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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.
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