Sir Alok Sharma: The Challenge of Funding a Greener Future
The world faces many immediate challenges, but arguably, the great challenge facing humanity both now and in the decades ahead is the chronic threat of climate change. Multilateral financial institutions have a real opportunity to make a bigger difference in assisting developing economies in their green ambition, but they’ll have to radically rethink their process to do so.
- 2023 was the hottest year, worsening climate shocks and economic issues in developing countries.
The facts paint a clear picture. 2023 was the hottest year on record, with ocean temperatures breaking records by the day. Climate shocks are becoming more intense and frequent, sending tremors through economies and damaging millions of lives. That’s especially true in developing countries, where climate impacts, debt, spiraling interest rates, energy and food insecurity are impeding economic progress.
The financial impact is huge: responding to climate vulnerabilities is costing some developing countries up to 15% or more of their annual GDP. What’s more, the number of countries facing debt distress has more than doubled over the past decade. It is vital that these economies are supported, not least because projections show that 75% of emissions are expected to come from just 81 developing countries by 2050. The opportunity is clear. Financial support would create wealth, jobs, and a better environment.
“75% of emissions are expected to come from just 81 developing countries by 2050”
However, it won’t come cheap. The global energy transition is estimated to require around $4 trillion every year for decades – around three times the current investment level. The way we finance such solutions will need to adjust, too. 81% of green investments in high-income countries are funded by the private sector. But in emerging and developing economies, that figure is only 14%. That’s partly because it’s more expensive to invest in emerging countries. For example, the cost of capital for a solar farm in the EU is around a third of that in emerging economies. So to work toward a solution, we must reimagine the current global financial architecture. Climate risk needs to become central to all economic, financial and investment decisions.
Specifically, multilateral development banks (MDBs) will need to significantly expand their own lending and leverage multiples of finance from the private sector. They could start by stretching their existing financial resources, as well as adjusting their risk appetite and risk assessment models. If the World Bank implemented G20 independent panel recommendations on capital adequacy frameworks, it could unlock nearly $190BN of additional financing for climate and development. Certain approaches including hybrid capital, guarantees, and first-loss products would also reduce the disproportionate risk premium of investing in emerging markets.
Institutions like the IMF, governments, and the private sector need to find creative solutions to reduce the debt burden of developing economies. This would allow for critical investments in energy transitions and climate-resilient infrastructure.
We are making progress, that’s for sure, but the pace and scale of reform needs to speed up significantly. The level of funding must move from the billions to the trillions to finance the global green transition and deliver on the World Bank’s recently revised mission: “To create a world free of poverty – on a liveable planet.”
ThinQ is the must-bookmark publication for the thinking investor.
