- Emerging markets are struggling to access green capital
- Just energy transition partnerships seek to generate investable ‘transition’ assets
- Banks and infrastructure investors are leading private sector participation
The International Energy Agency estimates that developing economies and emerging markets are responsible for more than two-thirds of global carbon emissions.
In its 2021 Global Energy Review, the IEA acknowledged changing energy consumption patterns during the COVID-19 pandemic but said developing countries were “driving energy demand back above 2019 levels”, accounting for nearly 70% of the projected post-pandemic increase.
That demand should come as no surprise. According to the UN, “almost all” population growth over the past 25 years has taken place in developing economies – mainly in Asia and Africa. Despite emerging markets experiencing a generally weak bounce back from the recent economic downturn, countries like China, Nigeria and Mexico are expected to become leading global powers over the coming decades.
That makes these countries exceptionally important when it comes to achieving the goals of the Paris Agreement. But with the World Bank predicting that adequate climate adaptation and mitigation efforts in emerging and developing economies could require up to 10% of annual GDP each year from 2022 to the end of the decade, in addition to post-pandemic headwinds, it is clear that there is a huge gap between climate financing needs and available capital.
“Lots of the challenges around financing the climate transition in emerging markets are not specific to the climate dimension,” notes Alice Carr, public policy director at the Glasgow Financial Alliance for Net Zero (GFANZ), which convenes more than 550 financial institutions with climate pledges. “They’re about broader, longer-standing barriers to capital mobilisation.”
But she says the urgency around net zero has created an unusual alignment of stakeholder interests.
“National economies want to be on the right side of the transition. Private finance is keen to build pipelines of attractive transition assets, and everyone can see that climate risk is a global problem.”
This alignment of interests has given rise to a new type of collaboration in the form of Just Energy Transition Partnerships (JETPs). Sponsored by the G7, JETPs are an attempt to pull together money, brains and influence from across public and private markets to help accelerate the climate transition in key emerging economies.
What are the JETPs?
First established at COP26 in 2021, there are now three JETPs – covering South Africa, Vietnam and Indonesia.
Each one is slightly different, but generally they work like this: an emerging market government with an especially complicated decarbonisation challenge (heavy reliance on coal, for example) will agree to accelerate its transition to net zero by devising new energy policies and strategies.
To help it finance those developments, the OECD pledges donor money – $8.5bn (€7.9bn) for South Africa for instance; $10bn for Indonesia; and $7.75bn for Vietnam.
The financial sector then comes in. GFANZ members have agreed to support the “mobilisation and facilitation” of private capital to at least match those donor commitments. Among those to join the new working groups are big names like Bank of America, Citi, Deutsche Bank, HSBC, Macquarie, Mizuho, Prudential and Standard Chartered.
“National economies want to be on the right side of the transition. Private finance is keen to build pipelines of attractive transition assets, and everyone can see that climate risk is a global problem”
Kofi Mbuk, a senior cleantech analyst at UK-based think tank Carbon Tracker, says the JETPs present a promising new way of financing emerging markets decarbonisation.
“Historically, the strategy for OECD nations wanting to invest in emerging markets has typically been to put together a nice fund, channelled through a multilateral development bank, which chooses where the money ends up.”
He says that model can be problematic because it takes a lot of agency away from national governments in terms of accessing and leveraging finance based on their individual decarbonisation needs.
Although development banks are expected to play a big part in the JETP model, through blended finance and guarantees, Mbuk believes the partnerships “could offer a means of financing these strategies in a way that’s more predictable, because they’re dedicated to individual countries”.
The current state-of-play
South Africa’s JETP is the most advanced so far and has already been transformed into a 216-page, five-year investment plan with clear targets (see figure 1).
If successful, the South African government says that the plan “will fundamentally change the economic landscape of the country, ensure security of electricity supply, create employment in new energy and industrial sectors, and provide the necessary support to communities affected by the transition”.
It explains how it expects to use the initial donor money to develop green energy, electric vehicles, training and localised distribution networks, but highlights that most of its needs – it estimates the cost of executing the five-year plan will be nearly $100bn – will have to be met by “the private sector and previously untapped sources such as institutional investors”.
The language used by GFANZ – that its members will “mobilise” and “facilitate” private finance for this big national shift – leaves a lot of wiggle room. Like many of the headline-grabbing green-finance pledges made by banks over the past decade, there is no explicit commitment to allocate capital from their own balance sheets; and it is unclear whether business activities such as selling green bonds will be counted towards the private finance targets.
Carr declined to comment on this concern, but South Africa intends to publish an implementation plan providing more detail on what financial structures and funding timelines would support its investment strategy.
IPE understands that, for now, the private sector’s role in the JETPs is largely an advisory one, with GFANZ members providing technical advice and guidance on whether national plans have the potential to generate a sufficient pipeline of assets that could secure a ‘transition’ label.
For Richard Folland, Carbon Tracker’s head of policy and engagement, it is critical that financial institutions push for truly green projects, rather than watering down ambitions in favour of higher returns or energy security considerations.
“The JETPs need to be a vehicle for serious decarbonisation,” he says. “These economies are all heavy on coal, and I worry that this emphasis on transition could mean simply shifting from coal to gas, which will lock in fossil fuel infrastructure in these countries and create stranded assets.”
South Africa’s investment plan addresses the need to retire coal assets (its state-owned utility Eskom has committed to closing nine of its 15 coal plants by 2035) and ramp up renewable energy. The government has placed the cost of the latter at around €24bn over the next five years – again, largely sourced from the private sector. The state will need to stump up the equivalent of €7bn for transmission lines to enable the uptake of this new capacity. A further €12.5bn will be needed to improve distribution infrastructure. Figure 2 shows how the plan is governed.
“These economies are all heavy on coal, and I worry that this emphasis on transition could mean simply shifting from coal to gas, which will lock in fossil fuel infrastructure in these countries and create stranded assets”
One of the first things that most banks and investors do when they commit to tackling climate change is to introduce a no-coal policy – promising not to finance companies that generate significant revenues from the energy source. This has been welcomed by environmental campaigners, but it makes the question of how to support the early retirement of coal assets especially tricky for these financial institutions.
Carr acknowledges that, given how essential the early decommissioning of operational coal assets will be to reaching net zero, “a shift in thinking is needed” to get GFANZ members comfortable with allocating capital to the industry again, in instances where they support a credible phase-out strategy.
Bringing in other net-zero investors
While GFANZ members come from all parts of the financial markets (asset managers and owners account for a large chunk of the group’s $150trn membership), the JETP working groups are dominated by banks. But Carbon Tracker’s Folland hopes government money backing the partnerships will be used to leverage a wider range of assets run by GFANZ members. He adds that this would “help back up the statements made when the alliance launched about all the capital that was waiting to come to the table to support this transition”.
Banks may be the obvious starting place for the JETPs, given the heavy focus on project finance and lending in the early stages of implementing these real-economy strategies, but Carr says other investors will be required over time.
“We’re exploring different types of financing structure, opportunities for pooling and securitising, and the different players that have different roles in the capital stack,” she explains. “We’re trying to get the right financing brought in, in the right way and at the right time, because these strategies will only work if the broader investor base gets involved.”
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