Following the recent COP 27 climate change summit, the DMS shifts our analysis this week towards the responsibility of emerging markets to now step up in the global effort against climate change. Known for its warm weather and luxury resorts, the Egyptian city of Sharm el-Sheikh played host to COP 27, where world leaders met over the past week to discuss the developments and future perspectives on tackling climate change.
On the agenda was the discussion of how developed countries have failed to meet the pledges made in COP15 2009 to make a collective $100bn investment towards aiding developing nations in their efforts of reducing climate change by 2020. This year’s conference turned the focus towards urging as many countries as possible, firms and key stakeholders to play their part in the struggle against climate change and the spotlight has now turned towards the question of how developing markets fit into the puzzle. Previously, emerging markets have struggled with accessing the financial resources necessary to credibly commit to any substantial changes and this has highlighted the need for such economies to be able to access low-cost financing solutions. This is the first step in enabling developing countries to reduce their carbon emissions from within, after this it is then a question of implementing the right policies and initiatives for effective impact.
The discussion surrounding raising low-cost financial solutions presents an exciting opportunity for developing economies to finally gain access to the capital necessary to make strides in areas of increasing importance such as energy transition. The energy transition accelerator was one such initiative, unveiled by John Kerry, the US’s climate convoy. This was launched in line with the recognition that new and creative ways must be released to put developing countries in the position to do something about the carbon emissions within their borders. The proposal involves implementing a carbon trading scheme designed to redirect investment towards poorer countries for use in the transition to clean renewable energy. The forecasted impacts are estimated to be in the region of trillions in the way of investment and whilst the effectiveness of such carbon markets are highly contested, this is a big step towards meeting the $4 trillion annual clean energy investment target set by the International Energy Agency for 2030.
What more then, can we expect to soon see of developing markets in dealing with the impacts of climate change? As mentioned previously, the penny has dropped for world leaders in terms of recognising that low-cost financing is crucial to moving forward with these challenges. In light of this, there have been recent initiatives undergone by governments and institutions to explore more innovative ways of raising capital in emerging economies. One such method is debt-for-nature swaps in which cash-deficient countries sell their debt to foreign countries who then use the proceeds to fund conservation activities in the developing country. Barbados recently struck a $150 million debt-for-nature deal, orchestrated by Credit Suisse and CIBC FirstCaribbean which is expected to generate $50 million towards marine conservation efforts. Whilst an exciting and fruitful opportunity the obvious downfall is that such initiatives pose a high risk to the investor, which is why these deals have previously not garnered as much interest. Risks aside, these types of deals are now gaining the necessary interest to make change on a global scale and will be a significant factor moving forward in the fight against climate change.
The potential carryover of the aforementioned low-cost financing cannot be understated; if a framework for emerging countries to unlock capital is established, there could be a large amount of potential growth to come from such solutions. If debt for nature and blended finance continue to grow and can gain traction amongst interested foreign investors, emerging economies can utilise this capital in much-needed areas outside of climate change initiatives. This prospect becomes more realistic when we acknowledge that climate change initiatives, when compared to other foreign investment avenues, are risky for investors due to high upfront costs and long-term commitments. As such this opens the door for emerging economies to build upon the new avenues opened by climate change, to raise capital in other areas to aid the build-up of their skilled labour force, research and development, infrastructure and more.
Overall, the challenges raised in the COP 27 summit signify a daunting, but opportunistic upcoming period for developing markets. These economies will undoubtedly have to focus efforts on trying to reduce global warming within their borders and we expect that there will be a large amount of structural transition within these markets over the next decade on account of this. However, with the current focus on providing low-cost financing comes an opportunity for a surge in foreign direct investment into developing markets. As such, the chance for accelerated growth in key areas and industries arises and observing how developing countries capitalise on this in the next few years will be fascinating to watch.
This article was written by Bilal Hashim, a second-year BSc PPE student at the LSE.
LSESU Developing Markets Society 