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Emerging markets and climate transition: progress, challenges and opportunities
In 2022, we wrote about emerging markets (“EM”) being a key piece in the climate puzzle. By this we meant that whilst developed markets have historically been the main contributor to climate change, EM markets will account for most of the increase in greenhouse gas emissions going forward. As such, the success or failure of EM will have a significant impact on the ability of the world to reach net-zero emissions by 2050, and therefore avoid the worst effects of climate change.
EM countries are feeling the sense of urgency when it comes to the worst effects of climate change. The devastating floods in Pakistan, and drought-induced famine in Uganda in 2022 are but a few of many likely climate-related natural disasters affecting EM countries, where the capacity to cope is limited. Unfortunately, it is precisely some of the most climate-vulnerable countries that are also facing the most acute debt distress – such as Sri Lanka and Zambia.
Here, whilst focusing on the restructuring of past debts is certainly necessary, it is solving only half of the problem. What these countries really require are new engines of economic growth to allow them to carry more (not less) debt, on a sustainable basis. On top of this, with the help of the international community, they need to invest in climate mitigation and adaptation projects to protect their populations from the adverse effects of climate change.
In our piece, we look at the progress that EM countries are making. Despite the overwhelming nature of the challenge, combined with a hostile external market environment, EM countries are continuing to push ahead with their green agendas, as follows:
- Climate change commitments: the growing ambition of EM countries’ Nationally Determined Contributions (“NDC”). Thes countries dominate the group with an ‘almost sufficient’ NDC target, as defined by the Climate Action Tracker initiative.
We discuss how, last year, Uruguay led the way in creating a direct link between the fulfilment of its NDC commitment and debt financing cost, via the first ever sovereign ‘step-up, step-down’ sustainability-linked bond. - Green taxonomies: EM countries have been developing and (in some cases) launching green taxonomies. These frameworks are important as they mobilise investments in domestic economies to line up behind a country’s own climate transition priorities and environmentally friendly projects.
Green taxonomies reflect the unique challenges that individual countries are facing, and although such frameworks might not be perfect, they are a much-needed starting point, and we expect them to dynamically evolve over time.
- Investments in alternative energy: EM countries are increasing their efforts to reduce reliance on fossil fuels and increase capacity in clean and renewables. Those with access to funds, especially China, are directing investment into this rapidly-growing industry, followed by India and Brazil.
What is becoming apparent, however, is the marked regional differences in EM’s capability to attract investments into clean energy. The least developed countries, as well as small island developing states, are finding it particularly challenging to attract investments. - Sustainable financing: given challenges ahead, stakeholders, including multinationals and market participants and sovereign issuers have been ramping up efforts to develop innovative financial instruments to channel funding into much-needed projects within EM.
We have seen ongoing issuance of EM sovereign ‘use-of-proceed’ bonds and improvements in their quality, while the sustainability-linked bond framework has started to be utilised by sovereigns and ‘debt-for-nature’ swaps have increased.
However, while these developments are a step in the right direction, significantly more capital needs to be channelled into EM countries to fulfil their climate transition objectives. The financial industry can play a critical role, by directing this capital into EM countries.
Ultimately, these countries are vital in the fight against climate change and their success or failure will have a significant impact on the ability of the world to reach net-zero emissions by 2050, and so avoid the worst effects of climate change.
How can the financial industry direct capital into EM countries? Find out here
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