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Published on: Dec. 19, 2023, 10:14 a.m.
Bridging the global climate financing gap
  • Investments in clean energy and climate-smart technologies in emerging markets could reach $23 trillion by 2030; Image: istock

By Vivek P. Adhia. The author is associate director within the Climate and Sustainability Practice Area at BCG

The global transition towards ‘Net Zero’ low carbon economy faces a monumental challenge. The chasm between financing required to combat climate change and resources deployed is vast. This chasm is not just about insufficient funds, but also uneven distribution of investments across a handful of countries and technologies. The key to unlocking full potential, therefore lies in redirecting attention towards emerging markets, with the highest decarbonisation space. 

The global climate financing gap: Currently, global efforts to combat climate change are marred by significant shortfalls in financing and investment flows. This inadequacy poses a substantial obstacle towards implementing large scale solutions critical for accelerating the transition towards low carbon pathways. Despite concerted efforts and commitments, the existing financial resources remain disproportionately concentrated in select nations and technologies, creating a skewed landscape.

According to the UN, the annual investment required to meet global climate goals stands at approximately $3 trillion, a figure that far exceeds current commitments. Shockingly, a mere 10 countries receive around 75 per cent of the total climate finance, leaving the rest of the world struggling to secure necessary resources. As a matter of fact, India alone, currently faces $100-150 billion financing gap each year to meet its NDC commitments, outlining a clear opportunity for redirecting growth capital. 

Empowering emerging market economies: Untapped potential: Emerging market economies possess a unique advantage -- they are positioned as the vanguards of development and growth while boasting a high potential for decarbonization. The International Finance Corporation (IFC) estimates that investments in clean energy and climate-smart technologies in emerging markets could reach $23 trillion by 2030. Harnessing the potential across emerging markets can serve as a game-changer in bridging the financing gap. Their active development and burgeoning growth profiles offer a ripe opportunity to tap into the global financing pool.

As an exemplar, while the world looks at tripling its renewable energy capacity addition, India has already doubled its capacity on renewables over the last five years, showcasing a global lighthouse opportunity, for similar impacts in other emerging markets. Further, studies show that every dollar invested in clean energy across emerging markets generates about three times more jobs than in developed economies signalling the potential for just transitions and all-round socio-economic growth. 

Outlining appropriate financing models to carve-out unlocks: For technologies and solutions to flourish on a mass scale within emerging markets, the formulation of robust commercial models is imperative. These models need to encompass not only innovative solutions but also sustainable and scalable financial structures.

Further, financing models tailored to local context for example, bringing in blended finance opportunities for partially viable projects, demand aggregation or market transformation models (urban and commercial lighting and cooling solutions, motors and thermal decarbonisation solutions for MSMEs), capex into opex models (or energy as a service applied for solar rooftops, electric mobility, solar cold-chains), or be it guarantee-backed instruments for upcoming technologies (for example across compressed biogas, green hydrogen, waste to energy or direct air capture) or topped with pre-financing of carbon credits or payment for ecosystem services (for landscape restoration, wetlands, nature-based solutions) or others innovative instruments (like extended moratorium for agro-forestry or long gestation projects) etc. have demonstrated, that if structured well, low carbon and green solutions can be significantly scaled up.

India for example, with its energy as a service model, has implemented one of the largest lighting programs globally, also has accelerated energy transition of small and medium enterprises with its National Motor Replacement Program etc. Also, the roll-out of climate friendly financing models and bankability of solutions can be significantly enhanced by tapping into low cost high impact resource raising by way of green bonds, blending with catalytic philanthropic capital etc. India for example, has seen great traction recently on the issuance of green and social bonds, providing viable financing alternatives for climate projects. 

  • Digital financing platforms led by the roll out of UPI and e-rupee, has significantly addressed the last mile financing gap

Addressing the last mile financing woes: Success of appropriate financing models and structures depends on their implementation, which have a significant dependency on the last mile financing ecosystem. In most emerging markets, the last mile financing system especially for green investments and products is largely fractured. Across the world, there has been a plethora of climate financing commitments, in fact more than $100 billion pledged by 20+ global agencies. However, the biggest challenge faced by most of them, is the lack of credible, agile and effective intermediaries, that can help boost the last mile delivery and financial ecosystem.

Credible intermediaries like NABARD, SIDBI, IREDA, PFC, NaBFID or retail banks like Axis, SBI, IndusInd playing that role to further engage with NBFCs like Annapurna, Svakarma, Electronica etc. and rolling out transformative schemes, can significantly help address this challenge. A strong intermediary further brings in a pipeline of investible projects, and unlock anywhere between 4x-10x private sector and commercial investments. It is important to organize projects and schemes well, to address the last mile financing challenge. SIDBI for example, runs amongst the largest credit guarantee schemes globally with CGTSME, enabling large scale financing deployed towards small and medium enterprises.

Seizing opportunities for change: India, amongst other emerging markets has somehow managed to build a momentum on digital and financial inclusion, like never done before. Digital financing platforms led by the roll out of UPI and e-rupee, has significantly addressed the last mile financing gap, increased access to credit, and enhanced bankability. Some of these learnings, especially from successful financial start-ups like PayTM, PhonePe, Uni, Fibe, IndMoney, have made credit accessible at the fingertips.

This is a call-out for smart entrepreneurs, businesses and industry leaders – on how green finance unlocks can be a big opportunity for growth over the next decade or so, if we are able to provide platforms that address last mile challenges, be a credible front line to climate financing channelised by intermediaries and are able to deploy smart, innovative solutions that low carbon tech currently requires. 

As COP 28 opens up, and call for global finance flow corrections takes centre stage, businesses from emerging markets can be the silver lining – in unlocking investments and in-turn accelerating low carbon people-centric growth that is equitable, sustainable and beneficial in the long run. 

(Views expressed are author’s own, and does not necessarily outline the organisation’s formal point of view)

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