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Thought Leadership From Luma Saqqaf
A recognised sustainable finance leader with 30+ years of expertise in law, sustainable finance and investing, Islamic finance and entrepreneurship. With a distinguished career spanning leadership roles at three leading global institutions UNPRI, Linklaters and Allen & Overy, Luma continues to play a leading role in the development of the sustainable finance ecosystem in MENA and IMEA regions.
Partnerships for climate finance: a UK blueprint to channel funds to emerging markets?
Last month, the UK announced a new initiative to leverage the country’s financial sector to support emerging markets to transition their economies whilst enabling growth in the UK.
The move highlights the need for more such ‘win-win’ initiatives globally, underpinned by effective partnerships which de-risk investments and enable the mobilisation of more private sector finance.
The scale of the funding challenge
That need is stark: the Independent High Level Expert Group on Climate Finance estimates that between $2.3-2.5 trillion per year between now and 2030 is required for emerging markets and developing economies (EMDEs) to meet their climate, nature and economic development goals.
Enabling these nations to meet their climate goals is everyone’s problem. Developing nations make up 75% of global emissions, and have additional challenges associated with balancing climate goals with urgent economic development needs, such as poverty reduction, job creation and social equity.
Many of these countries have already declared that their ability to transition their energy systems and meet climate targets is conditional on available climate finance. For example, Egypt’s NDC sets out planned reductions in electricity, oil and gas and transportation, while stating a reliance on approximately $246 billion in financing. Oman has pledged to reduce emissions by 21% by 2030, with two thirds of this conditional on, amongst other things, international climate financing as well as access to technologies and capacity building.
A crucial role for private finance
Governments cannot meet this need alone. The magnitude of finance required far exceeds available public funds, and with many emerging market economies approaching their debt ceilings and unable to borrow more, there is an urgent need for private sector investment.
Enabling this means tackling the core challenge of risk. Emerging markets are viewed as high-risk, often due to political instability, currency volatility and a resulting lack of investment-grade ratings from credit rating agencies. Together, these deter private investors who may otherwise have an interest in funding climate projects.
De-risking is therefore an essential piece of the puzzle, and where developed world governments, multilateral development banks (MDBs), and philanthropists must play a role. By providing concessional finance in the form of loans, grants, equity investments or first loss guarantees, these entities can bridge the gap from the limited available public sector funding to the wider pool of private finance.
The UK, as a finance hub, is well positioned to help drive this change forward. As policymakers seek to make London a leader on sustainable finance, this move recognises that existing financial expertise can be leveraged to structure de-risked investment vehicles which in turn attract global private finance.
Partnership and collaboration to enable change
Achieving this requires effective partnerships. The gap between where we are now and where we need to be is vast. No single actor can bridge the financing gap alone, so cohesive partnerships between entities, and close collaboration with emerging market actors are essential. The UK model recognises this, drawing on the expertise of several collaborative entities which are enabling this change on a global scale.
One such organisation is the Glasgow Financial Alliance for Net Zero (GFANZ), an alliance launched in 2021 to bring together global banks with shared commitments to align capital market, investment and lending activity with net zero goals. Now, with several banks altering their stances, driven by political headwinds in the US, the Alliance is pivoting its activities to focus on emerging market transition finance. In doing so, the organisation is recognising the scale of the opportunity in financial terms, and the role of collaborative organisations.
A win-win: and what next?
The UK’s announcement could be seen as a blueprint as other financial centres seek to attract sustainable finance flows. The collaborative financing model represented here can be a ‘win-win’; emerging markets receive the capital needed to accelerate their energy transition, stimulate economic growth and support just transition initiatives. Private investors and the wider UK economy benefit from what GFANZ is terming “a $5trillion opportunity created by countries modernising their energy systems and putting economies onto a low-carbon path in the next decade”. More importantly, they would be supporting resolving the climate change challenge, which, if not resolved on a global scale, will negatively impact them in the long run.
If we are to address the multi-trillion dollar shortfall in climate finance, we must bring together both imperative – to address global development and climate goals – and opportunity – to drive growth in developed nations. Without such a step-change, both climate finance and climate mitigation goals will be impossible to meet.