In 2009, COP15 in Copenhagen set a goal for developed economies to provide $100bn a year of climate finance to emerging economies. This pledge was designed to be achieved by 2020, however it continues to fall short. According to the OECD, $83.3bn was mobilised in 2020 with just under 16% provided by private markets. According to the OECD, the annual goal is not expected to be reached until 2023.
The G20 is responsible for approximately 80% of total greenhouse gas emissions to date. From the industrial age onward, these countries arguably contributed the most to global emissions while also disproportionately benefiting from global economic development. On the other hand, many countries that have contributed little to the problem of climate change are being affected by it in a disparate fashion.
Previous COPs have built equity into the conversation. At the third COP in 1997, the distinction was made that developed and emerging countries should approach climate change with a “common but differentiated responsibility and respective capabilities”.
Some 10 years later, formal text acknowledged the concept of climate loss and damage, meaning that financing should be provided to the most vulnerable countries for the losses and damages they face from climate change that they either cannot adapt to or cannot afford to adapt to. After much negotiation the concept was included in the Paris Agreement although without any ability for a legal or financial remedy.
With this backdrop, it should be no surprise that climate equity is expected to be a point of contention in Sharm El-Sheikh. The G77, which is a coalition of 134 developing countries, Alliance of Small Island States, and others, are expected to be very vocal and attempt to push climate equity issues such as loss and damage formally onto the agenda.
Emerging markets
Stakeholders should frame their work on climate change with an equity lens, including investors that have net zero in mind. The cost of capital for many emerging market countries is already higher than developed markets, which can make investing in transition and adaptation activities more expensive in the places where it is most needed.
Although the investment ecosystem has made progress in coalescing climate commitments, developing tools and frameworks, and improving data quality and availability, the link to real-world outcomes is largely missing.
The current one-size-fits-all approaches to net-zero investing generally fail to incorporate specific considerations for emerging markets including the financing gap, competition of capital between non-climate-related activities and between mitigation and adaptation, and the resulting differentiated pace of change compared to developed markets.
Emerging markets portfolios should be judged against an emerging markets framework, and should incorporate appropriate glide paths for decarbonisation that recognise the longer time horizons over which their governments have made net-zero commitments.
It also is important to adjust expectations of corporates that are domiciled in these countries and bound by the targets and policies of those sovereigns.
Engagements must go beyond simply requesting high-level information on areas such as climate policies or net-zero targets. Instead, we can tailor engagements to leverage detailed insights of individual company fundamentals, ability to transition, and rate of decarbonisation and achievability across different geographies.
Without a nuanced approach to net-zero investing in emerging markets, perverse incentives might compel some investors to use divestment as a catalyst to decarbonise their portfolios rather than provide needed capital for climate mitigation and adaptation.
Climate change is a global problem, but an inclusive and nuanced regional approach to investment can help direct capital flows to the countries and regions that will have the biggest real-world impacts. Many of those will be in emerging markets.
