Lack of Climate Finance for EMs a “False Barrier”
Developing economies have the ambition to tackle climate challenges, but require investors to step up and capitalise on a plethora of projects.
Industry experts have stressed the importance of mobilising finance in Africa and other emerging markets (EMs), urging investors and governments to take action and find ways to overcome perceived hurdles for investment.
Speaking at the London Stock Exchange-hosted Climate Investment Summit, Brian O’Callaghan, Vice President of the UN Economic Commission for Africa, described claims per which there is not enough funding to scale climate finance in EMs as a “false barrier”. There is money available, he argued, citing the US$20 trillion spent globally for the relief response to Covid-19 – including US$5 trillion from the US alone.
“There is this notion that there is no ambition coming forth from EMs. That is a complete falsehood,” O’Callaghan said. “I’ve met with government leaders from developed and developing countries alike, and developing country governments are more ambitious than developed ones. They don’t have access to the finance or all kinds of other internal resources necessary to meet their goals, but they are ambitious.”
Earlier this year, the International Energy Agency (IEA) underscored the crucial role that EMs will need to play in achieving the goal of tripling renewable energy use by 2030, warning that the target would not be met without further financial support from wealthier economies.
Africa, in particular, will need to play a key role in the climate transition – accounting for one-fifth of the global population but only attracting 3% of global energy investment. The continent only has 1% of installed solar photovoltaic capacity despite possessing 60% of the best solar resources globally. EMs including Africa have also been recognised for their importance in building the voluntary carbon market.
By 2030, energy investment will need to double and reach US$200 billion per year for African countries to achieve all their energy-related development goals, with more than two-thirds going to clean energy, according to the IEA.
O’Callaghan also pushed back on excuses of a perceived lack of projects to invest in in EMs. “There are plenty of projects,” he added. “Either you don’t know where to look, you’re applying a Western view of project sourcing in markets that are not developed in the same way, or what you really mean is there’s no access to projects that meet your risk tolerances.”
Jennifer Morgan, State Secretary and Special Envoy for International Climate Action, Federal Foreign Office, Germany, noted that while risks in EMs can seem high, investors and the private sector need to use their collective power to overcome these hurdles.
“We need you to engage with governments and finance ministries and have a very clear message that [you] are prepared to seriously assess the risks, and find the solutions in order to scale up our investments,” she said.
O’Callaghan called on investors attending the event to gather a team to investigate what could be investable in Africa, and “just explore if you haven’t already started that process”.
Invigorating innovation, finding funding
Africa has increasingly become subject to climate-related catastrophes including droughts, changing weather conditions, floods, and decreasing water quality, which have put a strain on the continent’s infrastructure.
Patrick Krappie, CEO of the Technology Innovation Agency, underscored the importance of resilience in this context. “The question in the [African] continent is largely around how do they build resilient economies – how do they adapt to the impacts of climate change in [a] manner that it affects them, but not that they contribute to [it].”
According to the Organisation for Economic Co-operation and Development, infrastructure has suffered from “chronic underinvestment” for decades, both in developed and developing economies. It estimated that US$6.9 trillion a year in infrastructure investment would be required until 2030 to meet climate and development objectives.
To overcome this investment shortfall, blended finance and funds backed by institutional investors will be key.
Last month, the Africa Finance Corporation (AFC) announced it was looking to raise almost US$1 billion to support industries and resilience against climate change. The AFC was established in 2007 to catalyse private sector-led infrastructure investment across Africa, with 43 member countries having invested US$13 billion since inception. The corporation intends to close financing for its inaugural US$750 million Infrastructure Climate Resilient Fund in Q2 2024, utilising a blended finance model.
Based on the same model is Denmark’s Investment Fund for Developing Countries (IFU), established a Sustainable Development Goals Investment Fund in 2019 with a total commitment of US$750 million comprising both state and large-pension-fund finance. Last year, the IFU invested DKK 142 million (US$20.4 million) of its own capital in Africa, representing 23% of the firm’s total invested capital in 2023.
“Meeting this [financing gap] challenge requires innovations in our models, in our modes of financing, in our regulatory frameworks, and in the enabling environments that can make it all happen,” said Jake Levine, Chief Climate Officer at the US International Development Finance Corporation. “We need to take the blended finance models that you and I have seen in individual transactions, and sometimes in large-scale funds, and standardise and syndicate those so they can crowd in not just the private sector – but institutional capital.”
Earlier this week, the International Renewable Energy Agency partnered with pan-African infrastructure investor and asset management Group Africa50, with a key objective to support infrastructure projects. Africa50 will pledge up to US$100 million to fund and co-finance renewables-based energy transition projects and infrastructure across Africa and support sustainable development and climate action efforts across the continent.
EM-focused funds have incidentally become more common in response to growing industry interest. Earlier this month, ABN AMRO Investment Solutions and Boston Common Asset Management launched a new Emerging Markets ESG Equities Fund, aiming to deploy finance across a portfolio of 40 to 60 primarily large- and mid-cap EM-based companies with strong ESG profiles.
Meanwhile, European asset manager Candriam released the Candriam Sustainable Equity Emerging Markets ex-China Fund, and Stewart Investors’ Global Emerging Markets Sustainability Strategy celebrated its 15th anniversary.
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