There are significant roles for developed economies, through public policy and government action, to foster investments and complementary roles for the private sector and international development finance community - including multilateral and regional development banks, bilateral agencies, and international organisations to support crucial partnerships and concessional finance of various forms, to strengthen enabling environments for private investment in climate investments across emerging markets.
Although markets differ, these recommendations can be applied to developing, emerging, and developed countries. Their scope will be made possible and accelerated through coordinated efforts and partnerships, which can be comprised of:
Governments - including national and sub-national governments, regions including municipalities, cities and associated governing bodies, regulators, and organisations,
Investors and Financiers - including public and private financial institutions, equity investors and institutional investors,
Enabling Partners and Institutions - including global climate finance institutions, UN organisations multilateral development banks, international organisations, bilateral aid agencies and other public financial institutions, think tanks, philanthropy, the civil society, and collaborative platforms.
Having a closer look at the current challenges put forward at COP27, a successful way forward can be defined through joint action by all the relevant stakeholders in all three phases of the project development.
Pre-phase: For investors and the private sector, greater deployment of financing is required for project preparation and development, in order to scale their investments. This includes streamlining already existing facilities – such as the Global Infrastructure Facility, as well as the exploration of next project preparation tools and funds. For the domestic bank (including national development banks), the importance is in the active engagement with private investors from the early stages of the development to ensure the long-term invest-ability of the pipelines.
Construction phase: The requirement is in managing both perceived and actual risks in emerging markets and developing economies. This is especially challenging when collaborating with smaller-scale projects, where the local developers are lacking the balance sheet needed to absorb such risks, coupled with unknown regulatory regimes. To manage this risk, it is recommended to include a counterparty, offtakes, and currency/exchange rate risk to avoid impacting the credit risk of the entity seeking capital. Other effective solutions include blended finance solutions like development guarantees, insurance and hedging provided by donor agencies and development banks to improve the credit rating of the project.
Operation phase: Barriers to mobilise large pools of institutional capital must be eradicated. Traditionally, institutional investors have lesser appetite for risk and are often unfamiliar with emerging and developing markets. It is essential to include better data points, aggregation, standardisation and benchmarks, and a close cooperation with the multilateral developing banks.
Indeed, multilateral development banks and finance institutions play a crucial role to attract larger sums of private capital through technical assistance, project development and the improvement of governments’ institutional capacity. Green or climate-related funds can invest in the equity of climate projects, leading development banks and commercial lenders to be more willing to lend. These are examples of ways public money can, and is, providing incentives at the fund and project level, and how both can be blended with public and private finance to increase investments in emerging markets and developing economies.
With greater joint efforts and collaboration between developed and developing economies, the financing gap for green projects in emerging markets and developing economies can be decreased.