Scaling up Climate Finance for Emerging Markets and Developing Economies
IMF News, February 27, 2023
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- Published: February 27, 2023
Economic and climate context
- Global growth expected to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023.
- Euro Area growth expected to slow from 3.5 percent in 2022 to an expected 0.7 percent in 2023 before a modest rebound to 1.6 percent in 2024.
- Energy security concerns in Europe remain significant despite recent drops in energy prices.
- Last year saw climate disasters on all five continents (heatwaves in Europe, wildfires in North America, droughts in Africa, floods in Asia).
- Required emissions reductions: cut global emissions by 25‑50 percent by 2030 compared to pre-2019 levels to contain temperature rises to between 1.5 and 2 degrees celsius.
- IMF analysis finds current global climate targets would only deliver an 11 percent cut—less than half of the minimum reduction that is needed.
- Financing needs: financing needed to meet adaptation and mitigation goals are estimated at trillions of US dollars annually until 2050.
- Current climate finance: only around630 billion dollars a year in climate finance across the whole world—with only a fraction going to developing countries.
- Advanced-economy pledge: importance of meeting or exceeding the pledge of providing $100 billion per year in climate finance for developing countries.
- Emissions distribution under business-as-usual: middle- and low-income countries are expected to account for 66 percent of global CO2 emissions by 2030, up from 44 percent in 1990.
Barriers to scaling private climate finance in emerging and developing economies
- High upfront costs and long timeframes associated with climate investments.
- Lack of liquid markets and foreign exchange risk.
- Scarcity of well-planned and scalable projects.
- Significant scarcity of high quality and reliable data, harmonized and consistent climate disclosure standards, and taxonomies to align investments to climate-related goals.
- Limited capacity to identify, appraise, select good quality projects, and to manage relevant fiscal risks.
Policy and capacity priorities to redirect investment
- Focus on policies that redirect investment flows from high-carbon projects towards climate-friendly opportunities:
- Smarter regulation, price signals, and well targeted subsidies that incentivize low-carbon investment while paying attention to each country’s unique fiscal and macro-financial characteristics.
- Build capacity:
- Strengthen public financial management and public investment management related to climate projects.
- Help policymakers identify, appraise, and select good quality projects and manage fiscal risks.
- Strengthen the climate information architecture to develop and deepen capital markets and improve project bankability.
- Provide technical assistance programs to develop guidelines, training programs for local stakeholders, and adoption of international best practices.
- Adopt flexible implementation approaches:
- Complement national strategies with regional strategies as appropriate.
- Adopt programmatic approaches in addition to traditional project-based approaches.
Innovative financial mechanisms and instruments
- De-risking instruments and a broader investor base are essential to mobilize private capital.
- Public-private synergies and blended finance can crowd in public and private investors:
- Public sector and multilateral development banks could provide first-loss investments, equity capital, or credit enhancements.
- Prioritizing equity over debt can help avoid adding to sovereign debt burdens of developing countries.
- Example of successful fund-level leverage:
- The Amundi Planet Emerging Green One fund, set up with support of the International Finance Corporation (IFC) and EIB, successfully leveraged private capital by several multiples; IFC and EIB invested in the equity and senior tranches.
- Multilateral development banks can use limited public resources to create green bond funds that tap institutional investor resources.
IMF actions and instruments
- The IMF has put climate at the heart of its work across surveillance, capacity development, lending, and data and diagnostic tools, including the climate information architecture.
- Collaboration to develop operational guidance and data:
- In collaboration with the World Bank, the Bank for International Settlements, and the OECD, the Fund is developing operational guidance on the G20 high-level principles for sustainable finance alignment approaches.
- The new G20 Data Gaps Initiative will help develop detailed statistics on climate finance and forward-looking physical and transition risks indicators.
- Lending instrument: Resilience and Sustainability Trust (RST)
- The RST will provide longer-term affordable financing for vulnerable low- and middle-income members.
- Goal: through the RST, deliver policy reforms, capacity development, and financing arrangements in a package to improve policy and capacity environments and scale up climate finance by crowding in large-scale private capital.
- RST can leverage sound policies and create additional fiscal space to promote financing arrangements or facilities that could mobilize large scale private capital.
- Capacity development via IMF expertise:
- Empower policymakers to better identify, appraise, and select good quality projects.
- Promote climate-friendly public financial management and public investment management for accountability, transparency, and more effective spending.
- Improve investor certainty that funds are spent effectively, attracting new donors through improved transparency and governance.
- Convene national authorities, multilateral development banks, and private sector (including institutional investors and export credit agencies) to broaden the investor base.
Core recommendation and concluding message
- Delivering shared climate goals requires combining:
- Policy reforms,
- Capacity development, and
- Financing arrangements.
- Unprecedented cooperation and coordination are needed among public and private actors, multilateral institutions, and other stakeholders.
- If financing needs of emerging markets and developing economies are not met, the goals of the Paris Agreement cannot be achieved.
Speech by Deputy Managing Director Bo Li at EIB Group Forum 2023; February 27, 2023. International Monetary Fund.