Private climate financing must play a vital role as emerging market and developing countries seek to contain climate change while curbing greenhouse gas emissions and addressing its impacts. Hmm.
Estimates vary, but to significantly reduce greenhouse gas emissions and mitigate climate change, these economies together would cost at least $1 trillion in energy infrastructure by 2030 and all $1 trillion by 2050. needs to invest between $3 trillion and $6 trillion annually in the sector. In addition, an additional $140 billion to $300 billion per year by 2030 will be required to adapt to the physical impacts of climate change, such as rising sea levels and intensifying droughts. This could jump from $520 billion to $1.75 trillion annually after 2050, depending on how effective climate mitigation measures have been.
As detailed in the analysis chapter of the latest Global Financial Stability Report, it is imperative that private climate finance be stepped up quickly. Key solutions include appropriate pricing of climate risk, innovative financing instruments, a broader investor base, greater engagement of multilateral development banks and development finance institutions, and enhanced climate information.
Encouragingly, private sustainable lending in emerging market and developing economies rose to a record $250 billion last year. But private funding, he said, should at least double by 2030. At a time when investable low-carbon infrastructure projects are often in short supply and funding for the fossil fuel industry has skyrocketed since the Paris Agreement.
The lack of effective carbon pricing reduces the incentive and ability of investors to put more money into climate-beneficial projects. This is similar to an imperfect climate information architecture with imperfect climate data, disclosure standards, taxonomies, and other harmonization approaches.
It is also unclear whether only very large and fast-growing environmental, social, governance or ESG investment flows could really impact the scaling up of private climate finance. is. In addition to the still uncertain climate benefits of ESG investing, companies in emerging market and developing countries systematically score lower than those in developed countries. As a result, ESG-focused investment funds have significantly reduced their allocations to emerging market assets. In addition, the risks associated with investing in assets in emerging markets and developing countries are: Often considered too expensive by investors.
Innovative financing vehicles can overcome some of these challenges while broadening the investor base to include institutional investors such as global banks, investment funds and insurance companies, impact investors, philanthropic capital and others. help.
In large emerging markets with more functioning bond markets, investment funds (such as the Amundi Green Bond Fund, backed by the private sector lending arm of the World Bank) are good examples of how to attract institutional investors such as pension funds. provide. Such funds should be replicated and expanded to incentivize emerging market issuers to finance low-carbon projects and increase the supply of green assets to attract a wide range of international investors.
In developing countries, multilateral development banks play a key role in financing critical low-carbon infrastructure projects. We need to channel more climate financing resources through such institutions.
An important first step is to increase our capital base and rethink our approach to risk appetite through partnerships with the private sector, underpinned by transparent governance and management oversight.
Multilateral development banks could then be better able to take advantage of equity financing. Currently only about 1.8% of commitments to climate finance in emerging market and developing economies. And while their shares can draw much larger amounts of private capital, they are currently only about 1.2 times the resources these institutions commit themselves to.
A key tool needed to support incentives for private investment is the development of transition taxonomies and other coordinating approaches. This will motivate companies to move towards emissions reduction targets by identifying financial assets that can reduce emissions over the long term.
Importantly, it focuses on innovation in industries such as cement, steel, chemicals, and heavy lift, where emissions cannot be easily reduced due to technical and cost constraints. This will ensure that those carbon-intensive industries that have the greatest potential to reduce greenhouse gas emissions are encouraged to reduce their carbon impacts over time, rather than being sidelined by investors. will be
The IMF launched a new Resilience and Sustainability Trust, which aims to provide affordable long-term financing to help countries build resilience to climate change and other long-term structural challenges. are playing an increasingly important role through There are pledges totaling $40 billion and staff-level agreements for his first two programs in Barbados and Costa Rica. This trust could encourage public and private sector investment in climate finance.
The IMF is also promoting the availability of high-quality climate data and the adoption of disclosure standards and transition taxonomies to create an attractive investment climate.
More broadly, through the Network for Greening the Financial System and other international organizations, we help strengthen climate information architecture and assist emerging market and developing countries with climate policy, including carbon pricing. As the movement toward more private climate financing takes hold, the Fund will engage partners to promote solutions where possible.
—This blog is based on Chapter 2 of the October 2022 Global Financial Stability Report, “Scaling up Private Climate Financing in Emerging Markets and Developing Countries: Challenges and Opportunities.”
