Scaling Up Climate Finance For Emerging Markets And Developing Economies – Speech
By Bo Li
Speech by Deputy Managing Director Bo Li at EIB Group Forum 2023
Good afternoon. It is an honor to join you here in Luxembourg for the first ever European Investment Bank Group Forum.
As we gather to discuss how we can address the challenges of climate change, let me first take stock of the wider economic context.
We expect 2023 to be another challenging year for the global economy. In our latest IMF World Economic Outlook, we expect global growth to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023.
In the Euro Area, the slowdown is even more pronounced —from 3.5 percent in 2022 to an expected 0.7 percent this year before a modest rebound to 1.6 percent in 2024. And despite the recent drop in energy prices, we expect energy security concerns will continue to loom large in Europe.
This speaks to the importance of the green transition—away from fossil fuels that are subject to supply disruptions and volatility, and towards renewables such as wind and solar energy.
The growing impact of global warming reminds us of the urgency. From heatwaves in Europe and wildfires in North America, to droughts in Africa and floods in Asia: last year saw climate disasters on all five continents. The effects of climate change are all around us.
Without decisive action, things are set to get worse because we are clearly not on the right trajectory for cutting global emissions.
We need to cut global emissions by 25‑50 percent by 2030 compared to pre-2019 levels to contain temperature rises to between 1.5 and 2 degrees celsius.
IMF analysis of current global climate targets shows, unfortunately, they would only deliver an 11 percent cut—less than half of the minimum reduction that is needed. And so we need higher ambition, stronger policies, and more finance for implementation.
This last point is where I will focus my remarks today.
Financing needed to meet adaptation and mitigation goals are estimated at trillions of US dollars annually until 2050.
But so far, we are seeing only around 630 billion dollars a year in climate finance across the whole world—with only a fraction going to developing countries.
This is particularly concerning—because emerging and developing economies have vast needs for climate finance. And it underlines why it’s so important for advanced economies to meet or exceed the pledge of providing $100 billion per year in climate finance for developing countries.
This is not just the right thing to do, it is the smart thing to do.
Why? Because under a business-as-usual scenario middle- and low-income countries are expected to account for 66 percent of global CO2 emissions by 2030, up from 44 percent in 1990.
In other words, because climate change is a global problem, it requires coordinated global solutions.
So, what can we do to boost financing?
First , focus on the policies that can redirect investment flows from high-carbon projects towards climate friendly opportunities. Here, think of smarter regulation, price signals and well targeted subsidies that incentivize low-carbon investment while paying attention to each country’s unique fiscal and macro-financial characteristics.
The second priority is to build capacity. We need to strengthen public financial management and public investment management related to climate projects for policymakers to implement needed reforms. Countries need the capacity to identify, appraise and select good quality projects, as well as to manage relevant fiscal risks.
There is a significant scarcity of high quality and reliable data, harmonized and consistent set of climate disclosure standards, and taxonomies to align investments to climate-related goals. So, capacity building is needed to strengthen the climate information architecture that will help develop and deepen the capital markets and improve the bankability of projects.
Innovative financial structures can also catalyze technical assistance programs to support the creation of new markets for climate finance by developing guidelines, providing training programs for local stakeholders, and facilitating the adoption of the principles and international best practices in emerging markets.
This brings me to my third priority: innovative financial mechanisms including de-risking instruments and a broader investor base.
At a more granular level, investors 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. That means being flexible — ready to complement a national strategy with a regional strategy as appropriate; or adopt a programmatic approach in addition to the traditional project-based approach in implementation to suit institutional mandates and needs.
Above all, public-private synergies will be critical.
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.
But this isn’t the only way that multilateral development banks can help.
Blended finance can play an important role to crowd in public and private sector investors. Public sector, including national governments and multilateral development banks like the EIB, could provide first-loss investments, equity capital, or credit enhancements. And by prioritizing equity over debt, development partners and multilateral development banks would also avoid adding to the sovereign debt burdens of developing countries.
At the IMF, we have stepped up and embraced the mindset change that is required to tackle climate change. We have put climate at the heart of our work – in surveillance, capacity development, lending, and in data and diagnostic tools, including the climate information architecture,
In collaboration with the World Bank, the Bank for International Settlements, and the OECD, the Fund is developing operational guidance on the G20 high-level principles for sustainable finance alignment approaches. And the new G20 Data Gaps Initiative will help develop detailed statistics on climate finance and forward-looking physical and transition risks indicators.
On the lending side, our new Resilience and Sustainability Trust (RST) will provide longer-term affordable financing for our vulnerable low- and middle-income members.
Our goal is that – through the RST – policy reforms, capacity development, and financing arrangement can be delivered in a package used to improve the policy and capacity environment and scale up climate finance by crowding in large-scale private capital.
For example, capacity development can empower policymakers to better identify, appraise, and select good quality projects. And climate-friendly public financial management and public investment management promote accountability, transparency, and more effective spending.
Such measures can not only help governments manage potential relevant fiscal risks from the various financing options – they can also give investors greater certainty that their funds are spent effectively and bring in new, interested donors through improved transparency and governance.
In addition, with the IMF’s expertise in macroeconomic and financial sector issues, we are hopeful that we can gather national authorities, multilateral development banks, and the private sector including institutional investors, export credit agencies, and others to identify and explore solutions to broaden the investor base and scale up private finance.
We are already working with some of these partners to see how the RST—by leveraging sound policies and creating additional fiscal space—can promote financing arrangements or facilities that could mobilize large scale private capital.
Let me conclude.
To deliver on our shared climate goals, we must combine policy reforms, capacity development, and financing arrangements. What we need today is unprecedented cooperation and coordination.
That is why this inaugural forum is so important.
People gathered here have expertise in public and private investment, structuring financial instruments, R&D, and low-carbon technologies among others.
And each of us has a unique role to play – and we must all step up.
Because if we do not deliver on the financing needs of emerging markets and developing economies, we cannot hope to meet the goals of the Paris Agreement.