The race to net zero is a global challenge that demands a multifaceted approach. While developed economies have made significant progress in decarbonization, achieving global climate goals requires investors to adopt a more expansive perspective. Traditionally, investments have been concentrated in developed markets, but it’s essential to broaden that focus to include emerging and developing economies. Despite having lower per capita emissions, these regions are pivotal in shaping the future trajectory of global climate change.
Investors in developed economies have a unique opportunity to drive the global climate transition. By directing capital towards emerging and developing markets, they can support the growth of sustainable industries, accelerate the adoption of clean technologies, and help these regions bypass the traditional, fossil fuel-heavy development path. This approach not only mitigates climate risks but also opens up new and significant investment opportunities.
The climate crisis is a global challenge that requires a global solution. While developed economies have taken significant strides in decarbonisation, we cannot ignore the crucial role of emerging and developing economies in determining the future of our planet.”
David Carlin, Head of Climate Risk at the United Nations Environment Programme Finance Initiative (UNEP FI)
However, investing in emerging and developing economies comes with its own set of challenges. These markets often face political instability, regulatory uncertainty, and infrastructure deficits. To navigate these risks, investors must take a long-term view, conduct thorough due diligence, and consider partnerships with local experts. With the right strategies, these markets can unlock their full potential, providing both impactful climate solutions and rewarding financial returns.
Traditional investment models often involve high risks and uncertain returns, discouraging private capital from flowing into climate projects. New approaches, such as green bonds, climate investment funds, and carbon markets, can help mitigate risks, reduce capital costs, and attract private sector investment.
Scaling Up Climate Financing
To meet the ambitious targets set by the Paris Agreement, it’s critical that climate financing is scaled up—especially in emerging markets, where capital is often in short supply. The World Bank estimates that emerging economies will need over $4 trillion annually to meet their climate and development goals. Bridging this financing gap requires a concerted effort from the private sector, public institutions, and multilateral development banks to unlock funds and create innovative financing mechanisms.
Blended finance, which leverages public funds to reduce the risk for private investors, is one such approach gaining traction. By combining public and private capital, investors can mitigate some of the financial and political risks associated with emerging markets while also generating meaningful returns. Green bonds, sustainability-linked loans, and impact investment funds are additional tools that can help channel significant resources into climate projects in developing economies.
Furthermore, multilateral institutions like the International Finance Corporation (IFC) and the Green Climate Fund (GCF) play a key role in de-risking investments by offering credit guarantees, political risk insurance, and concessional finance. These instruments lower the barrier for private investors to engage in projects that promote climate adaptation and mitigation, such as renewable energy, climate-resilient infrastructure, and sustainable agriculture.
“Scaling up climate finance is not just about increasing funding—it’s about mobilizing the right kind of capital in the right places. The private sector has an essential role to play in driving innovation and investment in emerging markets, where the potential for climate impact is greatest.”
David Carlin, Head of Climate Risk at the United Nations Environment Programme Finance Initiative (UNEP FI)
A Broader Investment Landscape
As David Carlin rightly highlights, the path to net zero requires a broader investment landscape. Expanding beyond developed markets to emerging economies is essential, as these regions will have a profound influence on global climate outcomes, despite their historically lower emissions.
Investing in these regions also addresses issues of climate justice. Emerging and developing economies are disproportionately affected by climate change, despite contributing less to historical emissions. By supporting sustainable development in these countries, investors can help build resilience and reduce vulnerabilities to climate-related risks.
Investors in developed economies have a unique opportunity to contribute to the global climate transition. By allocating capital to emerging and developing economies, they can support the growth of sustainable industries, accelerate clean technologies, and help these regions leapfrog traditional, fossil fuel-intensive development pathways.
The Role of Investors in Net Zero
Achieving net zero is a global endeavour that requires contributions from all corners of the world. Investors have a crucial role in supporting the decarbonisation journey of emerging and developing economies. By broadening their scope, scaling up climate finance, and taking calculated risks, they can help shape a more sustainable and equitable future for everyone.
To truly meet the challenge of climate change, investors must move beyond traditional boundaries and recognize the vast potential in emerging markets. Scaling up climate financing and engaging in innovative partnerships will not only accelerate the global transition to net zero but also offer meaningful opportunities for growth, innovation, and impact.