential rewards in the form of lower coupon rates for issuers if they achieve all sustainability objectives, or imposing penalties if these targets are not met. As such, these types of bonds hold considerable promise for financing initiatives in areas like biodiversity, climate change adaptation and social development – sectors that often lack the large, bankable asset pipelines necessary for issuing traditional GSS bonds. Additionally, unlike GSS bonds, which require underlying assets, SLBs can be backed by an issuer’s entire balance sheet, allowing them to be issued in higher values and with longer maturities (OECD, 2024[115]).

SLBs innovative structures in LAC are financing key development areas with multiple sustainable objectives. In 2023, the share of SLBs in total GSSS bond issuance in international markets in LAC stood at 36%, with sovereigns leading the issuance. Despite high volatility in recent years, SLB issuance in developing countries grew significantly following the first issuance in 2019 (OECD, 2024[115]).

Sovereign SLBs can be linked to existing sustainability commitments, enhancing their credibility and relevance. In addition to domestic resource mobilisation, primarily through taxes (see Chapter 2) and green budgeting – which integrates environmental and sustainability considerations into government budgeting and financial planning – these instruments can also help the national government meet its obligations under its nationally determined contributions (NDCs) and the Paris Agreement. Chile and Uruguay became pioneers in 2022 as the world’s first nations to issue sovereign sustainability‑linked bonds; as of April 2024, they remained the sole issuers in the LAC region (OECD et al., 2023[60]). In March 2022, Chile issued a USD 2 billion sovereign bond tied to two key performance indicators: reducing GHG emissions and boosting energy production. With this issuance, Chile became the first government to link its official NDC commitment on climate change to a bond issuance. Since then, Chile has continued to lead in sovereign SLB issuances, with six issuances in 2023 totalling USD 8 billion. In November 2022, Uruguay issued its first Climate Change-Indexed Bond (BIICC). The country issued another SLB in 2023 totalling USD 700 million (OECD et al., 2023[60]). In 2023, sovereign SLBs had an average value of USD 1.2 billion, higher than other thematic bonds. In 2023, they also had a longer maturity average of 16 years, and lower average coupons of 5%. SLB yields are linked to the achievement or non-fulfilment of KPIs/targets, with adjustments ranging from 5 basis points up to 100 basis points if multiple targets are not met (OECD, 2024[102]).

To scale up SLBs in the region, international financial co-operation is crucial for overcoming barriers hindering market development, particularly in establishing and aligning monitoring and supervision mechanisms to international standards to boost investors’ confidence by preventing green/SDG washing. At present, SLBs are at risk of such washing in countries with limited frameworks/taxonomies. International best practices exist (such as the EU Taxonomy) however some countries lack capacity to align their national frameworks to international best practices. Immaterial or not so ambitious KPIs and SPTs, insufficient data quality, and a shortage of skilled analysts to assess SLB KPIs are other risks for greenwashing. International co-operation can build the capacity of regulatory authorities to ensure enhanced quality and availability of data and indicators to track sustainability progress. Regulation and monitoring need improvement, and definitions should be harmonised regionally and internationally to enhance market transparency (see below on sustainable finance frameworks). Additionally, international capacity-building partnerships are essential to bridge regulatory and co‑ordination gaps. Developing and utilising locally adapted SLB guidelines that prioritise sustainability will be crucial for developing local-currency bond markets, mitigating currency risk and enhancing financial resilience (OECD, 2024[115]).

Catastrophe bonds have the potential to significantly increase governments' external borrowing capacity by transferring the financial risk of catastrophic events to investors, who are attracted by the potential for higher yields and portfolio diversification (OECD et al., 2022[116]). In 2009, Mexico became the first country to issue a multi-peril multi-region CAT bond, for USD 290 million, using the World Bank’s MultiCat Program. The CAT bond provided insurance against earthquake risk in three regions around Mexico City and against hurricanes on the Atlantic and Pacific coasts (World Bank, 2013[117]). Eight years later, in 2017, Mexico received a USD 150 million payout from the World Bank-supported CAT bond (Artemis, 2017[118])  In 2021, Jamaica issued a CAT bond of USD 185 million with the support of the World Bank that is helping the country to address its financing gap by providing coverage for three hurricane seasons. Through this insurance-like risk transfer agreement, Jamaica stands to receive the necessary funds if future storms surpass pre-defined intensity thresholds. Jamaica's experience underscores the importance of collaborating with international financial institutions throughout the pre-issuance and issuance phases of a CAT bond transaction. The World Bank helped Jamaica to secure bilateral financial support in the form of grants from donor countries to finance CAT bond premium and transaction costs related to the design, structure and placement of the CAT bond (OECD, 2024[119]). Although limited, implementation of sovereign CAT bonds by developing countries, such as the ones in Jamaica and Mexico, demonstrates that there is market appetite for this sophisticated financial instrument when it is deployed by highly exposed and vulnerable countries (OECD, 2024[119]).

Multi-country CAT bonds offer a solution for nations unable to issue CAT bonds independently. Such bonds allow several countries to pool resources for regional benefits. The example of the Pacific Alliance, which groups Chile, Colombia, Mexico and Peru, demonstrates how such initiatives can reduce transaction costs and attract a wider investor base, ultimately leading to lower premium rates. These CAT bonds total USD 1.36 billion, representing the largest sovereign risk insurance transaction and the largest CAT bond issuance ever facilitated by the World Bank (OECD, 2024[119]). They enable multiple sovereign nations to enter the CAT bond markets independently, without the need for a risk pooling facility. For Chile, Colombia and Peru, this transaction provides a gateway to capital markets for obtaining disaster risk insurance for the first time. The transaction involved five classes of bonds: one each for Chile, Colombia and Peru, and two totalling USD 260 million for Mexico (OECD, 2024[119]). Efforts are currently underway, with World Bank support, to develop a regional CAT bond for the Caribbean.

To advance the use of catastrophe bonds in LAC, it is crucial to overcome a number of challenges, such as developing robust legal frameworks that support risk transfer effectively. International co-operation is key to establishing clear regulations and procedures governing the issuance and management of CAT bonds that ensure transparency and compliance with international standards. There is also a critical need to define and clarify the roles and responsibilities of all stakeholders involved in the CAT bond ecosystem. This includes issuers, investors, reinsurers, regulatory bodies and government agencies, among others. Establishing clear guidelines and protocols for each stakeholder's involvement will help to streamline processes, mitigate risks and enhance market confidence (OECD et al., 2022[116]; OECD, 2024[119]).

Natural disaster clauses can link countries’ repayment capacity to their risk exposure. By accounting for the financial impact of disasters, these clauses help align debt servicing obligations with a country's ability to manage and recover from catastrophic events. A natural disaster clause was incorporated into Grenada's debt restructuring efforts in 2016, enabling the country to capitalise interest and defer principal maturities on bonds in the event of significant natural disasters, subject to specific conditions. In 2018, Barbados introduced the Barbados Economic Recovery and Transformation programme. This reform initiative, which included debt restructuring for both domestic and external debt, was the basis for the IMF’s Extended Fund Facility support programme. An agreement with domestic creditors was reached in late 2018, and natural disaster clauses were added to restructured government bonds. For example, the new bond, maturing in 2029, allows interest capitalisation and payment deferral for two years after a major natural disaster (ECLAC, 2021[120]).

Disaster clauses may lead to higher borrowing costs by encouraging governments to take on more debt at higher yields, potentially delaying repayments for investors. However, recent analyses suggest that these clauses improve borrowing terms overall. Governments tend to increase borrowing until their default risk mirrors that of economies without disaster clauses, with the expectation of delaying repayments. This reduces their expected debt servicing costs, despite higher spreads. Thus, governments accept the higher spreads with minimal impact on their overall borrowing costs (OECD et al., 2022[116]).

A debt-for-nature swap (DFNS) is a liability management exercise where the country issues a guaranteed instrument (loan or bond) on more favourable terms and then uses the proceeds to buy back outstanding more expensive sovereign debt, generating savings on the interest rate coupon and/or the principal. These savings will be used to finance nature conservation and/or climate change mitigation/adaptation activities. DFNS have already been employed in the region, and new proposals are under development, particularly among biodiverse but highly indebted Caribbean countries with low credit ratings and limited access to markets (OECD/IDB, 2024[108]). These nations can leverage climate or nature swaps to confront their escalating financial challenges. In May 2023, Ecuador executed the largest DFNS to date, replacing a USD 1.65 billion debt with a USD 656 million loan funded by a blue bond. This swap resulted in an average discount of 60% and was financed by a loan granted to the country by an SPV. The loan was enhanced by a USD 85 million guarantee from the IDB and USD 656 million in political risk insurance from the US Development Finance Corporation. The SPV financed the loan through the issuance of the Galapagos Marine Bond, a USD 656 million marine conservation-linked bond with maturity in 2041. Credit Suisse arranged and structured the issuance, with support from 11 private-sector insurers that provided more than 50% in reinsurance, enhancing Ecuador's conservation efforts (West, 2023[121]).

Other LAC countries have also implemented DFNS to manage debt sustainability. In 2021, The Nature Conservancy and the government of Belize finalised a USD 364 million debt conversion aimed at marine conservation (the protection of 30% of Belize’s ocean) (Green Finance Institute, 2021[122]). This initiative not only reduced Belize’s debt by 12% of GDP but also generated an estimated USD 180 million for conservation efforts (Green Finance Institute, 2021[122]). As in Ecuador’s DFNS, the US Development Finance Corporation played a crucial role by providing political risk insurance, which enhanced the credit profile of the bonds to Aa2 – significantly higher than Belize’s Caa2 rating (US International Development Finance Corporation, 2023[123]). The transaction represents the largest debt refinancing for ocean conservation worldwide (Green Finance Institute, 2021[122]). In 2022, Barbados conducted a debt-for-nature swap involving USD 150 million of international bonds, resulting in USD 50 million allocated to marine conservation initiatives. This swap holds particular significance for an island nation heavily dependent on its pristine waters and beaches for tourism (Savage, 2023[124]). In July 2024, the EIB and IDB approved guarantees for Barbados totalling USD 300 million to support an innovative debt-for-climate swap, unlocking resources for investing in critical climate adaptation infrastructure projects (European Investment Bank, 2024[125]). In November 2024, supported by the IDB, The Nature Conservancy (TNC), and others, the Bahamas launched a debt conversion project to save USD 124 million over 15 years for ocean conservation and managing its Protected Areas System. The project facilitated a USD 300 million debt buyback using proceeds from a new loan arranged by Standard Chartered Bank (IDB, 2024[126]).

Caribbean islands are also preparing to negotiate with creditors for debt swaps, given their needs for sustainable financing (OECD/IDB, 2024[108]). In 2018, Antigua and Barbuda, Saint Lucia, and Saint Vincent and the Grenadines commenced negotiations with creditors for debt swaps aimed at achieving a reduction in their debt-to-GDP ratio of at least 12.2%. This could result in generating approximately 1% of GDP of resilient growth, which could elevate the weighted average growth rate of these three nations to levels seen before the global financial crisis (ECLAC, 2018[127]). The total value of debt reduction needed to achieve a one percentage point increase in growth across the three countries is estimated at approximately USD 525.9 million, with the total value of the debt haircut ranging from USD 105.2 million for a 20% haircut scenario to USD 263.3 million for a 50% haircut scenario (ECLAC, 2018[127]).

Countries in the region must carefully assess the downsides of DFNS before engaging in them. Financial studies on the three DFNS transactions in the region indicate that these swaps alone cannot structurally reduce debt or improve sovereign creditworthiness (Caballero, Gonzalez and Nieto, 2024[128]). While they have reduced debt burdens and slightly improved the gross external financing needs metric, overall sovereign financing needs have remained high, exceeding 100% of current account receipts, with little material improvement in external metrics. From a fiscal perspective, DFNS may be less efficient than similar mechanisms such as conditional grants and broad debt restructuring. This is why these instruments can be useful tools but complementary to debt restructurings (Lazard, 2021[129]). The latter are more effective in ensuring that transferred resources reach their intended targets, whether for financing climate investments or reducing debt burdens, rather than benefiting other creditors (Chamon et al., 2022[130]). From a sustainability perspective, the ability of governments to fulfil long-term conservation commitments is uncertain. DFNS transactions often lack clarity on the green or blue projects they support, with some ‘’blue’’ bonds having no specified use-of-proceeds. This raises the risk of green/blue washing. Additionally, the extended duration of environmental commitments makes them vulnerable to political changes. Effective enforcement of climate contracts will be crucial in the coming years, as failure to meet commitments may impact the future of debt-for-nature swaps (Caballero, Gonzalez and Nieto, 2024[128]).

Looking ahead, it is crucial to ensure that DFNSs in the region serve two primary objectives: first, to increase fiscal resources for debtor countries unable to fully fund climate investments through loans alone, and second, to prioritise benefits for the debtor. To achieve this, reducing current transaction and agency costs is essential. DFNSs should guarantee that funds saved from reduced debt service are directed towards specific investments rather than general debt obligations, as demonstrated by Belize’s recent marine conservation swap (Chamon et al., 2022[130]). When involving buybacks of commercial debt, these transactions should be managed by third-party donors or creditors to potentially secure lower prices than debtor countries. Policies scaling up DFNSs should align with broader climate finance objectives by linking swaps to budget allocations, establishing standardised climate performance indicators for debt instruments and using carbon credits to incentivise swaps from private and public sources. Implementing efficient monitoring and oversight mechanisms will enhance transparency and strengthen institutional frameworks. International partnerships involving multilateral organisations, civil society, NGOs and the private sector can enhance collaboration, monitoring and standardisation (Fuller et al., 2018[131]). International organisations can help standardise the instrument to reduce structuring costs by implementing specific DFNS templates that offer debtor country practitioners clear guidelines and best practices (Lazard, 2021[129]). All these efforts could reduce transaction costs, promote effective emissions reductions and enhance fiscal benefits from DFNS and other climate finance mechanisms (Chamon et al., 2022[130]).

Countries in LAC are focusing on expanding, improving and harmonising sustainable finance frameworks, which are essential to regulating, monitoring and verifying the issuance of GSSS bonds and other sustainable financial instruments. Conceptual frameworks for measurement and decision making are also key to reorienting external flows to recalibrate for social risks and promote quality investment. Frameworks that are more consolidated or interoperable have the potential to reduce transaction costs for investors, making capital markets in the region more attractive. Such frameworks may include disclosures, principles, standards and/or taxonomies that serve two main purposes: i) reducing and managing the environmental, social and governance (ESG) risks of financial activities; and ii) encouraging the flow of capital to assets, projects, sectors and companies that have environmental, climate and social benefits. Sustainable finance frameworks guide the issuance of GSSS bonds at the international, regional and national levels (OECD, 2024[102]).

At the international level, the principles of the International Capital Market Association (ICMA) and the Helsinki Principles are often used as overarching guiding frameworks for the issuance of GSSS bonds at the regional and national levels (OECD et al., 2023[60]). ICMA’s suite of instruments – Green Bond Principles, Social Bond Principles, Sustainability Bond Guidelines and Sustainability‑Linked Bond Principles – have become increasingly important in international markets. Several countries and corporates around the world now use them as a reference to develop their own frameworks for the issuance of GSSS bonds and other sustainable financial instruments (OECD et al., 2023[60]). Other international frameworks aimed at improving ESG risk management for corporates are also being widely adopted, as demand for corporate sustainability disclosure is increasing from asset managers investing not only in GSSS bonds but also in all types of securities, including equity (OECD, 2023[132]). Such frameworks include, for instance, the OECD’s framework on measuring the non-financial performance of firms and the UN’s Principles for Responsible Investment, as well as more robust ESG metrics that account for the broader social performance of firms (OECD, 2022[133]).

While overarching principles and guidelines provide valuable advice, it is essential for issuers at the national level to establish clearer, more binding standards and taxonomies. By the end of December 2023, 14 countries in LAC had launched initiatives aimed at developing their sustainable finance frameworks, including protocols, standards, guidelines and/or taxonomies totalling 221 actions (OECD, 2024[102]). These initiatives include actions led by governments (e.g. ministries, central/development banks, and regulatory bodies), private sector entities (e.g. industry associations, capital market entities, stock exchanges, insurance companies and consulting firms), as well as joint efforts, including international co‑operation (OECD, 2024[102]).

When examining sustainable finance frameworks in LAC countries, green and sustainable taxonomies stand out. These initiatives have increasingly been adopted throughout the region since 2022. As of May 2024, they had been published in Argentina, Chile, Colombia, the Dominican Republic, Mexico and Panama, and were under development in countries such as Brazil, Costa Rica and Peru (Table 4.2).

These taxonomies establish technical assessment criteria and define green, social, sustainability or sustainability-linked activities based on prioritised sectors and sustainable development goals. In April 2022, the Colombian government published the region’s first green taxonomy, with a focus on land-use sectors. Since then, seven more countries have published or made significant progress in developing sustainable or green taxonomies, focusing on climate change mitigation and adaptation, the circular economy, biodiversity protection and sectors such as land use, electricity and water. Interoperability and harmonisation remain crucial, as each taxonomy determines environmental priorities based on its unique context. This is essential for international investors seeking a transparent set of criteria to track the environmental impact of the projects in which they invest. One way to standardise is by following the EU's green taxonomy and classification criteria. Moving forward, it is crucial to ensure that national taxonomies are comprehensive, encompassing all essential production sectors for sustainability, climate change mitigation and digital inclusion (OECD, 2024[102]).

At the EU regional level, the EU Sustainable Finance Framework is employed as a guiding reference for the issuance of GSSS and other sustainable finance mechanisms. This framework encompasses the EU Taxonomy, disclosure regulations, and standards, which help support companies and the financial sector, particularly by facilitating private financing for transition projects and technologies. Established in 2020, the taxonomy lays the groundwork for identifying and labelling environmentally sustainable activities with clear conditions and technical criteria (European Commission, 2020[142]). In 2023, the European Commission expanded the EU Taxonomy's scope by including additional activities and proposed new regulations for environmental, social, and governance (ESG) rating providers. These measures aim to enhance market transparency in sustainable investments and to facilitate the identification of activities eligible for sustainable financing (European Commission, 2023[143]).

The EU Taxonomy exemplifies a harmonised regional framework that enhances market confidence and transparency to facilitate investment in sustainable activities. Ensuring interoperability and clarity between LAC national taxonomies and the EU Taxonomy is crucial. Interoperability involves using similar guiding principles and core elements, such as objectives, sector classifications and science-based criteria with comparable metrics and thresholds (Climate Bonds Initiative/Ambire Global, 2023[144]). Taxonomy comparative studies, like the EU-funded ones for Colombia and Mexico, can enhance transparency for EU and international investors and stakeholders. Such studies can foster market clarity, reduce transaction and research costs, and aid in cross-border capital mobilisation for sustainable investments.

The first Common Framework of Sustainable Finance Taxonomies in LAC marks the initial step towards establishing a harmonised framework akin to that of the EU. Launched in June 2023 by the UN system in LAC, the regional framework was developed by the Working Group on Taxonomies of Sustainable Finance in Latin America and the Caribbean and funded by the EU through the EUROCLIMA Programme (UNDP, 2023[145]). The framework serves as a voluntary guidance tool for entities in the region engaged in or planning to develop taxonomies. It also offers direction for achieving interoperability of taxonomies within LAC and globally. Aligning the methodologies of various taxonomies will enhance investor confidence and minimise transaction costs (OECD et al., 2023[60]).

As Latin America and the Caribbean prepares for the Fourth International Conference on Financing for Development in 2025, there are opportunities to assess the region’s strategic priorities in a challenging international context. The development of a shared agenda will help the region to pursue sustainable development and present solutions to current challenges at a global level. A shared and integrating agenda would contribute to realise the region’s development opportunities and ensure greater sustainable development financial flows. This agenda should address challenges in the international financing context, such as access to liquidity, risk perceptions and access to concessional finance, as well as fragmentation and the need for co‑ordination among development providers.

To bring concrete solutions and proposals to the conference, a more unified approach would allow for greater coherence and ensure that that the region’s interests are properly represented, being able to influence final negotiations. First, private flows need to be aligned with sustainable and development goals. This entails improving and harmonising regulatory frameworks; better channelling of public policy and foreign investment into areas of productive transformation, including financing from the EU through the GGIA; and equipping the region to reach its 2030 goals. Second, greater collaboration is needed among development actors, including MDBs and DFIs from developed and emerging economies, in order to maximise the coherence and effectiveness of constrained financial resources. This entails using both official and private flows by leveraging the strengths of different actors and providing integrated financing options for the region. LAC can improve its financing outlook by fostering innovative development partnerships with private actors, such as philanthropic providers, and leveraging development flows across developing countries. To make sure that that these private and public flows go towards quality investment, a strong enabling environment with clear frameworks for investment is needed. Strategic partnerships, such as with the EU, offer opportunities to use sustainable taxonomies and mobilisation tools to deliver more sustainable development.

In addition, international partnerships need to contribute towards financing solutions that harness the strengths of the region, such as its rich natural environment and renewable energy potential. Debt tools for financing the sustainable development agenda can address some of the region’s most pressing challenges, such as debt distress, climate catastrophes and the risk of biodiversity loss. Effective co-operation to develop these tools and gear them towards the needs of the region can overcome some of the shortcomings of pre-existing financial instruments. The effective implementation of these tools requires enhanced regulation and oversight to improve governance and capacity building.

These solutions can help to build consensus and enable the more effective representation of LAC’s interests next year at the Fourth International Conference on Financing for Development. The region has the potential to drive global changes in development financing and partnerships. It therefore would benefit from improved co‑ordination and from engaging in constructive development solutions to navigate the challenging environment, both regionally and around the world.

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