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- Changing the flow of global climate finance
The appointment of newly announced World Bank President - Indian-born finance and development expert and former Mastercard CEO Ajay Banga - offers a fresh chance to address global challenges that directly affect the World Banks overarching mission of ending extreme poverty. The implementation of long-called-for reforms[1] which put climate change at the center of the organization’s lending strategy for middle- and low-income countries and the promotion of public sector first-loss provisions to crowd-in private sector capital may herald a shift in focus as the World Bank Group’s financing operations align with the goals of the Paris Climate Agreement.
The 10 highest CO2 emitting countries in EMDE, accounting for two-thirds of total EMDE emissions, received just 25% of total mitigation finance between 2016 and 2020.
Emerging market and developing economies (EMDE) are central to achieving the commitments laid out in the Paris Agreement. These countries – China and India foremost among them – have been responsible for more than 95% of the increase in greenhouse gas emissions (GHGs) over the past decade[2] and will be the source of 98% of world population growth by the end of this decade[3].
Yet these countries are still struggling to attract sufficient climate finance. For example, per capita clean energy investment in EMDE (excluding China) is less than a tenth of what it is in advanced economies[4]. Also, the 10 highest CO2 emitting countries in EMDE, accounting for two-thirds of total EMDE emissions, received just 25% of total mitigation finance between 2016 and 2020[5]. Unfortunately, this means their attempts to mitigate and adapt to climate change are not progressing as quickly or effectively as they should.
It has been estimated that in order to mitigate the effects of climate change and reduce greenhouse gas emissions, the annual global climate finance flows need to increase from an estimated US$850 billion in 2021 to between US$4.3 trillion and US$9.3 trillion by 2030 to avoid the worst effects of climate change[6]. These numbers are large, but to put this in perspective, the lower target of US4.3 trillion is equivalent to just 4% of global GDP or 6% of the combined assets under management of signatories to the Asset Owners Net Zero Alliance and the Net Zero Asset Managers initiative[7]. For EMDE, investments in energy infrastructure alone must be at least US$1 trillion by 2030.This means a significant scaling up of investments is required particularly in emerging markets outside China. Our hope is that the incoming World Bank president will put this front and center of the World Bank’s agenda.
But additional action is required since with increasing investment flows heading towards higher-rated ESG securities, emerging market issuers are often placed at a disadvantage as lower-rated ESG scores across emerging markets typically lead to lower allocations in dedicated ESG funds. This means steps are required to improve the climate finance environment, crowd-in private sector capital and close the investment financing gap.
The annual global climate finance flows need to increase from an estimated US$850 billion in 2021 to between US$4.3 trillion and US$9.3 trillion by 2030 to avoid the worst effects of climate change.
Such action can include for example:
- Improving climate data, disclosures and taxonomies across emerging markets
- Using public sector balance sheets to help de-risk investments for private sector investors
- Removing fossil fuel subsidies and introducing a suitable price on carbon
A good example of how public-private partnerships can work in practice is the ‘Indonesia Just Energy Transition Partnership’ (ETP) which culminated in 2022 from efforts to drive the country’s clean energy transition.
The partnership between some G20 countries and private sector financial institutions intends to mobilise an initial US$20 billion in public and private financing over a three-to-five-year period with the aim of achieving a peak in power sector emissions by 2030 and increasing the share of renewable energy generation to at least 34% of all power generation over the same period[8]. For investors, such partnerships can help to improve the risk-return profile of emerging markets investments as the public sector provides first-loss provisions.
