Investors must look at long-term concessional finance to keep a green recovery in developing countries alive

Taking on greater risks or adjusting investment horizons may be required

Mafalda Duarte, CEO, Climate Investment Funds, the $8bn climate finance accelerator, will be in keynote interview with Hugh Wheelan, Responsible Investor Co-Founder at the RI Digital: Canada 2020 conference on September 15/16 on the subject of Global energy investing after coronavirus.

Even before the COVID-19 crisis brought the global economy to a standstill, we were on a collision course for another major crisis – climate change. 

Now, stacked on top of that, the world is responding to an unprecedented health, social and economic emergency in which hundreds of thousands have lost their lives, staggering numbers of people have lost their jobs, and businesses are struggling to survive. The International Monetary Fund (IMF) has projected global growth to fall by roughly five percent in 2020, compared to a one percent drop during the 2008 financial crisis. 

Developing countries are being hit particularly hard. And, it is likely to get worse given the reliance of so many of these countries on the export of commodities, remittances, and tourism, which are all significantly impacted by the current crisis. 

One of the few silver linings of the COVID-19 crisis is that, as governments and development banks mobilize unparalleled amounts of capital to respond, opportunities will arise to help developing countries move towards a resilient and low-carbon development trajectory. For this to happen, the private sector needs to play a dramatically larger role in partnership with the public institutions and scarce public capital.

Low-carbon investment opportunities in developing countries 

It is estimated that the low-carbon, climate resilient infrastructure needed to keep temperature increases on the 2 °C trajectory is approximately $85 trillion by 2030, and around 60 percent of these needs are in developing countries. We only have one shot to get it right, and now is the opportunity of a generation to assist these countries and the world to meet our global climate goals.

Take cities, for example. Over 60 percent of the land projected to become urban by 2030 in developing countries has yet to be developed. We now have an important window to invest in climate-smart cities and avoid carbon and climate-vulnerability lock-in, especially in cities where urban form and urban infrastructure is expanding rapidly. The investment opportunities are there. Emerging market cities have the potential to attract more than $29.4 trillion by 2030 in cumulative climate-related investments in waste, renewable energy, public transportation, water, electric vehicles and green buildings. 

The overwhelming need for climate-smart investment is not limited to cities, but neither are the opportunities. Consider energy, where an estimated $15 trillion of additional investment – much of which will be in developing countries – is needed in clean energy by 2050 for us to stay on track to reaching a zero-carbon economy commensurate with our climate goals.  Or likewise land use,  where investments in more sustainable forms of agricultural and landscape management could generate over $2 trillion in economic benefits and millions of jobs, while helping to avoid conditions that led to the emergence of COVID-19. Massive climate-smart investment opportunities are out there, but the lack of financial and technical resources, exacerbated by the COVID-19 pandemic, could prevent us from seizing these chances to set a course towards a low-carbon and resilient future.

Climate finance: a critical piece of the puzzle

Concessional climate finance – in other words, resources that are invested at below market-rate terms – is one of the more powerful tools in accelerating the type of investments that can meet both our COVID-19 recovery aspirations and climate goals. In my work at the Climate Investment Funds, I have seen what concessional finance can do first hand. It can help tackle upstream investment barriers like inadequate policies and regulations, or lack of capacity and advisory services for local private banks. It can also bring down costs of new technologies, accelerate learning on the use of new financing instruments, and help create markets. 

BloombergNEF found that in India, concessional finance held the potential to help advance to the point that a new wind plant could become cheaper than running an existing gas or coal plant for new wind plants by up to four years. This is a critical step towards the deep decarbonization needed to reach a 2-degree world, as there are hundreds of gigawatts (GW) of coal capacity that will keep running for decades unless a more profitable choice is available.

With such a potent tool ready to be used, it is more important than ever to signal to key stakeholders and partners that there will be large-scale, concessional resources available in the short-term to finance low-carbon and climate resilient activities, so that these investments are prioritized as part of efforts to recover from COVID-19 and move toward the zero-carbon economy. Governments need the signal so that they can prioritize key policy reforms and investment decisions, our partners in the multilateral development banks need it so that they can prioritize resources from their own balance sheets; and the private sector needs it so that firms have visibility into, and can plan for, upcoming investment opportunities in the short term, which can then pave the way for institutional capital in the long term.

What next?

We have seen time and again clean technology markets that were once on the frontier, become mainstream in developing countries. Concessional finance can provide that push, but entities like us and our multilateral development bank (MDB) partners can’t do it alone – we need private and institutional capital to step in like never before. 

This might mean that investors need to take on greater risks than they have been comfortable with in the past. Or, that investment horizons need to be adjusted. Alternatively, short-term investment returns need to align with long-term climate impacts. Because business as usual simply isn’t going to propel us to a 2 °C future. We may need to step out of our comfort zone in the short-term, to get us where we need to be in the long-term.