Comment: Investors should tap renewed momentum for climate finance in developing nations

October 23 – Both investors and governments recognise that achieving global net-zero carbon emissions by 2050 requires involving developing countries in the clean economy transition. Despite their minimal carbon emissions, the world’s poorest and most vulnerable nations bear the brunt of climate damage.

Now, after years of deadlock over funding climate efforts in these nations and unfulfilled financial pledges from wealthy countries, there’s a fresh resolve among governments, multilateral banks and investors to contribute to solutions.

The significant New Delhi Declaration concluding the G20 summit in early September underscores the role of private sector financing and the public sector’s involvement in attracting private sector funds for clean energy initiatives. The White House statement following the summit reiterated this emphasis on leveraging public sector investments.

The renewed momentum, combined with rapid growth in clean energy investment, which is expected to hit $1.7 trillion this year, opens doors for investors to engage in emerging economies.

This shift started when multilateral lending institutions decided they must revamp their lending and grant-making operations to prioritise climate finance and support vulnerable countries with climate-resilient initiatives. Investors should take note as the World Bank, IMF and other institutions explore strategies such as new public-private financing vehicles and concessionary lending tools. Inspired in part by the innovative financing approaches outlined last year in Barbados, Prime Minister Mia Mottley’s Bridgetown Initiative, these projects aim to entice private financing to climate mitigation and resilience projects in emerging markets and developing nations. Such combinations of private financing backed by public guarantees or merged with public dollars would serve to de-risk investments for private sector investors.

Demonstrating its commitment to climate finance for developing nations, the World Bank reported a 19% annual increase in its financial assistance to climate-distressed countries, reaching a record $31.7 billion in 2022. Further galvanised by the Summit for a New Global Financial Pact, the bank launched several climate finance initiatives that include debt repayment flexibility and disaster insurance for developing countries experiencing extreme weather disasters. Under the leadership of its new president, Ajay Banga, the World Bank is now focusing significant attention on improving climate finance for developing countries. Banga, with his executive background as the former chief executive of Mastercard, couples business acumen with a deep compassion for low-income countries bearing the brunt of a climate crisis they didn’t create.

Notable World Bank initiatives include the Private Sector Investment Lab, which aims to nudge private sector investment in emerging market climate solutions aimed at scaling up transition finance for renewable energy, clean energy infrastructure and related sectors. The ongoing One Planet initiative, a joint venture with Allianz Group since COP26, offers $3 billion in loans to private enterprises for climate investments aligned with Paris Agreement goals in developing countries. The World Bank’s International Finance Corp also collaborated with Amundi to establish the Build-Back-Better Emerging Markets Sustainable Transactions fund, attracting investors to sustainable bonds issued by private companies in developing countries.

The International Monetary Fund (IMF) also began revamping its approach to climate finance. It has urged affluent nations to contribute their special drawing rights, a reserve currency for emergencies, to aid climate-stricken developing countries. And this summer the IMF announced it reached $100 billion in special drawing rights donations from wealthier nations for recovery projects in lower-income countries grappling with climate disasters.

At the same time, governments in the most climate-vulnerable and economically struggling countries are initiating new financing deals. Senegal and the Group of Seven (G7) nations forged a Just Energy Transition Fund in June to provide Senegal with $2.7 billion to transition the country’s electricity sourcing to 40% renewables by 2030.

And investors themselves are stepping up climate finance in emerging markets. Breakthrough Energy, which is backed by Bill Gates, has launched several emerging market climate investments. Builders Vision, LeapFrog Investments BlackRock and Wellington are other firms with emerging market climate investments.

This kind of creativity is essential for financial markets to explore the opportunities in developing regions – and to address the risks of inaction. Climate financing is crucial for developing nations hindered by existing debt burdens. Neglecting emerging markets and ignoring developing nations’ climate finance needs is ultimately costly, too. Weather disasters and droughts strip livelihoods, fueling poverty, unrest and migration. These conditions compound systemic instability risks for global investors, as demonstrated already where the droughts in Central America and Syria’s arable farmland and coffee plantations are exacerbating political instability and driving migration.

Climate finance reform is accelerating within the global financial system. As it does, the multilateral banks will likely extend opportunities to investors in the private sector. Investors should pay attention and get their deal books ready.

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