Scaling Up Private Climate Finance in Emerging Market and Developing Economies

(MainsGS2:Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.)

Context:

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.

Accelerate investment:

According to the IMF, economies must collectively invest at least $1 trillion in energy infrastructure by 2030 and $3 trillion to $6 trillion across all sectors per year by 2050 to mitigate climate change by substantially reducing greenhouse gas emissions.
In addition, a further $140 billion to $300 billion a year by 2030 is needed to adapt to the physical consequences of climate change, such as rising seas and intensifying droughts.
This could sharply rise to between $520 billion and $1.75 trillion annually after 2050 depending on how effective climate mitigation measures have been.

Challenges:

A lack of effective carbon pricing reduces the incentive and ability of investors to channel more funds into climate-beneficial projects.
It’s also unclear whether very large and quickly growing environmental, social, and governance, or ESG, investment flows alone could have a real impact in scaling up private climate finance.
In addition to the still-uncertain climate benefits of ESG investing, such scores for companies in emerging markets and developing economies are systematically lower than those for advanced counterparts.
As a result, ESG-focused investment funds allocate much less to emerging market assets as the risks associated with investing in emerging market and developing economy assets are often deemed too high by investors.

Way forward:

Innovative financing instruments can help overcome some of these challenges, together with broadening the investors base to include global banks, investment funds, institutional investors such as insurance companies, impact investors, philanthropic capital, and others.
For less-developed economies, multilateral development banks will play a key role in financing vital low-carbon infrastructure projects.
An important first step would be to increase their capital base and reconsider approaches to risk appetite via partnerships with the private sector, supported by transparent governance and management oversight.
An important tool needed to help incentivize private investment is the development of transition taxonomies and other alignment approaches, which identify financial assets that can reduce emissions over time and incentivize firms to transition towards emission reduction goals.