Increasing Financing for Transitional Projects in Developing Countries: Its Importance Revealed
In a bid to address the unprecedented energy demands and future emissions growth in emerging markets and developing economies (EMDEs), a multi-pronged approach is being implemented to attract private capital. This is crucial as these markets, driven by rapid industrialisation, urbanisation, and population growth, are expected to be the largest source of future emissions growth.
One of the key strategies is the use of blended finance mechanisms. These utilise public funds to reduce investment risks and attract private investors by leveraging blended financial instruments. However, while this remains a key strategy, the approach has so far yielded limited private investment in climate projects, with less than half of climate investments in developing countries in 2022 coming from private sources.
Governments in EMDEs play a critical role in this endeavour. They provide support to reduce earnings volatility for private investors and cover stranded costs or transition expenses, especially in coal-dependent areas. This public sector involvement aims to make climate investments more attractive and feasible in regions where private sector participation is limited.
Financial authorities in EMDEs, with support from organisations like the OECD, are also enhancing domestic capital markets and promoting integration into global financial markets. Efforts include building capacity of financial regulators and supervisors to scale green and sustainable finance markets, supporting SMEs’ access to sustainable finance, and embedding climate and biodiversity considerations in capital market activities.
Private equity and targeted investments are another avenue being pursued. Asset managers focused on decarbonization are channeling investments into key sectors driving emissions, such as energy, industry, buildings, and transportation. For instance, firms like Tikehau Capital use private equity strategies focusing both on sector-specific decarbonization and solution-oriented approaches (e.g., electrification, energy efficiency), investing in companies that directly reduce emissions.
Investments in circular economy initiatives in emerging markets are also being encouraged. These aim to reduce waste and emissions through innovative resource management—from e-waste recycling to industrial reuse—thereby creating resilient and sustainable economic models that attract private capital.
Carbon credits and other climate finance tools are also acknowledged as ways to scale proven solutions by attracting private investment through market-based incentives.
Together, these strategies form a comprehensive approach that combines public sector risk mitigation, market development, targeted private investment, and innovative climate finance tools to mobilise the large volumes of private capital needed for sustainable growth and emissions reduction in EMDEs amidst rapid development.
The need for capital in these markets is significant, as the energy demands are primarily driven by industrialisation, urbanisation, and population growth. The private sector is expected to play a key role in addressing these energy demands and emissions growth. Unprecedented levels of capital from the private sector are necessary for mobilisation in these markets.
The article was first published on NZI Spark, and the full article can be accessed here. It is clear that the private sector's involvement is crucial for managing future emissions growth in these markets, where historically, investments have been less compared to developed markets.
Science plays a vital role in identifying environmental challenges and developing solutions for climate-change mitigation in EMDEs, particularly in the sectors driving emissions such as energy, industry, buildings, and transportation. Financial authorities in EMDEs are working to attract private capital by building capacity for green and sustainable finance markets, supporting SMEs, and integrating climate considerations into capital market activities, following guidance from organizations like the OECD.
Environmental-science research and innovation can provide proven solutions for emissions reduction, which can be scaled through carbon credits and other climate finance tools to draw private investment in the markets with significant energy demands, primarily driven by industrialization, urbanization, and population growth.
