9 April 2021 / Macro
How emerging markets can attract sustainable investment
By Natasha Turner
Two new studies consider solutions to boosting the climate transition in developing nations
Emerging markets (EMs) are missing out on potential investment in climate change solutions and other areas of sustainability, according to two new studies.
The first, Marathon or Sprint? The Race for Green Capital in Emerging Markets, by the Centre for Climate Finance and Investment at Imperial College Business School, found although EMs are very vulnerable to climate change, few green funds exist, meaning there is little demand for green bonds.
The study is based on interviews with more than 40 emerging market asset managers and global banks. As well as a lack of green investment vehicles, it found some of the barriers to green bond issuance to be a high reliance on indexation and the rise of passive investment vehicles; underdeveloped local market investor base and local green finance infrastructure; incomplete, inconsistent and lagged environmental data; and a lack of industry consensus about balancing issuer engagement and exclusions.
It said coordinated efforts to launch transition bonds for heavy-emitters that aren’t able to access the green bond market could be a solution, but that a robust framework would be required.
“Our discussions with asset managers indicate a recognised transition bond, leading to meaningful decarbonisation of heavily-emitting EM entities, would solve several problems for both investors and issuers,” the report authors said.
Other potential solutions the study highlighted include a new forum for EM debt managers to address and climate and concerns with issuers; lessening the reliance on indexation and cost-cutting; and increased involvement by other sources of capital, such as sovereign wealth funds.
Jonathan Amacker, corporate fellow at Imperial College Business School, said: “Emerging market investors and issuers must come together to break down the barriers that are holding back vital transition capital. The needs are vast and the clock is ticking. Developing nations are faced with numerous climate-related financial risks. Without a significant overhaul of the current system, green finance will plateau and never reach its full potential.”
The second study, Unlocking Private Climate Finance in Emerging Markets: Private Sector Considerations for Policymakers, by the Climate Finance Leadership Initiative (CFLI), provides policy suggestions to help EMs attract private capital in key areas of sustainability.
“This report outlines steps emerging markets can take, with support from business and the international community, to attract more private capital for green projects, create new public-private partnerships, and ensure a strong recovery from the pandemic,” said Michael R. Bloomberg, founder of Bloomberg and Bloomberg Philanthropies, and chair of the CFLI.
In the area of clean energy, which the report said is the most developed sustainable infrastructure sector, these suggestions relate to stable clean energy targets, auctions that award cost-covering tariffs, tax incentives, a power-generation sector open to private participation, and transparent and robust payment agreements that recognise local currency dynamics.
In sustainable urban transport national and local authority oversight is key, as well as transparent fare setting, public procurement programmes and suitable pricing mechanisms.
Clear plans and oversight, including transparency on safeguarding will help attract investment in sustainable water and waste areas, whereas standardisation of energy performance is of greater concern when it comes to green buildings and streetlighting.
Finally, sustainable land use requires the existence and enforcement of land use regulation; data to identify critical natural habitats, including agro-climatic and resiliency data; the development of a carbon market; and community and environmental consultation.
“As an active asset manager, we are firmly committed to creating a more sustainable future,” said Tobias Pross, CEO of Allianz Global Investors.
“I am proud AllianzGI has helped to shape this new approach for unlocking climate finance in emerging markets, underlining our commitment to mobilising private capital in order to help finance the transition towards a more sustainable tomorrow. We actively structure financial solutions that combine public and private capital with the aim of combatting real-world issues.”
The CFLI said it is looking to design, launch, and coordinate a series of “country pilots” in collaboration with local governments, and leading private international and domestic financial institutions. The first pilots are planned for India and Indonesia, with the goal of replicating this model in other countries in the years ahead.