Climate Investments in Emerging Markets and Developing Economies
Many developing countries will need a sustained increase in investments in the order of 5–6% of Gross Domestic Product (GDP) by the end of the decade to put their economies on a credible path to deliver on development and climate goals. Beyond domestic savings, many will rely on the channelling of finance and investments from developed economies. The overarching urgency is for the global financial sector to cooperate in line with the goal of the Paris Agreement to make global finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development (art. 2.1c).
The pool of private investors with exposure to climate-based investments in emerging markets has increased substantially over the last decade. This is a result of increased cross-border flows and surging activity in key sectors like clean and renewable energy.
However, developed economy investors remain often more hesitant towards investments in emerging markets and developing economies due to both real and perceived investment risks. According to Goldman Sachs, as developed countries start to withdraw monetary and fiscal stimulus and emerging economies start to pick up, the growth gap between these two markets is predicted to widen. To dramatically scale up investor appetite and finance flows, it will be crucial that both well-known and new measures and instruments are activated to ensure that perceptions are realistic, and the risk-return profile of investments are adequate. Valuations are attractive relative to history and to developed markets; profitability, free cash flow, and dividend yields have all moved higher; and earnings growth is expected to recover in 2023.
Nordic Institutional Investor Experience
At the UNFCCC’s COP15 in Copenhagen in December 2009, it was decided that the developed countries should raise US$100 billion capital for climate investments in developing countries. In 2014 The Danish Government, Denmark’s development fund IFU, and a number of institutional investors established the Danish Climate Investment Fund (CIF), with the purpose of contributing to reducing global warming and promoting Danish climate technology through investments on commercial terms. The fund operated under a blended finance model, bringing together the public system through IFU, private capital through PensionDanmark and pension funds – PKA and Pædagogernes Pensionskasse -, with Dansk Vækstkapital acting as a semi-public entity which invested on behalf of several other pension funds.
Following the establishment and evolvement of the Danish CIF, the Danish SDG Fund was set up in 2018 and 2019. IFU and six Danish pension funds developed the SDG Fund to contribute to meeting the Sustainable Development Goals (SDG’s) through commercial private sector investments in emerging markets and developing economies. The fund operated and supported downside risk protection through IFU funding to partly protect pension fund investments. If the investments went below 0% on the rate of return, or if the rate of return of some of the investments became too high, the Danish Government could step in and mitigate risk.
Denmark also has private funds that invest in emerging markets and developing economies such as Copenhagen Infrastructure Partners’ CI NMF, a fund that focuses on energy infrastructure investments in fast-growing new economies primarily in Asia and Latin America, or the Maersk Growth, which focuses on decarbonising supply chains by backing new business models and technologies.
In Norway, public-private partnerships focus on green investments in emerging markets and developing economies with a focused impact. The Norwegian Climate Investment Fund was founded in 2022 with a focus on accelerating the global energy transition by investing in renewable energy in emerging markets and developing economies with large emissions from coal and other fossil power production. It is managed by Norway’s Development Fund, NORFUND, and the pension fund KLP. The Climate Investment Fund will allocate NOK10 billion over the next five years, with NOK1 billion coming from NORFUND’ s capital and NOK1 billion from the state budget each year. Since NORFUND can advance parts of the fund that originate from NORFUND’ s own capital, the total amount in the fund could already reach NOK2.8 billion by the end of 2022.
The Norwegian Climate Investment Fund operates using a blended model, where NORFUND manages the fund on behalf of the Norwegian Ministry of Foreign Affairs, but the fund’s investments and portfolio will be managed separately from NORFUND’ s other activities.
On a Pan-Nordic level, there are multiple strategies and initiatives which promote the investment flow from the region towards emerging markets and developing economies. Under the auspices of The Nordic Council of Ministers, these initiatives include, but are not limited to:
Nordic Energy Solutions which seeks to share Nordic energy models and know-how in regional energy markets in different parts of the world and assist in the design of renewable energy systems and attractive markets.
Nordic Climate Solutions which focuses on Fossil Fuel Subsidy Reform (FFSR) and Nordic Green to Scale on how progressive Nordic solutions in environmental economics, green technology and environmental policy can be deployed in the developing world.
Commitments From the Climate Investment Coalition
The Climate Investment Coalition has supported the mobilisation and announcement of a total collective commitment of US$130 billion from pension funds at COP26 in Glasgow in November 2021. This notable announcement was presented by Nordic Heads of State and Government and CEOs of Nordic and UK pension funds, to be invested in clean energy and climate solutions by 2030. In addition, a pension fund from Greenland declared its support to the Coalition.
The commitment was made by asset owners in Sweden, Norway, Finland, Denmark, Iceland, the Faroe Islands, and the UK, who have also agreed to track and report their commitments annually as they reach investment targets by 2030 or earlier. This collective commitment aims to contribute to increasing climate finance ambitions and presenting how public-private collaboration can be used to successfully accelerate the green transition.
A vital part of the commitment made by the asset owners is the willingness to allocate a portion of investments to emerging and developing markets, given the right framework conditions. In line with the transparency and tracking principles of the Climate Investment Coalition, some asset owners provide details on investments in emerging and developing markets as a part of their annual reporting.