The financing of sustainable development faces a monumental challenge: the lion’s share of private capital is concentrated in developed markets, while the most urgent needs for investment in infrastructure, energy transition, and social services are located in emerging market and developing economies (EMDEs).
A new study published by the National Bureau of Economic Research (NBER) analyzes the frictions preventing capital from flowing where it is most needed and proposes pathways to effectively scale sustainable investment.
The research, led by Caroline Flammer, Thomas Giroux, and Geoffrey Heal, is based on an unprecedented global survey of high-level decision-makers at asset managers, pension funds, sovereign wealth funds, and development finance institutions.
The analysis reveals that while there is growing interest in environmental, social, and governance (ESG) criteria, structural barriers and risk perceptions continue to limit the scope of these projects.
One of the most revealing findings is that return expectations in emerging markets are, in many cases, comparable to those in developed markets when adjusted by investor type. This suggests that categorical exclusions of assets in developing countries do not always stem from financial efficiency logic, but rather from institutional biases or a lack of precise data.
However, the study identifies a critical disconnect: the risks that concern investors most, such as currency volatility and political instability, are not being adequately mitigated by current “blended finance” tools.
The paper concludes that to mobilize private capital at scale, it is necessary to rethink how impact is evaluated. Currently, metrics focus more on invested resources than on real outcomes or “financial additionality” (i.e., whether the investment truly generated a change that would not have occurred otherwise).
The authors emphasize that the success of sustainable development will depend on better alignment between risk-guarantee instruments and the actual concerns of institutional investors.
Reference
Flammer, C., Giroux, T., & Heal, G. (2026). Scaling Sustainable Investing in Emerging and Developing Economies: Frictions and Opportunities (NBER Working Paper No. 34746). National Bureau of Economic Research. https://www.nber.org/papers/w34746