23-May-23 ESG

Dialing up climate finance in emerging markets

From the billions to trillions

Michael Lewis

Michael Lewis

Head of Research, ESG
  • Emerging market and developing economies (EMDE) lie at the heart of reaching the commitments laid out in the Paris climate agreement since over the past decade more than 95% of the increase in greenhouse gas emissions have occurred in EMDE and these countries will be the source of 98% of world population growth by the end of this decade . The appointment of a new World Bank President may help promote this agenda
  • The 10 highest emitting CO2 countries, accounting for two-thirds of total developing country emissions, received just 25% of total mitigation finance between 2016 and 2020
  • Climate mitigation efforts are largely deployed in the renewable energy generation and low-carbon transportation sectors. However, significantly larger capital investments are required since per capita clean energy investment in EMDE excluding China is less than a tenth of what it is in advanced economies
  • Chile, India and China are ranked as the top three clean energy investment country destinations . The spread of carbon pricing schemes across EMDE countries is a step in the right direction to help incentivize climate-friendly investments
  • But EM countries are still struggling to receive climate finance. This means innovative ways need to be found to crowd-in private sector investment. Public-private partnerships are one solution which can help unlock multilateral development banks’ capital as well as de-risk EM investments for private sector investors
  • EMDE countries are often punished by poor ESG quality scores yet in certain instances this can reflect global corporates outsourcing to these regions. For example, for many companies their supply chains can account for as much of 80% of their total climate impact . As more corporates address their climate impact, we expect this may encourage the growth in outcome-based debt instruments such as sustainability linked bonds
  • The adoption and spread of climate finance transition taxonomies across EMDE countries need to be encouraged as it will facilitate much needed disclosure and enhance transparency, welcome developments for private investors

1 / Climate finance landscape

EMDE account for 85% of the world’s human population[1], two-thirds of global greenhouse gas emissions[2] and 58% of both global foreign exchange reserves and world GDP[3]. We find that two-thirds of funds provided and mobilized from the developed to developing countries relate to climate mitigation projects. However, the 10 highest emitting CO2 countries, accounting for two thirds of total developing country emissions, received just 25% of total mitigation finance between 2016 and 2020.

When measured on a per capita basis, the 50 lowest emitting developing countries are receiving more than five times the level of mitigation finance compared to the top 10 highest emitting countries. An indication that not only the total size of climate finance flows needs to be increased, but these should be increasingly channeled to the largest emitting countries. In terms of the sector destination of climate finance, renewable energy and low carbon transportation projects are capturing 63% of total mitigation finance, and 46% of total climate finance. In comparison, 40% of adaptation finance over the 2016 to 2020 period has been directed into water supply and sanitation as well as the agriculture, forestry and fishing sectors.

While just over 90% of emerging market countries have set long-term renewable energy targets, when it comes to corporate ambition to reduce greenhouse gas emissions, commitments are not as widespread[4]. Of approximately 4,500 companies who have signed up to the Science Based Targets (SBT) initiative, emerging market corporates account for less than one-fifth, with Emerging Asia accounting for more than half of this universe[5].

While there are divergences in the cash return as well as the valuation of companies according to whether or not they have or have not committed to a SBT, the large majority[6] of the companies aligned with SBTi are from non-carbon intensive sectors such as IT, Communication Services and Consumer Staples. In contrast, we find that SBT commitments have not made many in-roads in high carbon intensive sectors such as Energy, Materials or Utilities. In many instances, companies from these sectors will have little to no ability to meet science based emission reduction targets[7]. In any event, there is a need to scale up SBTi within the EM region, especially among high emitting countries and sectors.

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1. UN World population prospects 2022 database

2. Netherlands Environment Agency (May 2020). Trends in global CO2 and total greenhouse gas emissions

3. IMF WEO database (October 2022). Gross domestic product based on purchasing-power-parity share of world total; IMF International reserves https://www.imf.org/external/pubs/ft/ar/2022/downloads/appendix.pdf

4. BTI Progress Report 2021 (June 2022). Scaling urgent corporate climate action worldwide

5. ata taken from SBTi as of January 19, 2023

6. 78% by count, 68% by market cap and 90% by NCI – of the total companies which have SBTi association are from the IT, Communication Services and Consumer Staples sector.

7. SBT (April 2022). Decarbonizing the energy sector: How the SBTi is approaching this transformation

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