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Local banks can champion decarbonization in emerging markets

  • Emerging markets need $1 trillion a year to get to net zero.
  • Investments in clean energy in the majority of emerging markets remain stable, despite the great economic benefits it could bring.
  • Local banks are key to creating climate-smart finance opportunities in these regions.

A transition to a low-carbon energy future is crucial to limit the rise in global temperatures to 1.5°C and avoid the catastrophic impacts of climate change. Current climate policies put us on track for a warming of 2.7°C above pre-industrial levels while, as agreed in the Paris Agreement, we must reach net zero carbon emissions by 2050.

The paradigm shift to achieve this goal requires significant additional green and climate investments across all sectors of the economy, most directed to emerging markets where they are needed, with great investment opportunities and growth potential. . In order to meet global decarbonization targets, investments will need to almost triple, from $760 billion in 2019 to $2.2 trillion in 2030, according to the International Energy Agency (IEA). Additionally, emerging markets need $1 trillion a year in public and private financing to transition to a net zero economy.

Climate ambitions in emerging markets

The financial sector plays a key role in the transition to low carbon economies. In line with the global climate goals set out in the Paris Agreement, the private sector is committed to channeling the economic resources needed to make this possible and to identifying the risks to which the economic agents responsible for making investment decisions are exposed.

At COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) announced that over $130 trillion in private capital has been committed to carbon neutrality. Companies, banks, insurers and investors will need to adjust their business models and implement plans to make this transition successful. Additionally, the Net-Zero Banking Alliance, facilitated by UNEP FI, ​​which includes 90 members representing over $60 trillion in assets, is working to accelerate and implement decarbonization strategies. . The alliance, which includes 12 banks from Latin America and the Caribbean, aims to support its members’ efforts to align their investment and lending portfolios with net zero goals by 2050.

Most of these investments will need to go into nationally oriented projects that create opportunities for national development. The COVID-19 crisis has hit emerging markets and developing countries as companies halt production and global value chains are disrupted. For example, Latin America and the Caribbean has been one of the most affected regions, with some countries reporting economic contractions of more than 10% in 2020 which have exacerbated already existing difficulties. Scaling up climate action and scaling up net zero investments could support a sustainable and climate-resilient recovery.

Strengthening climate ambitions in the local financial sector can also be catalytic since it has local knowledge and reach. In addition, we are witnessing the emergence of green products that are resilient to climate impacts; namely, financial instruments related to low-emission projects such as green loans, green bonds, etc.

However, short-term actions will not be enough. These need to be combined with medium/long term ambitions, engagement strategies and roadmaps to implement long term decarbonisation trajectories that could also bring economic and social benefits. It is estimated that the transition to a net zero economy could generate more than 15 million net new jobs by 2030 in Latin America and the Caribbean, according to an IDB-ILO study. In Southeast Asia, a green economy could generate up to $1 trillion in economic opportunity, with new growth sectors contributing 6-8% of the region’s GDP by 2030.

Over the past decade, private international investment in clean energy assets in emerging markets has more than tripled, from $6 billion in 2010 to $28 billion in 2019, according to clean energy asset finance data from Bloomberg NEF. However, this growth in private investment in clean energy assets has only been concentrated in 20 countries. Investment flows to 84 other emerging economies surveyed remained stable, according to the World Bank.

Local climate finance with less risk

Local banks in emerging markets face a variety of challenges: high perception of country risk in some geographies, low credit ratings, weak balance sheets in some jurisdictions, lack of climate-related knowledge and capacity, limited understanding of new climate technologies , lack of access to global climate information capital companies, among others.

A facility providing risk mitigation instruments (blended finance, first loss guarantees, etc.) as well as financial resources for personalized and individualized technical assistance (i.e. increasing local climate finance. Project finance, methodology disclosure, market intelligence, decarbonization pathways, access to global partnerships, etc., are some of these capabilities and tools.

Similar approaches to building strong, bankable pipelines have been successfully implemented in other sectors, such as the Global Infrastructure Facility (GIF), a global collaboration platform that integrates efforts to drive private investment in sustainable infrastructure. The GIF provides funds for technical assistance for the preparation and development of projects which, as of November 2021, had mobilized a total investment of $76 billion, including $52 billion of private investments in more than 56 countries in sectors such as energy, transport and others.

This solution will drive a climate-smart finance system in developing countries and emerging markets by leveraging resources and expertise to help banks build clean portfolios and decarbonize current portfolios. For example, IDB Invest is providing advisory services to Produbanco in Ecuador to define a roadmap to achieve its net zero emissions commitments by 2050. Replicating this approach across the emerging markets banking system will drive the financing own national projects in difficult geographical areas. .

The clean energy shift is key to tackling climate change, but over the past five years the energy transition has stalled.

Energy consumption and production contribute two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Additionally, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018, energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing the energy transition is the lack of preparedness of the world’s largest emitters, including the United States, China, India and Russia. The 10 countries with the highest score in terms of preparedness account for only 2.6% of annual global emissions.

To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials platform works on initiatives such as systemic efficiency, innovation and clean energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) works to bring together public and private partners to drive industry transition to put the heavy industry and mobility sectors on an emissions path. net zero. MPP is an initiative created by the World Economic Forum and the Commission for Energy Transitions.

Is your organization interested in working with the World Economic Forum? Learn more here.

In summary, helping local banks define and implement a net zero strategy can be a game-changer for the much-needed energy transition in emerging markets. This will unlock the potential for new projects accelerating net zero ambitions. Overall, the climate capital and expertise are there; However, to expand the equitable distribution of resources, including capital, it is absolutely essential to create local partnerships, and local banks are very well placed to provide this strength and ownership to achieve climate goals.

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