The Importance of Enhancing Financial Investment in Emerging Economies
In a world where industrialization, urbanization, and population growth are driving up energy demands, emerging markets and developing economies are projected to be the primary contributors to future emissions growth. Historically, these markets have received less investment compared to developed markets, but a significant mobilization of private sector capital is needed to address the energy demands and emissions growth.
The energy demands in these markets are primarily driven by the aforementioned factors, leading to the anticipated future emissions growth. The unprecedented levels of investment required to address this issue are substantial.
Strategies and initiatives to mobilize private capital for reducing future emissions growth in these markets focus on catalytic financing mechanisms, innovative financial tools, and enabling structural reforms.
One such strategy is catalytic financing and risk mitigation. Financial instruments like guarantees, first-loss capital, green and sustainability-linked bonds, and blended finance can be used to de-risk investments. For example, a proposed global facility, EMCIC, aims to mobilize $100-500 billion over 10 years by comprehensively guaranteeing loans for clean energy and nature-based solutions, without relying on host country guarantees that are often unaffordable in emerging markets.
National-level commitment and ecosystem development are also critical. Governments signaling strong commitment through agencies dedicated to clean energy project development, such as Morocco’s MASEN, which streamlines permitting and infrastructure to boost investor confidence, are essential. Local capacity building through workforce development and supplier integration helps reduce project costs and risks over time.
The private sector is identified as a key source for this required capital. The Net-Zero Asset Owner Alliance (NZAOA) has outlined a $1.3 trillion per year private climate finance roadmap by 2035, emphasizing the scaling up of catalytic capital, blended finance, and regulatory reforms. Multilateral development banks are called upon to increase their mobilization ratio of private capital from 0.5:1 to 5:1 to meet climate targets.
Circular economy initiatives also play a role in attracting capital. Integrating circular economy principles helps reduce waste and pollution while creating jobs and innovation. IFC investments exceeding $1 billion in circular projects across emerging markets are a testament to this approach's success. These projects enable predictable demand and emissions reductions, making them attractive to private investors.
Lastly, support for emerging market green technology sectors through sound policies and investments in research can attract international investors by lowering costs and expanding clean tech trade and deployment.
In conclusion, these strategies combine financial innovation, government signaling, ecosystem development, and investor alignment to attract and scale private capital for climate mitigation amid rapid industrialization, urbanization, and population growth in emerging markets.
The full article can be accessed here. The article was first published on NZI Spark.
[1] World Resources Institute. (2021). Mobilizing Private Capital for Climate Mitigation in Emerging Markets. Retrieved from https://www.wri.org/blog/2021/05/mobilizing-private-capital-climate-mitigation-emerging-markets [2] Net-Zero Asset Owner Alliance. (2021). Private Climate Finance Roadmap. Retrieved from https://www.net-zero-alliance.org/private-climate-finance-roadmap/ [3] International Finance Corporation. (2021). Circular Economy in Emerging Markets. Retrieved from https://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/circular-economy [4] International Renewable Energy Agency. (2021). Policy Support for Emerging Market Green Technology Sectors. Retrieved from https://www.irena.org/publications/2021/Mar/Policy-Support-for-Emerging-Market-Green-Technology-Sectors
- To counterbalance the future emissions growth in emerging markets, strategies are being implemented that focus on mobilizing private capital through catalytic financing mechanisms, such as green and sustainability-linked bonds, and innovative financial tools like blended finance.
- In order to attract international investors, support for emerging market green technology sectors can be fostered through sound policies and investments in research, which can lower costs and expand clean tech trade and deployment.
