Public markets are the Path of Least Resistance to Scale

Time is running out on closing the sustainable finance gap. Thanks to accumulated trust and liquidity, public capital markets could offer the shortest route to mobilising private capital for investment in developing countries, writes PMC Chair Cameron Khowsrowshahi.

Policymakers everywhere are wringing their hands. Their eyes keep drifting to the calendar. With 2030 no longer a distant deadline, they know the world is woefully behind in driving enough investment into developing countries.

A Trillion-dollar gap and a shrinking time horizon to close it

According to the United Nations, we need around $4.3 trillion a year to help developing countries build the kind of resilience and prosperity that would benefit us all and avoid the worst effects of climate change, food insecurity, and mass migration. There is no future scenario where public budgets for aid and investment – which are already shrinking – could close this mammoth investment gap.

Governments and global development banks have long sought to broaden and deepen the universe of mainstream private capital that regularly invests in developing countries to make up the shortfall. The world’s private financial institutions hold over $500 trillion in total assets. This means that a small shift of less than 1% in where these assets are allocated would entirely close the investment gap. The growing question is, with ever-tighter time horizons, what is the most dependable route to scale such private capital mobilisation?

Meeting Investors Where They Are

The actual and perceived risks of investing in developing countries – political uncertainty, currency risk, opaque and uneven regulation, lack of robust and transparent performance data – often prevent institutional investors from deploying significant capital in them. Any sound strategy for driving private capital mobilisation towards the developing world must meet these investors where they are.

Institutional investors are the pension funds and insurance companies that manage a population’s life savings. Most of them are rather conservative about where they invest. They prefer transparent, liquid, and predictable markets where regulation and data systems have built trust over decades of transactions. It is no surprise, then, that global stock exchanges and bond markets are where the world's largest investors deploy the overwhelming majority of their capital.

The Unique Advantages of Public Capital Markets

Public markets offer a unique pathway to increase the speed, magnitude, and reliability of capital deployment. Development finance can leverage accumulated trust and predictability in these markets to build a more expedient channel for mobilisation.

Global asset owners already have sizeable, longstanding allocations to listed equities and debt in emerging and developing countries. For example, a recent report by the EMDE Investor Taskforce found that major UK pension schemes and insurers allocate 5% to 10% of their portfolios to listed equity and debt in emerging markets. They view these positions as critical to their global diversification. These are not niche impact investments.

If, for example, UK institutional investors allocated another 0.5% of their assets to emerging markets, this would mobilise around $21 billion (GBP16 billion) of new investments in these markets. This figure is significant when considered alongside the OECD’s estimate that total global ODA spending mobilised a historic peak of $77 billion in private capital in 2024. The UK commands less than 10% of total global assets under management. Similar allocation shifts in other markets – especially the US – could mobilise billions more.

Most barriers are in private markets

Most investors’ concerns about investing in developing markets mainly relate to private assets in developing countries, where exposure is minimal, and capability, governance, and product gaps are real. Crucially, investors do not see data or market infrastructure as material barriers to investing in public markets. Given these significant advantages, in the near term, public capital markets should be considered the “ready to scale” channel for capital mobilisation into developing countries.

However, the overwhelming majority of transactions in development finance still take place in private markets. In many cases, there may be good reasons for this. But in others, governments and development banks could be missing an opportunity to broaden the universe of participants, capital and capacity at a time when we need all the approaches in our toolkit.