Sustainable Finance & Sovereigns
Climate Finance
Low- and lower-middle-income countries are most vulnerable and least ready to adapt to climate change—yet receive the least amount of investment to transition their economies and build resilience to physical climate risks.
Overview
Climate Finance Gap
Our research shows that low- and lower-middle-income countries are disproportionally at risk of economic losses from, and are most exposed to, physical climate risks. As extreme weather conditions and worsening physical risks continue to increase and influence credit fundamentals, more frequent climate risks could pose an additional barrier to low-carbon economic development—especially because financing adaptation to, and recovery, from physical climate risks is more difficult for countries with fewer resources and more restricted access to capital.
The transition and adaptation financing gap in low- and lower-middle-income countries is a focus of multiple international forums. Developed economies may have resources to plan and prepare, but the global energy transition cannot successfully happen without developing and emerging economies. Closing the climate finance gap would require a significant scaling of international capital flows, and financing may become even more difficult in periods of slowing global growth and challenging credit conditions. Market participants estimate that trillions of dollars in climate finance mobilization are needed to fund their transition and adaptation needs, which most often far exceed these countries’ domestic funding capacities.
Rating Actions
Capital & Challenges
Public & Private Sources of Finance
Most broadly, climate finance represents financial flows to facilitate actions to mitigate and adapt to climate change. There is no single definition of climate finance, and thus the sources of finance vary across the definitions. The most common public sector funding ranges across domestic, bilateral, and multilateral funding, while private sector sources can include philanthropic capital, investors, asset managers, insurance companies, banks, and nonfinancial corporations.
Together, both public and private climate financing provide approximately $30 billion in annual capital flows for the world’s least-developed countries (3% of the world’s total climate finance flows), and $150 billion for emerging markets (excluding China), according to Climate Policy Initiative data.
Market participants are able to access climate finance through a plethora of instruments—not limited to grants, concessional loans, guarantees, equity, loans, bonds, insurance, funds, or swaps—all of which can be combined as blended finance solutions to address stakeholders’ specific and unique needs.
Few issuers in lower-income countries are issuing sustainability-labeled debt instruments—with just 1% of the sustainability-labeled bond market issued in low- and lower-middle-income countries. But high-income countries in Asia-Pacific, Latin America, and the Middle East have recently increased their share of issuance, which could lay the groundwork for issuers in lower-income countries in these regions to access the sustainable bond market.
Challenges to Closing the Climate Finance Gap
Implementing comprehensive and coordinated climate policies and strategies—which can underpin opportunities for climate finance mobilization—remains a challenge for governments and companies. Against this backdrop, the bridge to closing the climate finance gap is blocked by numerous multi-faceted challenges.
Financial risks and roadblocks can materialize from many developing countries’ low creditworthiness, high foreign-exchange risk in illiquid currencies; transfer and convertibility risks that prevent an issuer in a sovereign’s jurisdiction from moving money out of that jurisdiction; and the reality that adaptation investments are often non-cashflow generative despite their significant positive financial externalities, among others.
Non-financial risks can emerge from lower-income countries’ lack of supportive domestic operating environments, the prevalence of unestablished or unequal local expertise to develop climate finance opportunities, and the difficulty of sourcing, establishing, scaling, and standardizing projects.
Blended finance solutions, which allow for different stakeholders to leverage capabilities and needs, can be integral for risk mitigation and private capital mobilization to address the climate financing gap.
Methodology Updates
Sustainable Finance
Research & Insights
Latest Research
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