Climate finance: Creating the conditions we need to invest in emerging markets

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Image symbolizing the need to invest in climate friendly infrastructure | © Shutterstock. Poginici
Image symbolizing the need to invest in climate friendly infrastructure | © Shutterstock. Poginici

As we enter 2021, the world faces an enormous challenge: rebuilding our economies devastated by COVID-19. While vaccines hold the promise of economic recovery, we have a long road ahead and much work to accomplish.

But in this arduous recovery, private investors, lenders, and developers also see great opportunity to accelerate investments that support the transition to low-carbon economies.

While the circumstances that led to this opportunity are catastrophic, the timing is fortuitous. The urgent need for economic recovery from COVID-19 unlocks an unprecedented amount of public resources available for investment. Simultaneously, the demand for sustainable investment is surging.  These are building blocks for a successful green recovery, which have fallen into place just as we enter this decisive decade in the climate crisis. And, because most infrastructure investments made today will operate for several decades, we can make significant progress to make sure tomorrow’s infrastructure is low carbon.

Private international investment into clean energy assets in emerging markets has more than tripled over the last decade, from $6 billion in 2010 to $28 billion in 2019, according to BloombergNEF’s clean energy asset finance data. While this is great news, it’s not nearly enough. Available capital for sustainable investment is only part of what we need to reduce carbon emissions and build resilient economies. We also need the projects themselves : energy, building, transport, and waste infrastructure projects designed to facilitate the transition to net zero.

Unfortunately, there simply aren’t enough of these projects that meet private sector investors’ risk/return profile and attract capital. This is the problem that the Climate Finance Leadership Initiative (CFLI), in partnership with the Association of European Development Finance Institutions (EDFI) and the Global Infrastructure Facility (GIF) has set out to solve. The CFLI, formed by Michael R. Bloomberg at the request of the United Nations Secretary-General Antonio Guterres, convenes leading companies to mobilize and scale private capital for climate solutions. Our members include Allianz Global Investors, AXA, Bloomberg, Enel, Goldman Sachs, Japan’s Government Pension Investment Fund, HSBC, and Macquarie.

Together with EDFI and GIF, we are working to identify the policies that strengthen enabling environments for private climate finance.

How are we going about this? We know that countries that pursue a combination of enabling policies—such as stable clean energy targets, auctions that award cost-covering tariffs, tax incentives, and a power-generation sector open to private participation—fare far better in attracting private climate finance than those that do not. The strong growth of private investment into clean-energy assets I noted earlier was concentrated in only 20 markets. Investment flows toward another 84 emerging economies surveyed have remained flat.

Unsurprisingly, large markets like Brazil, China, and India are present in the top 20. More interesting is that smaller countries like Morocco, Kenya, Uruguay, and Jordan also made the top 20. It’s the experience of these countries that highlights the enabling conditions needed to mobilize private climate finance. We’ve seen clearly that these policies open the door to wider pools of private capital.

FDI in emerging markets clean energy assets

We also see that successful countries tend to follow a similar trajectory. When a country adopts policies that support clean-energy investment, such as renewables targets in combination with auctions, the initial investments in years following are often from development finance institutions. Such institutions play a key role in supporting first-movers, given that they are comfortable taking higher risks and can finance projects at lower costs. Once a country gains experience in clean energy, the market matures and private investors’ perception of risk is diminished and private capital flows in. 

Here’s an important point: while public finance institutions actively engage policymakers on policy adjustments to create stronger enabling conditions, private finance voices have yet to contribute to the conversation in a clear and unified way.

With this in mind, CFLI, EDFI, and GIF have developed a working paper that outlines precisely the conditions needed to produce bankable pipelines of low-carbon, climate-resilient investment opportunities in emerging markets.

We set forth the most important factors investors will consider when evaluating investments in a given country and sector. We note high-level conditions needed to support climate finance across all sustainable infrastructure sectors, such as currency stability. We also examine policy considerations for specific sectors and subsectors, including clean energy, sustainable urban transport, climate-smart water and waste, green buildings, and sustainable land use. Making certain policy decisions can significantly boost a country’s ability to attract private climate finance. Examples include:

  • Standardizing power purchase agreements and putting in place protections required by international markets
  • Establishing regulations to grow mobile payment systems, a key building block for the development of pay-as-you-go solar energy and energy storage
  • Creating clear goals and targets for water and sanitation addressing conservation and development, access, network extension, cost recovery, and reliability of services
  • Developing pricing mechanisms in urban transport that account for the full costs of fossil fuel-based transport, such as carbon prices, fuel and vehicle taxes, congestion charges, fossil fuel subsidy reform, and parking levies

Our goal is not to set out a prescriptive set of expected policy changes or mandatory investment criteria. Instead, we hope the paper is a starting point for public-private dialogue on these issues.

While the paper was drafted with the help of experienced lenders and investors, we need to engage a broader community of experts to make it as useful as possible. To that end, we’re inviting comments from diverse stakeholders across business, government, and civil society. We especially welcome comments from sector and sub-sector specialists and in-country experts who can weigh in on the specific considerations associated with the relevant sectors across sustainable infrastructure.

Will you take the time to review and socialize among your networks? The consultation period ends on January 15, 2021. Details on how to comment can be found here.

With your help, we can make an important contribution toward achieving a low-carbon global economy.


Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.


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This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.

Authors

Jameela Pedicini

Executive Director, Climate Finance Initiatives, Bloomberg LP

Join the Conversation

Amado C Tancioco III
January 08, 2021

Climate finance is “finance that aims at reducing emissions, and enhancing sinks of greenhouse gases and aims at reducing vulnerability of, and maintaining and increasing the resilience of, human and ecological systems to negative climate change impacts”, as defined by the United Nations Framework Convention on Climate. In the Philippine we are actually on the road to full renewable energy utilization but the problem on renewable energy is power quality as of now we are trying to mitigate this issues as we assess it and look for possibilities for flexiblock
Energy mix. I believe UK is now doing this climate finance considering nuclear energy as renewable energy can help.

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October 12, 2021

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