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### Sustainable Finance and Financial Stability
- Sustainable finance: incorporation of environmental, social, and governance (ESG) principles into business decisions, economic development, and investment strategies.
- Channels through which sustainability considerations impact financial stability:
  - Environmental risk exposures can lead to large losses for firms; climate change can entail losses for financial institutions, asset owners, and firms (IMF, 2020). Garanin et al. show natural-disaster losses can lead to firm bankruptcy.
  - Governance failures at banks and corporations have contributed to past financial crises (e.g., 2008 Global Financial Crisis). López, Garcia, and Rodriguez (2007) show corporate social responsibility influences stock performance.
  - Social risks (inequality) can trigger political responses of easier credit standards to support consumption while middle- and lower-income incomes remain stagnant (Rajan, 2010).
- Sustainable finance markets can spur positive changes:
  - Issuers of green bonds, green loans, and sustainability-linked loans tend to reduce emission intensity over time faster than other firms (Schmittmann and Han Teng, 2021).
  - Elmalt, Igan and Kirti (2021) find a weak link between ESG scores and emissions of large emitters, indicating widespread greenwashing due to inconsistent reporting.
- Climate finance emphasis:
  - BIS 2020 survey: members acknowledge climate change as a systemic risk and find climate measures desirable in regulatory/supervisory frameworks, but members shied away from incorporating it into the prudential capital framework.
  - NGFS (2019) expresses concern that climate-related financial risks are not fully reflected in asset valuations and calls for integrating these risks into financial stability monitoring.

### Trends and Importance for Emerging Markets (EMs)
- Energy transition investment momentum and ambitious emissions commitments indicate unprecedented momentum toward a low-carbon economy.
- EMs: until recently minor role in global sustainable financial markets; some EMs are seizing opportunities, but risks that lower-income economies fall further behind.
- Fiscal constraints: most emerging economies lack budgetary space to deploy fiscal support comparable to advanced economies, implying private sector must play a crucial role and underscoring the importance of liquid and deep sustainable finance markets in EMs.

### Drivers, Development, and Impediments in EMs
- Principal drivers and structural constraints:
  - Core challenge: balancing adaptation to a carbon-neutral global economy while containing energy prices, maintaining economic growth and creating jobs.
  - Structural disadvantages: lower education levels, shallower capital markets, less flexible workforce.
  - EM economic structure: large shares of activity in fossil fuel production or carbon- and water-intensive industries; greater reliance on cheap, often subsidized energy.
  - Trade-offs between short-term growth/stability and long-term environmental protection; COVID worsened strains.
- Transition cost and risks:
  - IEA estimate: nearly $4tr annually through 2050 to achieve the energy transition.
  - Carbon Tracker: under IEA’s low carbon assumption (oil prices average $40/bl), the 40 countries most reliant on hydrocarbon exports would lose $9tr in revenue by 2040, with 95 percent of these countries being an emerging market.
  - IEA notes heavy reliance of EMs on public finance for large-scale projects and calls for greater policy initiative to attract larger private investment.
- Demographic and urbanization pressure:
  - United Nations prediction: by 2050, an additional 2.5 billion people will migrate from rural to urban areas, with nearly 90 percent of this increase concentrated in growth and emerging markets.
- SDG financing gap:
  - UNCTAD: achieving the SDGs will cost between US$5 and $7 trillion annually, with an investment gap in developing countries of about U.S. $2.5 trillion.

### Market Performance and Investor Momentum
- ESG index outperformance:
  - Bonds: since 2019, average annualized return of EM ESG bond segment is 2.1ppts higher than corresponding broad indices; since COVID-19 this differential is 1.5ppts.
  - Equities: for major EMs (China, Chile, India, Mexico, South Africa), average annualized return for ESG sub-indices since Jan 2020 is 17 percent, almost 7ppts higher than the broad indices; excluding Chile’s negative broader returns, the average return differential since Jan 2020 is 5.2 ppts for China, India, Mexico, and South Africa.

### Growth and Structure of EM ESG Financial Markets (key statistics)
- 2021 breakout year:
  - Gross flows into ESG-related bonds: almost $200bn in 2021 vs $66bn in 2020.
  - Cumulative ESG bond issuance since 2015: ~$500bn; 2021 issuance accounts for ~40 percent of cumulative issuance.
  - EM share of global ESG issuance: fell from 31.6 percent in 2016 to 8.7 percent in 2020; EM bond issuance grew 200 percent in 2021, raising EM share to 12.8 percent for 2021.
  - ESG equity flows: $25bn in 2021.
  - Total assets under management: rose to almost $150bn.
  - Cumulative ~$50bn flows in last 2 years vs $20bn in the last 6 years.
  - Penetration: proportion of EM ESG AUM rose by 1.2 ppts to 6.4 percent; number of funds rose by 1.9 ppts to 7.8 percent.
- ESG issuance as share of total issuance (EMs ex China):
  - ESG instruments: almost 4 percent of total issuance in 2021 vs around1 percent over the last five years.
  - Offshore markets: ESG instruments accounted for 17 percent of total issuance in 2021 vs c4 percent over the last 5 years.
- China and EMs ex China:
  - China issued almost $110bn ESG in 2021; China became the third largest issuer of ESG debt globally in 2021 and is the second largest issuer in green bonds (cumulative green bond issuance of almost ~2 percent of GDP).
  - EMs ex China: ESG issuance rose to $90bn in 2021 (vs average of $25bn over the last five years), increasing their share of total EM issuance to 45 percent in 2021 vs ~30 percent over 2016–18.
  - Green bond issuance in EMs: ~$20bn in 2021 vs average of $11bn in the last five years.
  - Issuer breadth remains low; number of issuers concentrated among few entities.
- Market concentration:
  - EMDE countries issuing ESG debt increased from 5 in 2015 to 32 in 2021, but top 5 countries constitute almost 80 percent of total issuance in 2021.
  - AEs: in 2021 all but 4 AEs issued ESG debt; top 5 countries’ share in AEs was ~60 percent.
  - EM concentration ratio of 80 percent in 2021 is equivalent to AEs’ concentration ratio in 2015—indicating convergence over time.
  - Average coupon for EMs in the last 2 years was around 3.6 percent.

### Instrument Types, Evolution, and Composition
- Classification:
  - Activity-based (use-of-proceeds) instruments: green bonds, social bonds, sustainability bonds.
  - Behavior/KPI-based instruments: sustainability-linked bonds/loans.
- Trends:
  - Activity-based debt historically dominant; behavior-based (sustainability-linked) gaining traction.
  - Sustainability-linked debt: negligible until 2017; by 2021 constituted 1/4 of $1.5tr ESG debt issuance (global).
  - EM specifics (2016–2021): green bonds constitute about 64 percent of all EM ESG fixed income issuances since 2016, with annual growth rate of c20 percent in volumes.
  - EMs raised $103bn in green bonds in 2021 (almost 2.5x the five-year average); China accounted for a significant portion (meets about 90 percent of its ESG debt finance through green bonds over 2016–2021).
  - Non-green segments rising: non-green instruments accounted for almost half of total issuance in 2021 vs ~20 percent in 2016–18.
  - EMs ex China: non-green instruments comprise ~80 percent of ESG issuance (vs ~60 percent in 2020); sub-sectors: social (16 percent), sustainability-linked (13 percent), sustainability bonds (9 percent) — these collectively raised almost 40 percent of EM ESG debt funding in EMs ex China over 2019–21 vs just 4 percent over 2016–18.
  - Behavior-based debt in EMs is largely issued as loans; bonds dominate otherwise.

### Differentiation: Currencies, Sectors, Ownership, and Risk Premia
- Currency denomination:
  - CNY accounts for ~60 percent of total EM green bond issuance, but China has increasingly issued in USD.
  - Outside China, USD accounts for almost two-thirds of green bonds in EMs.
  - EUR prominence growing (Poland, Turkey, Chile); local currencies picking up (Malaysia, Colombia, South Africa).
- Sectoral composition:
  - Financial sector dominant in China (~60 percent of China’s total issuance).
  - Non-financial sectors (utilities, energy, industrials) rose from 40 percent to 60 percent of overall EM issuance and from 85 percent to 90 percent for EMs ex China (comparing 2016–18 vs 2019–21).
  - Financial sector issuance declined in absolute terms: $69bn in 2019–21 vs ~$72bn in 2016–18.
- Ownership:
  - Issuance by government-related entities rose from 40 percent in 2016–18 to almost 60 percent in 2019–21, primarily due to China.
  - Corporate participation rising in EMs ex China: constituted 2/3rd of 2021 issuances, and half of 2019–21 cumulative issuances vs 30 percent during 2015–18.
- Embedded risk premia (coupons and tenors):
  - FX: Coupons for USD and CNY denominated bonds significantly higher than EUR denominated bonds; USD denominated bonds have highest tenors; CNY denominated bonds have lowest tenors.
  - Credit: Corporate bonds pay significantly higher coupon rates but have shorter tenors than government-related sector bonds.
  - Sectoral: Financials have lowest coupon and tenor; industrials at the other end.
  - Country variation: Latin American EMs (Chile, Mexico, Peru) issued longer tenors; India, China, Turkey, Romania issued relatively short-term instruments.
  - Coupon ranges: e.g., Poland (<2 percent) to South Africa and Colombia (~7 percent). Like-for-like, Brazil, Peru, Turkey, India paid highest coupons in USD denominations; Turkey, India and Indonesia paid highest coupons in local currency denominations.

### Tenor and Issuance Patterns
- For most major EM issuers, except Chile, the average tenor was about 5 years in 2021.
- Chile raised $12.4bn in USD/EUR denominated debt, with a tenor of over 20 years.
- Sovereigns of Peru and Indonesia were also able to issue USD/EUR denominated debt with longer maturities.
- Advanced economies (AEs) are relatively homogenous with Korea being the only country in the group to have tenor of less than 5 years.

### Data Disclosure, ESG Scores, and Observed Risks
- Data disclosure:
  - EMs average disclosure score: 40 (Index; Based on bloomberg indices) compared with almost 50 for advanced economies.
  - Big variation across EMs; Asian countries (notably India, Indonesia and Thailand) lag significantly.
  - Within disclosure metrics: governance segment highest, social next, environment notably lower.
  - Proportion of EM sustainable debt issuance adhering to ICMA principles has improved but overall adherence remains quite low at less than half of total issuance; for laggard EMs adherence can be as low as 20 percent.
- ESG scores and credit:
  - JP Morgan’s data shows ESG scores for most EM regions have declined in the last few years and especially post pandemic.
  - Median credit ratings of EM ESG new debt issuance in 2021 was BB and has remained around the same level since 2016; credit rating of such AEs debt was BBB in 2021.
- Observed risks and market dynamics:
  - Research links weaker ESG scores with worsening credit ratings for emerging markets.
  - Examples of divergence and concerns:
    1) Simpson et al. 2021: only one out of 155 upgrades cited reduced emissions as a factor; MSCI’s ESG ratings focus on exposure to environmental impacts, not necessarily environmental impact itself.
    2) Baines and Hager 2022: ESG funds from big asset managers often invest in many of the same “Carbon Majors” as non-ESG funds and tend to vote the same way at Carbon Major AGMs.
    3) Temple-West et al. 2022: proposals calling for several SIFIs to stop fossil fuel financing consistent with the IEA’s 2050 net zero scenario won less than 13 per cent support from all shareholders.
  - Global banks provided $742 billion in financing to coal, oil and gas companies in 2021 despite climate pledges by lenders that signed up to GFANZ.

### Policy Recommendations (enumerated as in the source)
- 1) Strengthen the global climate information architecture comprised of: (1) high-quality, reliable, and comparable data; (2) sustainable finance classifications that align investments with climate goals; and (3) a harmonized and consistent set of climate-related disclosure standards to incentivize efficient pricing of climate risks and avoid greenwashing.
- 2) Address data quality challenges in EMs: standardize data availability at least for the biggest corporates; note NGFS repository initiative for climate data needs and available sources.
- 3) Develop better information management systems in EMs to reduce maturity mismatches, lower borrowing costs, and improve resource allocation; information asymmetry is cited as a key reason for higher financing costs for green bond issuers.
- 4) Adopt a formal Green Finance definition to mitigate greenwashing, improve reporting and disclosure, and strengthen ability to identify, assess, and control climate-related financial risks; adherence to ICMA’s green bond principles can strengthen investor confidence.
- 5) Integrate ESG factors into firms’ business models—prompted by regulators or investors—to mitigate risks, given ESG issues’ material impact on corporate risk profiles and system financial stability.
- 6) Sensitize EM financial sectors about the importance of Green and Sustainable Finance and accelerate capital investment for the low-carbon transition; only a handful of institutions in EMs participate in sustainable finance markets and are signatories of the Principles for Responsible Investment (PRI).
- 7) Implement data disclosure requirements to enable investors to price risks appropriately; examples include India’s new mandatory ESG disclosure guidelines (BRSR).
- 8) Achieve global sustainability disclosure standards to foster ESG markets and avoid fragmentation; note IFRS Foundation’s ISSB intent to establish a comprehensive global baseline of sustainability disclosures.
- 9) Incentivize green projects through tax breaks or penalizing firms not aligned with the Paris accord to develop sustainable finance markets and raise stakeholder awareness.

### Conclusion and Key Statistics
- 2021 was a breakout year for EM ESG markets with record flows across asset classes, most notably fixed income.
- Sustainable finance markets expanded in size and breadth, including a meaningful pickup in issuance in EMs excluding China and sustainable debt excluding green bonds.
- Greater share of ESG instruments in the EM financing mix, especially foreign currency, raises issues related to financial stability in emerging markets.
- EM sustainable finance markets remain more concentrated, embed a significant risk premia, and are dominated by the financial sector.
- EM challenges include: data disclosure quality, data standards, and declining ESG scores.
- IEA/World Bank estimate: annual clean energy investments in EMs will have to reach $1 trillion by late 2030, which is 7 times of 2020 levels (~$150 bn.). The report expects ~70 percent at global level of this investment to be made by the private sector; nominal financing costs are up to seven times higher than in leading AEs.

*IMF WORKING PAPERS Sustainable Finance in Emerging Markets: Evolution, Challenges, and Policy Priorities — Working Paper No. WP/2022/182*

### Conclusion and Policies ................................................................................................

### Conclusion and Policies

### Sustainable Finance and Financial Stability
- Sustainable finance is defined as the incorporation of environmental, social, and governance (ESG) principles into business decisions, economic development, and investment strategies.
- Research has documented how sustainable finance can generate public good externalities.
- Sustainability considerations impact financial stability through multiple channels:
  - (1) Environmental risk exposures can lead to large losses for firms and climate change can entail losses for financial institutions, asset owners, and firms (IMF, 2020). Garanin et al. have shown that, while climate risks may seem abstract, losses in the event of a natural disaster can lead to a firm bankruptcy.
  - (2) Governance failures at banks and corporations have contributed significantly to past financial crises, as evident during the Global Financial Crisis in 2008. López, Garcia, and Rodriguez (2007) have shown how corporate social responsibility influences the performance of stocks.
  - (3) Social risks in the form of inequality can contribute to financial instability by triggering a political response of easier credit standards to support consumption while the incomes for middle and lower-income groups remain stagnant (Rajan, 2010).
- Sustainable finance markets can spur positive changes to address environmental, social, and governance issues:
  - Issuers of green bonds, green loans, and sustainability-linked loans tend to reduce their emission intensity over time at a faster rate than other firms (Schmittmann and Han Teng, 2021).
  - Elmalt, Igan and Kirti (2021) find weak link between the ESG scores and emissions of large emitter, primarily on account of lack of consistency in reporting, and hence indicating widespread greenwashing of ESG investments.
- Within sustainable finance, climate finance is of particular importance (IMF, 2021).
  - The Bank for International Settlements (BIS) conducted a survey of Basel committee members in 2020 on climate-related financial risk initiatives. Responses indicated acknowledgement of climate change as a systemic risk to financial stability and that climate measures are desirable in regulatory or supervisory frameworks, but members shied away from incorporating it into the prudential capital framework.
  - The Network for Greening the Financial System (NGFS) has expressed concern that financial risks related to climate change are not fully reflected in asset valuations and has called for integrating these risks into financial stability monitoring (NGFS, 2019).

### Trends and Importance for Emerging Markets (EMs)
- Trends in energy transition investment and commitments to ambitious emissions reductions indicate unprecedented momentum behind the transition to a low-carbon economy.
- These issues are particularly relevant for emerging markets (EMs), which until recently played a minor role in global sustainable financial markets.
- A number of EMs are already seizing opportunities, but risks exist that lower-income economies will fall further behind.
- Most emerging economies do not have the budgetary space to deploy fiscal support comparable to advanced economies—as evidenced during the COVID episode—implying the private sector needs to play a crucial role in driving sustainability and highlighting the importance of creating liquid and deep sustainable finance markets in EMs.

### Existing Literature and Gaps
- Existing literature has identified issues related to climate transition in the developed world, including insufficient climate finance, cost of transition, and policies.
- The OECD technical note dated Oct 2021 presents scenarios estimating climate finance needed to be mobilized in developed economies to EM under different scenarios by 2025, including:
  - Scenario 1 assumes that public finance is scaled up in line with the information provided by countries and MDBs, subject to OECD analysis and assumptions.
  - Scenario 2 illustrates the joint impact of several factors that may result in lower-than-targeted levels of climate finance.
- Under the Copenhagen accord of 2009, developed countries agreed to mobilize $100 bn annually by 2020.
- In emerging markets, there is little analysis on sustainable finance markets compared with developed countries.
  - Josué Banga (2019) examines green bond markets of developing countries and notes rising investor appetite for green bonds.
  - Jakob et al. (2015) estimate transfers needed by developed countries to developing countries under the United Nations Framework Convention on Climate Change.
- EM sustainable finance markets have grown impressively over the past few years and are getting increasingly complex.

### Paper Structure (as provided)
- Section 2: Discusses the importance and drivers of sustainable finance for emerging markets.
- Section 3: Discusses the growth and evolution of the sustainable finance markets for EMs focusing on the overall trend as well as differentiation across various dimensions.
- Section 4: Analyzes the green bond markets in EMs as a case study to highlight the pervasive richness and variation in EM ESG markets.
- Section 5: Discusses the differences between the sustainable finance markets in EMs and advanced economies.

*IMF Working Paper — Conclusion and Policies*

### Section 6 discusses  some  development  areas  of EM ESG  markets  and  Section  7  concludes  with  some

### Section 6 — Drivers, Development, and Impediments of Sustainable Finance in Emerging Markets

### Principal drivers and structural constraints
- Core challenge: balancing adaptation to a carbon-neutral global economy while containing energy prices, maintaining economic growth and creating jobs.
- Structural disadvantages in many EMs: lower education levels, shallower capital markets, and less flexible workforce.
- EM economic structure: large share of activity involves fossil fuel production or carbon- and water-intensive industries (mining, agriculture, heavy industry); greater reliance on cheap, often subsidized energy.
- Trade-offs: short-term growth and stability versus long-term environmental protection; COVID worsened strains.

- Transition cost and risks:
  - IEA estimate: nearly $4tr annually through 2050 to achieve the energy transition.
  - Carbon Tracker analysis: under IEA’s low carbon assumption (oil prices average $40/bl), the 40 countries most reliant on hydrocarbon exports would lose $9tr in revenue by 2040, with 95 percent of these countries being an emerging market.
  - IEA notes heavy reliance of EMs on public finance for large-scale projects and calls for greater policy initiative to attract larger private investment.

- Demographic and urbanization pressures:
  - United Nations prediction: by 2050, an additional 2.5 billion people will migrate from rural to urban areas, with nearly 90 percent of this increase concentrated in growth and emerging markets.

- SDG financing gap:
  - UNCTAD: achieving the SDGs will cost between US$5 and $7 trillion annually, with an investment gap in developing countries of about U.S. $2.5 trillion.

### Market performance and investor momentum
- ESG index outperformance may have supported momentum:
  - Bonds: Since 2019, average annualized return of EM ESG bond segment is 2.1ppts higher than corresponding broad indices; since COVID-19 this differential is 1.5ppts.
  - Equities: For major EMs (China, Chile, India, Mexico, South Africa), average annualized return for ESG sub-indices since Jan 2020 is 17 percent, almost 7ppts higher than the broad indices; excluding Chile’s negative broader returns, the average return differential since Jan 2020 is 5.2 ppts for China, India, Mexico, and South Africa.

### Impediments to sustainable finance development in EMs
- Conflict with short-term objectives: green projects require greater up-front outlays while EM cost of capital is often much higher than in AEs.
- E and S perceived as opaque and long-term; governance improvements have driven most ESG score gains historically.
- Rating and assessment inconsistency:
  - Rating agencies use divergent criteria, especially in the environment segment.
  - ESG frameworks influenced by “ingrained income bias” that favors higher-income countries, reinforcing status quo.
- Lack of clear sovereign frameworks: some EM sovereigns lack frameworks to ensure progress toward Nationally Defined Contributions (NDCs), potentially limiting green bond market participation.
- Investor knowledge gaps: education on ESG debt products is lacking among key investor groups in EMs outside China.

### Growth and structure of EM ESG financial markets
- 2021 breakout year:
  - Gross flows into ESG-related bonds: almost $200bn in 2021 vs $66bn in 2020.
  - Cumulative ESG bond issuance since 2015: ~$500bn; 2021 issuance accounts for ~40 percent of cumulative issuance.
  - EM share of global ESG issuance fell from 31.6 percent in 2016 to 8.7 percent in 2020; EM bond issuance grew 200 percent in 2021, raising EM share to 12.8 percent for 2021.
  - ESG equity flows: $25bn in 2021, slightly ahead of 2020 record flows.
  - Total assets under management rose to almost $150bn.
  - Cumulative ~$50bn flows in last 2 years vs $20bn in the last 6 years.
  - Penetration: proportion of EM ESG AUM rose by 1.2 ppts to 6.4 percent; number of funds rose by 1.9 ppts to 7.8 percent.

- ESG issuance as a share of total issuance (EMs ex China):
  - ESG instruments accounted for almost 4 percent of total issuance in 2021 vs around1 percent over the last five years.
  - Offshore markets: ESG instruments accounted for 17 percent of total issuance in 2021 vs c4 percent over the last 5 years.

- China and EMs ex China:
  - China issued almost $110bn ESG in 2021; China became the third largest issuer of ESG debt globally in 2021 and is the second largest issuer in green bonds (cumulative green bond issuance of almost ~2 percent of GDP).
  - EMs ex China: ESG issuance rose to $90bn in 2021 (vs average of $25bn over the last five years), increasing their share of total EM issuance to 45 percent in 2021 vs ~30 percent over 2016–18.
  - Green bond issuance in EMs: ~$20bn in 2021 vs average of $11bn in the last five years.
  - Issuer breadth remains low; number of issuers concentrated among few entities.

- Country leaders and concentration:
  - Chile, India, Mexico and Brazil have largest shares in cumulative green bond issuance among EMs ex-China.
  - As percent of GDP, largest cumulative green bond issuances (2015–2021): Chile, China, Poland, Mexico and India.
  - Chile: sustainable debt equivalent to almost 12 percent of its GDP (significantly higher than peers); Peru and Mexico at ~2 percent of GDP each.
  - 2021 constituted more than 50 percent of cumulative issuance for many EMs including Chile, Peru and Turkey.

### Instrument types and evolution
- Classification:
  - Activity-based (use-of-proceeds) instruments (green bonds, social bonds, sustainability bonds) and behavior/KPI-based instruments (sustainability-linked bonds/loans).
  - Activity-based instruments restrict issuer base to relevant economic sectors; behavior-based instruments allow a wider issuer base for transition financing.

- Market composition and trends:
  - Activity-based debt historically dominant; behavior-based (sustainability-linked) gaining traction.
  - Sustainability-linked debt: from practically non-existent until 2017 to constituting 1/4 of $1.5tr ESG debt issuance in 2021 (global context).
  - EM specifics (2016–2021): green bonds constitute about 64 percent of all EM ESG fixed income issuances since 2016, with annual growth rate of c20 percent in volumes.
  - EMs raised $103bn in green bonds in 2021 (almost 2.5x the five-year average); China accounted for a significant portion (meets about 90 percent of its ESG debt finance through green bonds over 2016–2021).

- Non-green segments rising:
  - Non-green instruments accounted for almost half of total issuance in 2021 vs ~20 percent in 2016–18.
  - EMs ex China: non-green instruments comprise ~80 percent of ESG issuance (vs ~60 percent in 2020); sub-sectors: social (16 percent), sustainability-linked (13 percent), sustainability bonds (9 percent) — these collectively raised almost 40 percent of EM ESG debt funding in EMs ex China over 2019–21 vs just 4 percent over 2016–18.
  - Behavior-based debt in EMs is largely issued as loans, while bonds dominate otherwise.

### Differentiation across countries, currencies, sectors, ownership, and risk premia
- Currency denomination:
  - CNY accounts for ~60 percent of total EM green bond issuance, but China has increasingly issued in USD.
  - Outside China, USD accounts for almost two-thirds of green bonds in EMs.
  - EUR prominence growing (Poland, Turkey, Chile); local currencies picking up (Malaysia, Colombia, South Africa).
  - Significant portion of EM ex China green bonds denominated in USD/EUR.

- Sectoral composition:
  - Financial sector dominant in China (~60 percent of China’s total issuance).
  - Non-financial sectors (utilities, energy, industrials) rose from 40 percent to 60 percent of overall EM issuance and from 85 percent to 90 percent for EMs ex China (comparing 2016–18 vs 2019–21).
  - Financial sector issuance declined in absolute terms: $69bn in 2019–21 vs ~$72bn in 2016–18 (implied by “~$3bn less”).

- Ownership:
  - For overall EMs, issuance by government-related entities rose from 40 percent in 2016–18 to almost 60 percent in 2019–21, primarily due to China.
  - Corporate participation rising in EMs ex China: constituted 2/3rd of 2021 issuances, and half of 2019–21 cumulative issuances vs 30 percent during 2015–18.

- Embedded risk premia (coupons and tenors):
  - FX: Coupons for USD and CNY denominated bonds significantly higher than EUR denominated bonds; USD denominated bonds have highest tenors; CNY denominated bonds have lowest tenors.
  - Credit: Corporate bonds pay significantly higher coupon rates but have shorter tenors than government-related sector bonds.
  - Sectoral: Financials have lowest coupon and tenor; industrials at the other end.
  - Country variation: Latin American EMs (Chile, Mexico, Peru) issued longer tenors; India, China, Turkey, Romania issued relatively short-term instruments.
  - Coupon ranges: e.g., Poland (<2 percent) to South Africa and Colombia (~7 percent). Like-for-like, Brazil, Peru, Turkey, India paid highest coupons in USD denominations; Turkey, India and Indonesia paid highest coupons in local currency denominations.

- Market concentration versus AEs:
  - EMDE countries issuing ESG debt increased from 5 in 2015 to 32 in 2021, but the market is highly concentrated: top 5 countries constitute almost 80 percent of total issuance in 2021.
  - AEs: in 2021 all but 4 AEs issued ESG debt; top 5 countries’ share in AEs was ~60 percent.
  - EM concentration ratio of 80 percent in 2021 is equivalent to AEs’ concentration ratio in 2015 — indicating EM markets are converging toward AEs over time.
  - Average coupon for EMs in the last 2 years was around 3.6 percent (compared with lower levels in AEs).

### Key takeaways on market implications
- Rapid 2021 expansion signaled growing investor appetite and increased issuance, but structural constraints—education, market depth, inconsistent ratings and taxonomies, reliance on public finance, currency and credit risk premia—remain significant impediments.
- Non-green instruments and behavior-based instruments are broadening the issuer base and addressing transition needs, especially in EMs ex China.
- China remains dominant in volume and green-bond focus, while EMs ex China show diversification across instruments, currencies, sectors, and ownership types.

*IMF Working Paper — Section 6 (excerpt) from the provided PDF content*

### 1.2 percent for AEs. Similarly, while the average tenor for EMs has risen in the last few years, it remains

### wpiea2022182-print-pdf - 1.2 percent for AEs. Similarly, while the average tenor for EMs has risen in the last few years, it remains

### Tenor and Issuance Patterns
- For most major EM issuers, except Chile, the average tenor was about 5 years in 2021.
- Chile raised $12.4bn in USD/EUR denominated debt, with a tenor of over 20 years.
- The sovereigns of Peru and Indonesia were also able to issue USD/EUR denominated debt with longer maturities.
- Advanced economies (AEs) are relatively homogenous with Korea being the only country in the group to have tenor of less than 5 years.

### Sectoral Composition and Trends
- AEs have seen a rise in issuances from the financial sector and a decline from government-related sectors.
- EM ESG issuers saw the relative share of government agencies rise, while issuances from financials declined.
- EM markets experienced larger issuances from utilities and energy sectors, encouraging for market development.
- The increased issuance from government-related entities in EMs reflects a larger role of sovereigns and state-owned enterprises in respective financial ecosystems.
- In terms of overall contribution, government sector remains the largest sub-sector in advanced economies, while financials remain the largest sub-sector for advanced economies (text retains original phrasing).

### EM ESG: Key Development Areas and Green Bond Principles
- ICMA green bond principles are voluntary process guidelines recommending transparency and disclosure and promoting integrity in sustainable finance markets.
- Proportion of EM sustainable debt issuance adhering to ICMA principles has improved across four major metrics but:
  - The overall adherence remains quite low at less than half of the total issuance.
  - For laggard EMs, adherence is as low as just 20 percent of the total issuance.
- Adherence benefits:
  - Aiding investors by promoting availability of information necessary to evaluate environmental impact.
  - Assisting underwriters by facilitating transactions and market integrity.

### Data Disclosure and ESG Scores
- Data disclosure is a key challenge for sustainable ecosystem development; reliable and comparable data are crucial to assess financial stability risks and price ESG-related risks.
- Emerging Markets have an average disclosure score of 40 (Index; Based on bloomberg indices) compared with almost 50 for advanced economies.
- There is big variation across EMs, with Asian countries (notably India, Indonesia and Thailand) lagging significantly.
- Within the disclosure metrics, disclosure is highest for the governance segment followed by the social segment; environment related disclosure metrics are notably lower.
- JP Morgan’s data shows ESG scores for most EM regions have declined in the last few years and especially post pandemic.
- Median credit ratings of EM ESG new debt issuance in 2021 was BB in 2021 and has remained around the same level since 2016; credit rating of such AEs debt was BBB in 2021.

### Observed Risks and Market Dynamics
- Research links weaker ESG scores with worsening credit ratings for emerging markets.
- Examples of divergence and concerns:
  1) Simpson et al. 2021: only one out of 155 upgrades cited reduced emissions as a factor; MSCI’s ESG ratings focus on exposure to environmental impacts, not necessarily environmental impact itself.
  2) Baines and Hager 2022: ESG funds from big asset managers often invest in many of the same “Carbon Majors” as non-ESG funds and tend to vote the same way at Carbon Major AGMs.
  3) Temple-West et al. 2022: proposals calling for several SIFIs to stop fossil fuel financing consistent with the IEA’s 2050 net zero scenario won less than 13 per cent support from all shareholders.
- Global banks provided $742 billion in financing to coal, oil and gas companies in 2021 despite climate pledges by lenders that signed up to GFANZ.

### Policy Recommendations (enumerated from the source)
- 1) Strengthen the global climate information architecture comprised of: (1) high-quality, reliable, and comparable data; (2) sustainable finance classifications that align investments with climate goals; and (3) a harmonized and consistent set of climate-related disclosure standards to incentivize efficient pricing of climate risks and avoid greenwashing.
- 2) Address data quality challenges in EMs: standardize data availability at least for the biggest corporates; note NGFS repository initiative for climate data needs and available sources.
- 3) Develop better information management systems in EMs to reduce maturity mismatches, lower borrowing costs, and improve resource allocation; information asymmetry is cited as a key reason for higher financing costs for green bond issuers.
- 4) Adopt a formal Green Finance definition to mitigate greenwashing, improve reporting and disclosure, and strengthen ability to identify, assess, and control climate-related financial risks; adherence to ICMA’s green bond principles can strengthen investor confidence.
- 5) Integrate ESG factors into firms’ business models—prompted by regulators or investors—to mitigate risks, given ESG issues’ material impact on corporate risk profiles and system financial stability.
- 6) Sensitize EM financial sectors about the importance of Green and Sustainable Finance and accelerate capital investment for the low-carbon transition; only a handful of institutions in EMs participate in sustainable finance markets and are signatories of the Principles for Responsible Investment (PRI).
- 7) Implement data disclosure requirements to enable investors to price risks appropriately; examples include India’s new mandatory ESG disclosure guidelines (BRSR).
- 8) Achieve global sustainability disclosure standards to foster ESG markets and avoid fragmentation; note IFRS Foundation’s ISSB intent to establish a comprehensive global baseline of sustainability disclosures.
- 9) Incentivize green projects through tax breaks or penalizing firms not aligned with the Paris accord to develop sustainable finance markets and raise stakeholder awareness.

### Conclusion and Key Statistics
- 2021 was a breakout year for EM ESG markets with record flows across asset classes, most notably fixed income.
- Sustainable finance markets expanded in size and breadth, including a meaningful pickup in issuance in EMs excluding China and sustainable debt excluding green bonds.
- Greater share of ESG instruments in the EM financing mix, especially foreign currency, raises issues related to financial stability in emerging markets.
- EM sustainable finance markets remain more concentrated, embed a significant risk premia, and are dominated by the financial sector.
- EM challenges include: data disclosure quality, data standards, and declining ESG scores.
- IEA/World Bank estimate: annual clean energy investments in EMs will have to reach $1 trillion by late 2030, which is 7 times of 2020 levels (~$150 bn.). The report expects ~70 percent at global level of this investment to be made by the private sector; nominal financing costs are up to seven times higher than in leading AEs.

*IMF WORKING PAPERS Sustainable Finance in Emerging Markets: Evolution, Challenges and Policy Priorities — INTERNATIONAL MONETARY FUND*

### References

### wpiea2022182-print-pdf - References

### Sustainable finance market analyses and overviews
- Amacker and Donovan, - “Marathon or Sprint? The Race for Green Capital in Emerging Markets, 2021”
- BloombergNEF’s “1H2022 Sustainable Finance Market Outlook. Exceeding expectations”, Jan, 2022.
- Financial Markets and Climate Transition Opportunities, Challenges and Policy Implications, 2021, OECD
- Renaissance Capital report – “ESG in EM and FM – really?” October 17, 2018
- Network for Greening the Financial Systems – “Progress Report on Bridging Data Gaps, May 2021”
- Nature Journal feature – “How to Fix the Broken Promise of Climate Finance, Oct 2021” — Jocelyn Timperley

### Green bonds, climate finance instruments, and market potential
- International Capital Market Association: “Green Bond Principles – Voluntary Process Guidelines for Issuing Green Bonds, June 2021”
- International Capital Market Association (June 2021). Green Bond Principles. Voluntary Process Guidelines for Issuing Green Bonds
- Josué Banga (2019) The green bond market: a potential source of climate finance for developing countries, Journal of Sustainable Finance & Investment, 9:1, 17-32, DOI
- Kiseleva, Elena, Green Bonds as a Tool for Sustainable Development on Emerging Markets (November 13, 2019). International Business Information Management Association (34st IBIMA), ISBN: 978-0-9998551-3-3, 25-26, Madrid,Spain, November, 2019, pp. 5619-5628
- Urban Institute, Kyushu University, Department of Civil Engineering, Kyushu University & World Bank Disaster Risk Management (DRM) Hub, Tokyo, Japan. (2021, May). Policy targets behind green bonds for renewable energy: Do climate commitments matter? (No. 120051). Science Direct.

### Energy sector transition, cost of capital, and fossil-fuel subsidies
- International Energy Agency’s “Net Zero by 2050 A Roadmap for the Global Energy Sector, 2021” report
- International Energy Agency’s “Energy and Carbon Tracker, 2021”
- International Energy Agency, 2021. “The cost of capital in clean energy transition”
- International Energy Agency and the World Bank’s “Financing Clean Energy Transitions in Emerging and Developing Economies, 2021”
- IEA, Value of fossil-fuel subsidies by fuel in the top 25 countries, 2020, IEA, Paris https://www.iea.org/data-and-statistics/charts/value-of-fossil-fuel-subsidies-by-fuel-in-the-top-25-countries-2020
- Steffen, B. (2020). Estimating the cost of capital for renewable energy projects. Energy Economics.
- Costs or benefits? Assessing the economy-wide effects of the electricity sector's low carbon transition – The role of capital costs, divergent risk perceptions and premiums Fabio Natalucci and Rohit Goel, 2021.

### Sovereign ESG, default risk, and emerging market finance
- Broner, Lorenzoni and Schmukler (2003), “Why Do Emerging Markets Borrow Short Term?”
- Arnaud Mehl and Julien Reynaud, 2005. The Determinants of Original Sin in Emerging Market Economies.
- Governance and strong institutions are key in assessing default probability: Rong Qian, (2012), Why do some countries default more often than others? The role of institutions, No 5993, Policy Research Working Paper Series, The World Bank.
- Gratcheva, Emery and Wang (2021, forthcoming) “Demystifying Sovereign ESG” EFI Insight. World Bank Group
- Gratcheva, Gurhy, Emery and Wang (2021, forthcoming) “New Dawn: Rethinking Sovereign ESG” EFI Insight. World Bank Group
- JPM Morgan, Hurdles for EM Sovereign ESG Strategies, February 25, 2021

### Private sector actors, asset managers, and corporate sustainability
- Joseph Baines and Sandy Brian Hager, “From Passive Owners to Planet Savers? Asset Managers, Carbon Majors and the Limits of Sustainable Finance”, 2022
- Camilla Hodgson (2022) Global banks keep up pace with $742bn in fossil fuel finance despite climate pledges | Financial Times (ft.com), March 30, 2022
- Patrick Temple-West, Kristen Talman, Tamami Shimizuishi (2022) Top asset managers shun investor climate proposals | Financial Times (ft.com) April 27, 2022.
- Robert G. Eccles, Ioannis Ioannou, George Serafeim (2014) The Impact of Corporate Sustainability on Organizational Processes and Performance. Management Science 60(11):2835-2857.
- Chodnicka-Jaworska, Patrycja. 2021. ESG as a Measure of Credit Ratings. Risks 9: 226. https://doi.org/10.3390/risks9120226
- Elmalt, Dalya and Igan, Deniz and Kirti, Divya, Limits to Private Climate Change Mitigation (April 2021). CEPR Discussion Paper No. DP16061, Available at SSRN: https://ssrn.com/abstract=3846150

### Country and regional studies, emerging markets focus
- Chawla, Neha Arora and Sharma, Dr. Pooja Chaturvedi, Sustainable Finance in Emerging Markets: Rational for Indian Stock Market and Decision Making for Sustainable Future (October 31, 2020). Journal of Commerce and Accounting Research, Vol 9 (4), 2020
- Development of India ESG Financial Markets
- Michael Jakob, Jan Christoph Steckel, Christian Flachsland & Lavinia Baumstark (2015) Climate finance for developing country mitigation: blessing or curse?, Climate and Development, 7:1, 1-15

### Methodology, risk assessment, and modelling
- Garanin, D., Lukashevich, N., Salkutsan, S. and Svirina, A. (2017), ‘Formalization of stochastic restrictions in risk assessment models of investment projects’, International Conference "Quality Management, Transport and Information Security, Information Technologies", IT&QM&IS Conference, ISBN: 978-1-5386-0703-9523-525, 24 September 2017, Russia, St. Petersburg. doi: 10.1109/ITMQIS.2017.8085875

### Data, policy tracking, and multilateral reporting
- OECD (2021), Climate Finance Provided and Mobilised by Developed Countries: Aggregate trends updated with 2019 data, Climate Finance and the USD 100 Billion Goal, OECD Publishing, Paris, https://doi.org/10.1787/03590fb7-en
- United Nations, Department of Economic and Social Affairs, Population Division (2019). World Urbanization Prospects: The 2018 Revision (ST/ESA/SER.A/420). New York: United Nations.

*Sustainable Finance in Emerging Markets: Evolution, Challenges, and Policy Priorities — Working Paper No. WP/2022/182*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022182-print-pdf.pdf_