Paying for a just transition to net zero

Steven Cranwell Chief Executive Officer, US and Americas

24 Mar 2023

We cannot tackle climate change without helping developing economies to reduce their emissions – but who will pay for these countries to move towards net zero?

Climate change is a global crisis that requires a global response – including in developing economies, even though they are likely to struggle to invest in the sustainability solutions required. After all, these economies now account for an increasingly large share of global emissions – as much as 34 per cent, or 63 per cent if you include China, according to the World Bank.

The scale of the challenge is laid bare by research from Standard Chartered. It concludes that emerging markets will need to invest an additional $94.8tn – more than the world’s total annual economic output – in order to get to net zero in time to meet global climate change targets.

Where will that money come from? Certainly, it looks unlikely that developing markets themselves will be able to foot the entire bill. Standard Chartered’s research suggests that if these countries tried to raise the money from higher taxes and borrowing, they would reduce household consumption by 5 per cent – leaving households $2tn worse off between 2022 and 2060.

“A structural shift in the global economy is needed to reorient capital flows to address the climate crisis.”

In which case, developed markets will need to offer their support. “A structural shift in the global economy is needed to reorient capital flows to address the climate crisis and avert the resulting social and economic consequences,” argues Rhian-Mari Thomas, CEO of the Green Finance Institute. “The process of redefining the purpose and architecture of finance to tackle our most pressing global challenges is going to require both ambitious vision and radical collaboration.”

In particular, the private sector will play a crucial role. Steven Cranwell, CEO and Regional Head Client Coverage at Standard Chartered, Americas, emphasises that “closing the financing gap is key to ensuring a just transition, particularly in the emerging markets that have not historically been the largest emitters of carbon.”

So far, however, there is little sign that western investors are ready to step up to the level that is required. “The funding gap to halve global emissions by 2030, a critical component of delivering on sustainability goals, is measured in the trillions while the best available data estimates that climate finance flows reached $900bn in 2021,” says Thomas. “Admittedly, that was an all-time high and a 40 per cent increase on the prior year, but it is troublingly off track.”

Indeed, the world’s top 300 investment firms, with total assets under management between them of more than $50tn, have just 2 per cent, 3 per cent and 5 per cent of their investments in the Middle East, Africa and South America respectively, according to the United Nations Framework Convention on Climate Change.

The good news is there is no shortage of investment capital for sustainability projects globally. As demand from investors for environment, social and governance (ESG) products continues to soar, asset managers globally are expected to increase their ESG-related assets under management to $33.9tn by 2026, from $18.4tn in 2021, according to PwC.

The question, however, is how much investment capital will end up in emerging markets, despite the scale of the opportunity? To close the gap, policymakers must encourage investors to support the transition story in developing economies. Public sector money can unlock private sector finance – blended finance, for example, reduces the risk for private sector investors.

The key is to enable collaboration, says Cranwell. “We aim to catalyse finance and partnerships to scale impact, and direct capital and climate solutions to where they are needed most, including a plan to mobilise $300bn in green and transition finance between 2021 and 2030,” he says.

“If investors help fund a just transition, emerging market economic output could be 3.1 per cent higher each year until 2060.”

Groups such as the Glasgow Financial Alliance for Net Zero Principles Group – an ambitious programme to generate the commitment, engagement, investment and alignment needed to drive forward the transition to net zero – can help in this regard. But it will also be important to build more robust regulation and standards around sustainability investment in developing countries. Investors are looking for clearer parameters on how to judge the environmental benefits of such investments, better data on their impacts and tighter policing of the claims often made about performance.

Still, the case for doing more is not in dispute. Leaving aside the moral imperative to support such initiatives, there is also a clear economic argument. Standard Chartered’s research suggests that encouraging more private investment could help emerging markets transition while also increasing growth. If investors help fund a just transition, emerging market economic output could be 3.1 per cent higher each year until 2060 – to the benefit of the entire global economy.

It may be that some investors are put off by the perceived risks of investing in developing economies. These are markets that have often been characterised by volatility and uncertainty. Yet the long-term prospects of these countries are encouraging. The Economist Intelligence Unit expects developing market economic growth to consistently outpace that of the west over the next three decades to 2050. In which case, many investors will be anxious to find new opportunities in these markets. Financing a just transition could be a chance to do well by doing good.

This content was paid for and produced by Standard Chartered in partnership with the Commercial Department of the Financial Times.