Mobilizing climate capital to emerging and developing markets
Costs, risks, and capacity gaps have been holding back the mobilization of climate capital to many emerging market economies.
As many emerging-market countries have acute needs for climate finance in areas such as resilience, adaptation, and the renewable energy transition, what measures can be taken to pave the way forward and bridge this climate finance gap?
Many countries with developing economies are disproportionately affected by catastrophic weather events — which are, increasingly, becoming regular weather events.
Additionally, these economies typically lack sufficient infrastructure to manage such disasters compared to their developed counterparts.
According to Marisa Drew, Chief Sustainability Officer at Standard Chartered, there’s a common perception across the private sector that addressing climate adaptation and resilience deficiencies in such countries is a job for their governments.
But few of those governments have the funds on hand to deal with a reality in which catastrophic weather events frequently occur.
"We need to reframe the narrative [as] this isn’t just governments’ problem, it’s everybody’s problem, if we don’t deal with it.
"We need to reframe the narrative [as] this isn’t just governments’ problem, it’s everybody’s problem, if we don’t deal with it," Drew said during the Bloomberg Sustainable Finance Forum that took place in September. "But if we do reframe the narrative, our calculations show that for every dollar invested today, in a 1.5-degree C [warming] scenario, you get $12 of return on disaster avoided," added Drew.
Getting more private-sector entities invested in adaptation- and resilience-focused projects in emerging-market countries is challenging, according to Nana Maidugu,
Head of Sustainability and ESG at Nigeria Sovereign Investment Authority (NSIA), due in part to the nascent regulations overseeing climate investments in such countries, and the high level of risk many capital sources perceive as involved in financing projects in developing regions.
“There are two sides to the risk story, because yes there is risk — whether you’re thinking about the effects of currency risk, or thinking from the credit risk perspective,” says Maidugu of investing in Africa. “But the perception of the risk in this region is higher than the actual risk in this region.”
Capacity and execution gaps in emerging markets and developing economies can often also be barriers to the mobilization of climate capital.
That’s why, through the multi-entity Joint Project Preparatory Facility launched in 2023, Maidugu’s organization is helping project developers get the early-stage financing and technical assistance they need to get their climate-related initiatives investment ready.
Another NSIA-funded initiative, the Green Guarantee Company, extends guarantees to project developers to help make their bond issuances more attractive in the capital market.
The perception of the risk in this region is higher than the actual risk in this region.
Ultimately, addressing climate issues in countries with developing economies will take innovation and investment across many areas of sustainability — from advancing weather, heat, and storm resistance in built environments to developing adaptive business models in agriculture that require less water or irrigation.
According to Drew, adaptation is an “enormous, multi-hundred-billion-dollar opportunity” for institutions in areas like insurance, banking, private equity, and more.
Advancing innovation in the carbon credit space is also especially important. For example, many emerging-market countries in Africa lack clear regulations around their carbon markets and coal remains their primary energy source.
“In a lot of developing markets, the coal plants are ‘teenagers’ relative to the U.S. where they’re end-of-life,” says Drew.
“Somebody built those plants, and someone’s going to have to pay to shut them down. One of the novel ideas that we’re working on [at Standard Chartered] is the concept of a decommissioning credit… which I think will be a bit of an unlock in terms of getting the energy transition to move in some of these markets.”
Quotes in this article are based on the “Mobilizing Capital to Emerging Markets and Developing Economies” panel moderated by Jon Moore, Chief Executive Officer, BloombergNEF. The panel took place during Bloomberg Sustainable Finance Forum in NYC in September 2024.