How to Scale Up Private Climate Finance in Emerging Economies
IMF Blog, October 7, 2022
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Bibliographic details
- Authors: Torsten Ehlers, Charlotte Gardes-Landolfini, Fabio Natalucci, Prasad Ananthakrishnan
- Published: October 7, 2022
Overview
- Private climate financing must play a pivotal role as emerging markets and developing economies seek to curb greenhouse gas emissions and contain climate change while coping with its effects.
- Boosting private climate financing quickly is essential, as detailed in Chapter 2 of the October 2022 Global Financial Stability Report.
Investment needs
- Emerging market and developing economies must collectively invest at least $1 trillion in energy infrastructure by 2030.
- These economies need $3 trillion to $6 trillion across all sectors per year by 2050 to mitigate climate change by substantially reducing greenhouse gas emissions.
- Additional adaptation needs:
- $140 billion to $300 billion a year by 2030 to adapt to the physical consequences of climate change.
- Could rise to between $520 billion and $1.75 trillion annually after 2050 depending on how effective climate mitigation measures have been.
Current flows and gaps
- Private sustainable finance in emerging market and developing economies rose to a record $250 billion last year.
- Private finance must at least double by 2030.
- Investable low-carbon infrastructure projects are often in short supply.
- Funding of the fossil fuel industry has soared since the Paris Agreement.
Barriers to scaling private finance
- A lack of effective carbon pricing reduces incentives and ability of investors to channel more funds into climate-beneficial projects.
- A patchy climate information architecture with incomplete climate data, disclosure standards, taxonomies and other alignment approaches.
- Unclear climate benefits of ESG investing; ESG scores for companies in emerging market and developing economies are systematically lower than for advanced counterparts, leading ESG-focused funds to allocate much less to emerging market assets.
- Perceived high risks associated with investing in emerging market and developing economy assets.
Solutions and financing instruments
- Adequate pricing of climate risks.
- Innovative financing instruments to overcome project and risk barriers.
- Broaden the investor base to include:
- Global banks
- Investment funds
- Institutional investors such as insurance companies
- Impact investors
- Philanthropic capital
- Others
- Investment fund models in larger emerging markets:
- Example: Amundi green bond fund backed by the World Bank’s private-sector financing arm as a way to draw in institutional investors such as pension funds.
- Recommendation: replicate and expand such funds to incentivize issuers in emerging markets to generate a greater supply of green assets.
- For less-developed economies, increase climate financing through multilateral development banks (MDBs) and development finance institutions (DFIs).
Role of multilateral development banks and development finance institutions
- Increase capital base of MDBs and reconsider approaches to risk appetite via partnerships with the private sector, supported by transparent governance and management oversight.
- MDBs could make greater use of equity finance—currently only about 1.8 percent of their commitments to climate finance in emerging market and developing economies.
- Private finance currently equals only about 1.2 times the resources these institutions commit themselves; MDB equity can draw in much larger amounts of private finance.
Transition taxonomies and alignment approaches
- Develop transition taxonomies and other alignment approaches to identify financial assets that can reduce emissions over time and incentivize firms to transition towards emission reduction goals.
- Include focus on innovation in industries like cement, steel, chemicals, and heavy transport that cannot easily cut emissions because of technological and cost constraints.
- Aim to ensure carbon-intensive industries with the greatest potential to reduce greenhouse gas emissions are incentivized, not sidelined.
IMF actions and international coordination
- IMF’s Resilience and Sustainability Trust is intended to provide affordable, long-term financing to help countries build resilience to climate change and other long-term structural challenges.
- The Trust has pledges totaling $40 billion and staff-level agreements on the first two programs—Barbados and Costa Rica.
- The Trust could catalyze official and private sector investments for climate finance.
- IMF is promoting availability of quality climate data and fostering adoption of disclosure standards and transition taxonomies to create an attractive investment climate.
- IMF is helping strengthen the climate information architecture through the Network for Greening the Financial System and other international bodies to support emerging market and developing economies with climate policies, including carbon pricing.
- The Fund will engage partners and promote solutions as private climate financing scales up.
Key statistics (preserved exactly)
- $1 trillion (energy infrastructure investment by 2030)
- $3 trillion to $6 trillion (annual investment across all sectors by 2050)
- $140 billion to $300 billion a year by 2030 (adaptation needs)
- $520 billion to $1.75 trillion annually after 2050 (potential adaptation needs)
- $250 billion (private sustainable finance in emerging market and developing economies last year)
- at least double by 2030 (required increase in private finance)
- 1.8 percent (share of MDB commitments to climate finance that is equity)
- 1.2 times (private finance currently relative to resources MDBs commit themselves)
- $40 billion (pledges to the Resilience and Sustainability Trust)
This blog is based on Chapter 2 of the October 2022 Global Financial Stability Report, “Scaling Up Private Climate Finance in Emerging Market and Developing Economies: Challenges and Opportunities.”
Content in this bundle
- 2020-Joint-MDB-report-on-climate-finance-Report-final-web