Developing countries may not be able to tap into private capital: panelists

Low-to-middle income countries may not have the needed access to the billions promised in private capital at the UN COP26 climate conference last November for reaching net-zero climate goals, especially if they do not enjoy investment-grade ratings.

There's "an expectation mismatch" between the $130 trillion the Glasgow Financial Alliance for Net-Zero (GFANZ) said it has secured to help economies transition to net zero and "what's really available to the weaker credit, non-investment grade, emerging markets," Jay Collins, vice chairman of Citi's Banking, Capital Markets and Advisory group, said at a 23 April briefing organized by Foreign Policy magazine.

Collins said most of that financing is for investment-grade activity, so countries with weaker economies—and which often are the most vulnerable to climate change—could be frozen out of the capital they need. Countries with rating of BBB- or lower are avoided by financial institutions that are looking for a safer return on their investments.

Taking place on the sidelines of the International Monetary Fund-World Bank annual spring meetings, which ran 18-24 April, the briefing had ministers from Egypt, Indonesia, and Canada in attendance along with Collins and other executives from dedicated climate investment and pension funds. They discussed approaches for overcoming the barriers to directing climate funds to middle- and low-income countries.

Need private capital to keep apace with demand

The participants acknowledged that private capital is not making its way to such countries, either at the scale or the pace needed to achieve net-zero carbon levels by 2050.

They also acknowledged that low-to-middle income countries that are most vulnerable to climate effects are struggling with the global grip of inflation that has driven up food and fuel prices along with borrowing costs. The world's poorest nations are hit by nearly eight times as many natural disasters relative to the 1980s, according to the World Bank.

Released 12 April, the UN in 2022 Financing for Sustainable Economic Development urged the alignment of sustainable financing with development goals, contending that "60% of least developed and other low-income countries are already at high risk of, or in, debt distress."

The financiers on the 23 April panel said they are looking to governments and multilateral development banks (MDBs) to lower the risk, ensure a reasonable return, and ease the regulatory path in these countries for deploying capital to projects to mitigate GHG emissions and to adapt to climate impacts. For instance, by protecting coastal wetlands that naturally guard against flooding.

Echoing the UN report's recommendations, Rania al-Mashat, Egypt's minister for international cooperation, said climate-fueled challenges posed by food and water scarcity as well as energy access should be seen as development goals.

"When we are talking about climate, we should not divorce it or see it as a track separate from development. If you tie both of them together, we will find more financing directed towards projects," al-Mashat said.

More than 190 countries have committed to the 2015 Paris Agreement goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels. Of this figure, 132 countries have now set or are considering a net-zero carbon target by 2050.

As the host of this year's UN COP27 conference on climate, al-Mashat said: "This COP is about moving from commitments [made at COP26] to implementation."

But implementation carries a price tag.

A year ago, the International Energy Agency (IEA) and the World Bank said that for the world to reach net-zero emissions by 2050, clean energy investment in emerging and developing countries needs to increase to over $1 trillion per year by 2030, which is a quarter of the $4 trillion IEA said is needed globally.

Funds flowing away

The compounding crises of the pandemic, rising inflation driving up prices of food and fuel, and the war in Ukraine means funds are flowing away from middle-to-low income countries, "where they are needed most," said Mafalda Duarte, CEO of the $10 billion Climate Investment Funds (CIF).

The CIF, which was established in the wake of the 2008 subprime mortgage crisis, seeks to lower risk and provide low-interest financing through partnerships with six MDBs to assist developing countries with their energy transition plans.

However, al-Mashat noted that the "climate-development agenda is a multi-stakeholder agenda" that can only move forward when governments, the private sector, the MDBs, and the public play key roles in identifying projects that can be implemented.

Governments must have "a climate-development vision" to guide them so they can reform regulations and create access to markets, al-Mashat said.

The private sector wants to bring capital into these markets, but it needs to know whether MDBs can de-risk some of these projects, she said.

GFANZ said it has private capital lined up, but how this translates into concrete developments is key, Duarte added.

A year ago, the European Bank for Reconstruction and Development's 2020 Joint Report on Multilateral Development Banks' Climate Finance found that the high-income economies of the EU received $26.6 billion out of a total of $66 billion that the MDBs doled out in 2019. The next largest recipient was Sub-Saharan Africa, which received $9.06 billion, while South Asia received $8.03 billion. These funds were mostly distributed in the form of investment loans, rather than as grants, bonds, or equity investments.

The effect of climate change on crops, fish, and livestock is a key factor behind a steady rise in hunger that is eroding years of progress, according to the CGIAR global agriculture research partnership.

Government funding falls short

During COP26, CGIAR was successful in raising $1 billion to help smallholder farmers in Africa adapt to climate change, including a $315 million pledge from the Bill & Melinda Gates Foundation. The trajectory of the climate threat is particularly daunting in sub-Saharan Africa, it said, where climate change could cost African countries up to 15% of their GDP by 2030.

Some 500 million smallholder farmers and livestock keepers in low-income countries—the majority of whom are women—facing a rising tide of climate threats that impede their ability to support their families and provide food for billions of consumers.

While the private sector is looking to invest funds to meet the climate challenge, governments—especially from the developed world—fell short in meeting their $100 billion climate pledge to developing countries to pay for climate mitigation and adaptation projects.

De-risking private capital

Because of the magnitude of investment required, it's critical to address the question of "how do we best use the scarce public capital to really de-risk the private capital," Duarte said.

Investors at the Foreign Policy briefing said they want to invest, but they don't know which projects to back and scale up, and whether there are third parties such as MDBs willing to step in with guarantees or other mechanisms to reduce the risk of a project in a country that does not have an investment-grade rating.

"We need to have a faster, better, easier way to scale," said Marc-André Blanchard, who is head of Caisse de Dépôt et Placement du Québec (CDPQ) Global, a Quebec City, Canada-based investment fund that manages $420 billion in 60 countries,

He said it is unfortunate that CDPQ has not been able to invest at all in the African continent, but the question is how to get there. Institutional investors like the CDPQ, Blanchard said, have more capital to invest than MDBs, but the system is not adapted to handle their investments.

"We need to have options to invest … and if we're going to go in some way, then it needs to make sense for us and be in line with our fiduciary obligation," he added.

Currently there is no standardized process for enabling the billions of dollars in private capital that awaits deployment for tackling the climate crisis, Collins said

Private financiers and banks need to know what they will get out of investing in clean energy projects, both financially and in terms of meeting their ESG goals, Blanchard said.

"What is material enough to generate that type of inducement? Who verifies and what is the framework underlying it," he asked.

"There needs to be linkages to outcomes, such as reducing CO2 levels that can connect bonds and grants together," said Collins, who rued that every time a bank has to invest in an emerging market it has to start the process from scratch.

While the ministers called for greater support for climate adaptation projects, Blanchard noted that it is impossible to know which projects to back without a pipeline of bankable projects in place. And there's no central body that is providing perspective on which are bankable.

Changing mindset

The mindset needs to change, he added. Instead of just having governments and MDBs at the table, it needs to be widened to accommodate institutional investors and philanthropists, as Simon Harford, CEO of the Rockefeller Foundation's Global Alliance for People and Planet, suggested at the briefing.

This is why Blanchard said CDPQ, which has traditionally worked with external investment advisors on where to deploy its funds, is planning to develop a $1.2 billion platform that it will manage itself to finance adaptation projects in low-to-middle income countries. The idea behind this project, he added, is to bring financiers, philanthropists, MDBs, and institutional investors to the table to identify and target solutions in low-to-middle income countries.

Also in attendance was Keith Bettinger, senior technical director for climate change with development contractor DT Global, who said the discussion had made it clear that "we need to do a better job of scaling access to finance."

It is equally clear, Bettinger said, that institutional investors, such as CDPQ, need help from development aid agencies, such as US Agency for International Development (USAID) or the Canadian International Aid Agency (CIDA), to understand the legal and regulatory frameworks of developing countries where they plan to invest.

In fact, Bettinger said, this is where agencies like USAID and CIDA can play a key role in helping identify a pipeline of bankable climate adaptation projects.

Posted 26 April 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.