Unlocking the transition: de-risking as a catalyst for a low-carbon economy

How public capital can reduce risks and mobilize private investment for the climate transition, catalyzing green creative destruction

Leonardo Colombo Fleck and Viviane Otsubo Kwon, Santander Brazil

The challenge is clear: we must mobilize USD 1.3 trillion annually by 2035 for developing countries — a climate finance target agreed upon at COP29 — with at least USD 300 billion per year coming from developed nations. It is a massive volume in a global context marked by constrained liquidity, geopolitical tensions, trade barriers, inflation, high interest rates, and increasing capital allocation toward artificial intelligence and defense.

There is broad consensus that private capital must be the primary driver in closing this financing gap. However, public capital plays a critical role in reducing inertia within incumbent systems and laying the groundwork to unlock private investment for the economic transition.

This perspective is reinforced by recent studies on innovation-led growth and the theory of creative destruction, which earned the 2025 Nobel Prize in Economics. Creative destruction explains how new technologies displace outdated processes and companies, boosting productivity and growth — but also ushering in periods of uncertainty, during which private investment tends to fall short in the early stages.

This is where public capital acts as a catalytic force: by improving the risk-return profile and mobilizing private capital into high climate impact, emerging sectors that lack track records or scale. Instruments such as guarantees, first-loss tranches, concessional debt, insurance, foreign exchange hedging, thematic sovereign bonds, and public procurement can reduce risk and enhance revenue predictability — correcting market failures and accelerating the deployment of clean technologies. In practice, this means aligning the dynamics of creative destruction with the goal of a low-carbon economy, transforming innovation into bankable investment at the pace this decade demands.

Brazil offers compelling examples of public investment fostering innovation and the creation of new markets. The BNDES has been instrumental in consolidating sectors such as pulp and paper, meat processing, renewable energy, and aviation — having financed approximately USD 25–27 billion in Embraer exports since 1997. This mirrors the approach of leading capitalist economies: in the United States, sectors like the internet, aerospace, and semiconductors only reached their current scale thanks to sustained public investment. Today, U.S. industrial policy emphasizes reshoring, supporting domestic industries in semiconductors, critical minerals, and rare earths through subsidies, public loans, and bilateral agreements. Given today’s economic and geopolitical landscape, capital allocation must be surgical. Every dollar of public capital should be used to leverage multiples of private investment — not to replace it. It is essential that public capital fosters the financial independence of supported sectors. This calls for fewer direct capital injections and more risk mitigation structures, such as guarantees, insurance, revenue support, and financial instruments that remove barriers to scale.

Blended finance mechanisms (structures which combine concessional and market-rate capital to improve the risk-return profile of investments in nascent sectors) enable private capital to engage in higher-risk, early-stage opportunities, supporting the scale-up of new technologies. A standout example is Eco Invest Brazil, the country’s largest blended finance program, which has already held two auctions:

• 1st auction (2024): Focused on diversified climate-related investment theses aligned with the Ecological Transition Plan, with approved proposals potentially mobilizing USD8.3 billion from USD1.27 billion in catalytic public capital.

• 2nd auction (2025): Targeted at restoring degraded pastures, with the potential to mobilize USD 5.88 billion to restore approximately 1.4 million hectares, leveraging USD 3.24 billion in public capital.

Together, these two auctions indicate a mobilization potential of around USD 14 billion — a figure comparable to Brazil’s total sustainable bond issuance in 2024.

If blended finance is already gaining traction, the next step is to scale guarantees, insurance, and revenue stabilization mechanisms. Private capital follows lower risk. Innovative projects — such as sustainable aviation fuels (SAF), nature-based solutions (NBS), and green hydrogen — often face barriers like the absence of firm offtake agreements, unproven technologies, and high upfront capital requirements. In other words, strong investment theses do not become bankable projects without a robust de-risking architecture.

Platforms like BIP – Brazil’s Climate Investment and Ecological Transformation Platform are already providing visibility into a pipeline of financeable projects, especially for international investors. The challenge now is to integrate risk mitigation tools to convert visibility into actual investment.

The goal is to turn potential into competitive advantage. Timing is critical: lowcarbon markets are forming globally and will likely concentrate where scale and investor confidence converge. Blended finance, guarantees, and revenue support mechanisms may be the deciding factors between leading or playing a peripheral role in the value chains that will define the markets of the coming decades.

Brazil has the natural resources, industrial base, and human capital to lead in sectors of the new economy. What will determine our position is our ability to orchestrate demand (mandates, public procurement, offtake agreements), de-risking (guarantees, insurance, FX hedging), and alignment with global standards (such as the Brazilian Sustainable Taxonomy and its interoperability). This is a business, development, and competitiveness agenda for the decade ahead.