Private climate finance has a critical role to play as emerging markets and developing economies seek to reduce greenhouse gas emissions and contain climate change while dealing with its effects.
Estimates vary, but these 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. greenhouse. Also,
another $140 billion to $300 billion a year
by 2030 it is necessary to adapt to the physical consequences of climate change, such as rising sea levels and intensifying droughts. This could rise dramatically to between $520 billion and $1.75 trillion annually after 2050, depending on how effective climate mitigation measures have been.
Rapidly leveraging private climate finance is essential, as we detailed in an analytical chapter of our latest Global Financial Stability Report. Key solutions include appropriate pricing of climate risks, innovative financing instruments, broadening the investor base, expanding the involvement of multilateral development banks and development finance institutions, and strengthening climate information. .
Encouragingly, private sustainable finance in emerging market and developing economies rose to a record $250 billion last year. But private financing must
at least double
by 2030, at a time when investable low-carbon infrastructure projects are often scarce 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 channel more funds into climate-friendly projects, as does a
irregular weather information architecture
with incomplete climate data, disclosure standards, taxonomies, and other alignment approaches.
It is also unclear whether very large and fast-growing environmental, social and governance (ESG) investment flows could have a real impact on 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 consistently lower than those of their advanced counterparts. As a result, ESG-focused mutual funds allocate much less to emerging market assets. In addition, the risks associated with investing in assets of emerging market and developing economies are often considered too high by investors.
Innovative financing instruments can help overcome some of these challenges, as well as broaden the investor base to include global banks, investment funds, institutional investors such as insurance companies, impact investors, philanthropic capital, and others.
In larger emerging markets with more functional bond markets, investment funds, such as the Amundi green bond fund backed by the
The private sector finance arm of the World Bank—provide a good example of how to attract institutional investors such as pension funds. Such funds should be replicated and expanded to incentivize issuers in emerging markets to generate a greater supply of green assets to finance low-carbon projects and attract a wide range of international investors.
For less developed economies, multilateral development banks will play a key role in financing vital low-carbon infrastructure projects. More climate finance resources should be channeled through such institutions.
An important first step would be to increase its capital base and reconsider risk appetite approaches through partnerships with the private sector, backed by transparent governance and management oversight.
Multilateral development banks could then make greater use of equity financing, currently only around 1.8 percent of your commitments to climate finance in emerging market and developing economies. And their capital can attract much larger amounts of private funding, currently only about 1.2 times the resources these institutions commit.
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 companies to transition to those. emissions reduction targets.
Importantly, they include a focus on innovation in industries such as cement, steel, chemicals, and heavy transportation that cannot easily reduce emissions due to technological and cost limitations. This helps ensure that these carbon-intensive industries, those with the greatest potential to reduce greenhouse gas emissions, are not marginalized by investors, but rather incentivized to reduce their carbon footprint over time.
The IMF is playing an increasingly important role, including through its new Resilience and Sustainability Trust Fund, which aims to provide affordable, long-term financing to help countries build resilience to climate change and other long-term structural challenges. We have commitments for a total of $40 billion and agreements at the staff level in the first two programs: Barbados and Costa Rica. This trust could catalyze official and private sector investment in climate finance.
The IMF is also promoting the availability of quality climate data and encouraging the adoption of disclosure standards and transitional taxonomies to create an attractive investment climate.
More broadly, we are helping to strengthen the climate information architecture through the
Network for the Greening of the Financial System
and other international bodies to support emerging market and developing economies with climate policies, including carbon pricing. As the movement towards more private climate finance takes hold, the Fund will engage partners and promote solutions wherever possible.
—This blog is based on Chapter 2 of the October 2022 Global Financial Stability Report, “Expanding Private Climate Finance in Emerging Market and Developing Economies: Challenges and Opportunities.”