Climate change

Developing nations racing behind in green capital opportunities

Developing nations are racing behind in green capital opportunities investment as a result of their debt markets compounded with climate shocks.

According to a report by the Centre for Climate Finance Investment at Imperial College Business School, for the developing nations to attract investor interests in sustainable green capital opportunities, they will require a significant overhaul of their capital markets.

The researchers during their study interviewed more than 40 emerging market asset managers and global banks. They identified key stumbling blocks for the developing economies seeking to issue green capital bonds among other sustainable instruments. They addressed the tensions within asset management and how to effectively allocate green finance within a framework that was designed by, and for, developed economies.

The developing nations will require significant funding to upgrade their economies and break their dependency on unsustainable sources of energy such as fossil fuels for use at home that is catastrophic to the environment. Without an economic paradigm shift to sustainable economic development, developing nations will face an enormous catastrophe of bearing the brunt of climate change. These countries contribute insignificantly to the causes of climate change, but if the trend continues, their financial capacity to mitigate the impacts of climate change will be limited.

The report outlined the ways current markets may prevent the issuance of sustainable bonds to finance the green energy transition. 

They include: 

  • undeveloped local market investor base and local green finance infrastructure
  • incomplete, inconsistent, and lagged environmental data
  • high reliance on indexation and the rise of passive investment vehicles
  • lack of dedicated green funding and appropriate investment vehicles
  • lack of industry consensus on balancing issuer engagement and exclusions

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The report also laid out potential solutions such as:

  • coordinated efforts to launch transition bonds for heavy emitters unable to tap the stricter green bond market
  • decreasing the historic reliance on cost-cutting to secure assets in favor of a greater emphasis on long-term credit differentiation
  • greater involvement by other stakeholders in capital mobilization such as International Financial Institutions, Sovereign Wealth Funds and actively engaging local market investors
  • a new forum for emerging market debt managers to actively address and coordinate climate and environmental concerns with issuers.

The Executive Director of the Centre for Climate Finance Investment at Imperial College Business School, Dr. Charles Donovan noted that big forces are pushing for the capital markets towards more sustainable investing yet they’ve done little to address the resource dependency and climate variability that’s holding back the countries that house the vast majority of the world population. He added that the multilateral development banks and sovereign wealth funds are positioned to lead but are failing to catalyze sustainable finance in the countries that need most.

His colleague, Jonathan Amacker challenged the emerging green capital market investors and issuers to come together and breakdown the barriers holding back vital transition capital. He noted the world is racing behind time as the developing nations face numerous climate-related financial risks. He added without a significant overhaul of the current system, green capital opportunity finance will plateau never to reach its full potential.

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