How to scale up private climate finance in emerging economies

 How to scale up private climate finance in emerging economies

Expanding private capital is important to finance critical low-carbon infrastructure projects, especially in less developed economies.

Torsten Ehlers, Charlotte Gardes-Landolfini, Fabio Natalucci, Ananthakrishnan Prasad


Private climate funding should play an important role as emerging market and developing economies try to curb greenhouse gas emissions and control climate change while combating its effects.

Estimates vary, but these economies should collectively invest at least $1 trillion in energy infrastructure by 2030 and $3 trillion to $6 trillion in all sectors by 2050 to substantially reduce greenhouse gas emissions. Climate change can be reduced by reducing In addition, $140 billion to $300 billion a year is needed by 2030 to adapt to the physical consequences of climate change, such as rising seas and intense drought. This could rapidly increase to between $520 billion and $1.75 trillion annually after 2050, depending on how effective climate mitigation measures are.

It is essential to accelerate private climate financing, as we detail in an analytical chapter in our latest Global Financial Stability Report. Key solutions include adequate pricing of climate risks, innovative financing instruments, expanding 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 reached a record $250 billion last year. But private finance should at least double by 2030, at a time when investable low-carbon infrastructure projects are often in short supply and funding of the fossil fuel industry has increased since the Paris Agreement.



The lack of effective carbon pricing undermines investors' incentives and the ability to put more money into climate-benefiting projects, as does a vague climate information architecture with incomplete climate data, disclosure standards, classifications, and other alignment approaches.

It is also unclear whether the very large and rapidly expanding environmental, social and governance, or ESG, investment flows alone can have a real impact in enhancing private climate finance. In addition to the still uncertain climate benefits of ESG investments, such scores for companies in emerging market and developing economies are systematically lower than for advanced counterparts. As a result, ESG-focused investment funds allocate little to emerging market assets. In addition, the risks associated with investing in emerging market and developing economy assets are often overestimated by investors.

Innovative financing instruments can help address some of these challenges, along with broadening the investor base to include global banks, investment funds, institutional investors such as insurance companies, influential investors, philanthropic capital, and others. Huh.

In large emerging markets with more functional bond markets, investment funds—such as the Amundi Green Bond Fund backed by the private sector financial arm of the World Bank—provide a good example of how it has attracted institutional investors such as pension funds. Go. Such funds should be replicated and expanded to encourage issuers in emerging markets to generate a greater supply of green assets to finance low-carbon projects and attract a wider range of international investors.

For less developed economies, multilateral development banks will play an important role in financing important low-carbon infrastructure projects. More climate financing resources should be channeled through such institutions.

An important first step would be to increase their capital base and rethink their approach to risk taking through partnerships with the private sector, backed by transparent governance and management oversight.

Multilateral development banks could then make greater use of equity finance – currently only about 1.8 percent of their commitments to climate finance in emerging market and developing economies. And their equity can attract a very large amount of private finance, which is currently equivalent to about 1.2 times the resources these institutions own.


An important tool needed to help encourage private investment is the development of transition taxonomies and other alignment approaches, which identify financial assets that can reduce emissions over time and help firms meet emissions reduction targets. may encourage further infection.

Importantly, they focus on innovation in industries such as cement, steel, chemicals and heavy transportation that cannot easily cut emissions due to technical and cost constraints. This helps ensure these carbon-intensive industries – which have the greatest potential to reduce greenhouse gas emissions – are not sidelined by investors, but rather over time.

The IMF is playing an increasingly important role, including with its new Resilience and Sustainability Trust, which aims to provide affordable, long-term financing to help countries build resilience to climate change and other long-term structural challenges. We have committed a total of $40 billion and staff-level agreements on the first two programs—Barbados and Costa Rica. The trust can catalyze official and private sector investment for climate finance.

The IMF is also promoting the availability of quality climate data and the adoption of disclosure standards and transition taxonomies to create an attractive investment climate.

More broadly, we are helping to strengthen the climate information architecture through the Green the Financial System and other international bodies to support emerging market and developing economies with climate policies, including carbon pricing. As the move toward more and more private climate funding moves, the fund will engage partners and promote solutions wherever possible.