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Green Investing Developing Countries

Why Developing Countries Need Green Investors

Last week’s Spring 2023 World Bank Meetings wrapped up in a turbulent economic climate in Washington, DC. Concerns about inflation, debt, and more formed an undercurrent for behind-closed-doors meetings, but one other topic permeated the conversations: climate change.

It’s not that the World Bank has been indifferent on the subject. Development Committee Chair Mohamed bin Hadi Al Hussaini pointed out in a statement that the organization has served as the most significant global contributor to climate finance in developing countries over the past three and a half fiscal years, providing almost $90 billion. 

The only problem? We’re miles from where we need to be.

The Climate Finance Crisis in Developing Countries

The popularity of green investing has surged in recent years, with more than $1 trillion flowing into sustainable investments in 2022 alone. Backed by social pressures and bolstered by government incentives, the market continues to expand rapidly.

Aside from the fact that $1 trillion still needs to catch up to the estimated $4 trillion needed to really move the needle on climate change, these initiatives have specifically failed the most vulnerable populations across the world. Despite a 2009 pledge by wealthy nations to provide developing countries with $100 billion in climate finance annually by 2020, we’re still nowhere near fulfilling that promise.

Realistically, a robust commitment to combatting climate change worldwide is necessary to make a difference. The impact of climate change, however, disproportionately impacts developing nations. From displacement to disease, food and water insecurity, and beyond, rising temperatures negatively affect the people who can least afford it.

It’s the (Lack of) Money

In a perfect world, global organizations and influential countries would solve the climate finance gap in developing nations on their own. In reality, it’s been challenging to get buy-in. Major world economic forces have turned increasingly isolationist in the wake of COVID-19, bowing to domestic political pressures demanding internal focus. 

Even if the political will existed to invest more heavily in climate finance for developing countries, the resources just aren’t there. As the World Economic Forum explained, even if every multilateral development bank in the world committed all of its resources to the green transition challenge, it would still only amount to 4% of the requisite capital.

In contrast, only 4% of global private financial assets would meet the need.

Overcoming Green Investing Hurdles in Developing Countries

There is little disagreement that it will take both public and private sector investments to support the green transition in developing countries. Barriers to entry, unfortunately, complicate matters. As IMF Deputy Managing Director Bo Li explained at the European Investment Bank (EIB) Group Forum earlier this year:

[I]nvestors who want to deploy capital into emerging and developing economies must overcome a host of constraints. These include high upfront costs and long timeframes associated with climate investments, lack of liquid markets, foreign exchange risk, and scarcity of well-planned and scalable projects.

Overcoming these obstacles requires a change of mindset – from the public sector, the private sector, and multilateral institutions – to revamp the financial architecture so more private finance is pulled towards climate projects.

[…]

Above all, public-private synergies will be critical.

If that sounds exceedingly complicated, that’s understandable. The idea is to move the needle toward a less complicated, more accessible framework for global climate finance investment. And it’s already been done before.

Li further detailed:

Consider green bond funds that can tap into the vast resources of institutional investors by using relatively limited public resources. Such funds have great potential, as the example of the Amundi Planet Emerging Green One fund shows.

Set up with the support of the International Finance Corporation (IFC) and EIB, the Amundi green fund successfully leveraged private capital by several multiples. And let’s not forget the investors who contributed to that success by taking calculated risks, including the IFC and EIB which invested in the equity and senior tranches of this fund.

There are two key takeaways here. First, the need for private capital investments to support the green transition in developing countries is profound. Second, experiments with public-private partnerships to attract private capital have proven successful in the past. 

So how do we speed things up?

How Investors Can Participate in Developing Countries’ Green Transitions

Climate change data ought to be proof positive enough of the too-slow pace of global progress. Though the hurdles for accessing opportunities like foreign direct investments (FDI) are substantial, new financial products have emerged to open up the space. 

The scope of the opportunity cannot be overstated. The IFC estimates that trends fueled by the Paris Agreement have opened up more than $23 trillion in investing opportunities

The diversification value for savvy green investors in developing countries and emerging markets is substantial, as well. This is especially true for long-term investors. As the New York Times points out:

Numerous studies, including those by Vanguard and Morgan Stanley, show that over extended periods, the stock returns of emerging markets and developed countries like the United States don’t move in lock step most of the time. Over the long term, this low correlation means that adding emerging market exposure to predominantly American investments can reduce the overall portfolio’s volatility and enhance returns.

To this end, the answer is clear. We have a shortfall in funding for green transitions where we need it most. We have multilateral organizations and governments incapable of rising to the occasion. We have a wide open market with significant diversification value for smart green investors. 

The question isn’t about whether you should prioritize green investing in developing countries or not. The question is: why aren’t you already?


Interested in learning more about green investing?

Check out the upcoming Earning Green by Investing Green event on April 27, 2023. A one-day event featuring experts from across the green economy, this symposium on navigating the green economy seeks to provide investors, asset managers, advisors, and other professionals with the information and perspectives they need to make smart, ethical, and lucrative choices in their portfolios. Attend in person or stream the event live, but don’t miss out!

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©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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