Statement by Glasgow Financial Alliance for Net Zero
Mobilizing private finance to the energy transition in emerging markets and developing economies (EMDEs) is critical to reaching net zero emissions by 2050. The IEA estimates that, by end of the decade, $1 trillion of additional annual investment in EMDEs’ energy transition alone will be needed to achieve net zero. Research undertaken for GFANZ suggests that energy transition finance to EMDEs over last 5 years has flatlined at around $70bn per annum. We therefore need a 15x increase over the balance of this decade.
Unfortunately, there are considerable barriers to boosting this financing, particularly: insufficient project preparation and pipeline development; limited deployment of de-risking and risk finance from concessional finance organisations; and inadequate collaboration between MBDs/DFIs and private finance, including on data. GFANZ has been working to help address these issues – including by advocating for and supporting new ‘country platform’ approaches, which could substantially improve the three issues simultaneously.
A large part of the financial system – 40% of private financial assets – is now committed to net zero through GFANZ. Financial institutions are therefore increasingly looking to invest in and lend to transition-aligned assets. Sufficient capital is looking for projects, but there are not enough investible projects to finance.
As the Sharm El-Sheikh Guidebook for Just Financing correctly stresses, a new financial architecture is needed to address this challenge. GFANZ advocates a number of key solutions.
First, MDB reform is necessary to ensure that MDBs and DFIs have explicit mandates to support EM&DEs’ just transitions by mobilizing private finance at the scale and leverage required. Concessional lenders should aim to crowd in closer to the 8-10x of private finance needed, as opposed to ratios that currently average at best 1:1.
Outside of reform, MDBs and IFIs can do better now. The G20’s MDB Capital Adequacy Framework shows how increasing MDB/DFI institutional risk tolerance and financing capacity and scaling the use of guarantees and originate-to-distribute models would support the systemic change required to crowd in private finance. Additionally, the UNFCCC points out that public guarantees can offer a fifteen times multiplier effect on the scale of low-carbon investments generated with such support, compared to a 1:1 ratio in direct financing. Greater use of public guarantee structures can crowd in private finance.
Second, we need accelerated and broader application of Country Platforms for Large Emitting EMDEs. GFANZ has from the start advocated new County Platforms as a way to pool, blend, and match all types of finance to EM&DE’s domestic climate plans. This is a way to address head-on the three bottlenecks identified by above. The G7 have identified Just Energy Transition Partnerships to build out a version of this concept for large, complex, and high-emitting emerging markets. These also intend to address domestic enabling environments, including and going beyond project preparation. If successful, the JETP model could be extended to other countries. GFANZ is working to support the partnerships in Indonesia and Vietnam by helping bring together the structuring expertise (and potentially balance sheets) of six of the world’s largest financial institutions.
Although the G7 process will not cover all countries, other countries can use the key insights from country platforms to deploy better concessional finance to mobilize private finance in support of their climate strategies. To that end, GFANZ is supporting the development of Egypt’s Country Platform for the Nexus of Water, Food, and Energy (NWFE) نوفي Program. GFANZ is providing private finance expertise and advice on how to best design the platform to crowd-in private finance. We are also advising on what is required before proposed projects are bankable from a private finance perspective – examining data/information, enabling environments, project preparation, and de-risking. Smaller scale country pilots – such as the Climate Finance Leadership Initiative (which has successfully financed its first largescale project in India, and recently launched in Colombia and South Africa) – can also help facilitate this collaboration and preparation support with domestic climate priorities.
High quality carbon credit markets must play a key role in providing EM&DEs with additional capital to protect natural sinks, decommission stranded assets, and develop their clean infrastructure. The largest carbon sinks are in EM&DEs. Without sufficient capital for protection and conversation, natural sinks stand to be exploited and destroyed – imperilling the global carbon budget. Work must turn rapidly from building the guardrails on supply and demand for carbon credits to supporting EM&DEs to appropriately deploy and develop them – including, but not limited to, as part of JETPs and country platforms. Carbon credit markets are also important to credible frameworks for the managed phaseout of stranded assets. Financial sector net zero commitments must not disincentivise the deployment of finance to support the responsible early retirement of stranded assets – and so GFANZ is working with others to develop guidance to ensure this is not only permissible but incentivized, with appropriate guardrails in place to prevent greenwashing.
Going forward, more donor and philanthropic capital should be targeted toward supporting EM&DE’s project preparation. The Global Infrastructure Facility (GIF) was set up in part to address this pressing bottleneck, but more capacity is needed to be deployed at pace. This can be done in support of JETPs and country platforms, which should provide a pipeline of projects that are a part of the domestic government’s climate plan to achieve net zero. These projects inevitably require extensive planning prior to being investible from global financial institutions, which is often beyond the capacity of the domestic country. International financial institutions such as GIF and the World Bank can help, but additional direct capacity support to the host country will still be needed. Again, country platforms can provide the engagement mechanism to efficiently match global finance, DFIs, capacity support, and domestic climate projects. The involvement of MDBs and donor governments – both financially and from capacity perspective – can help to de-risk projects financially and politically and potentially play a role in signalling that projects are consistent with net zero commitments. In sum, the challenge is great but must be overcome to avoid climate catastrophe. To succeed, we need a multi-faceted approach catalysed by valuable resources like the Sharm El-Sheikh Guidebook for Just Financing. Urging private finance to invest more in EM&DEs will not be successful. MDBs and DFIs must deploy risk capital and guarantees to a much greater extent, ideally in light of reform but also without it. More resources must be deployed to project preparation, as well as broader reforms in domestic economies to support enabling environments. And greater collaboration, including but not limited to data sharing, must be facilitated across governments, MDBs/DFIs, philanthropy, and private finance. Building country platforms (including but not limited to high-quality JETPs) is one way to try to tackle all of these issues at once.