Quick Win No. 9
Leverage investment financing to assist developing countries in the green transition
Tackling climate change is the most pressing issue of our time. To solve it, we need to change our traditional patterns of production, as well as our networks of economic cooperation. While everyone is impacted by climate change, developing countries are currently set to carry the brunt of the crisis by being both disproportionately vulnerable to its impacts and having less access to financial resources to shift to green technology. Investment in developing country economies is needed to ensure that the green transition proceeds equitably around the globe.
According to UNCTAD estimates, we are facing a whopping 4 trillion USD annual gap to finance the Sustainable Development Goals (SDGs) in developing countries. The optimism behind the “sustainability boom” following the Paris Agreement did not move the needle for developing countries. Much of the international investments for the green transition were made in high-income countries and large emerging economies. At the half-way mark between 2015 and 2030, the gap between the funds needed and the funds available has actually expanded by 60%. This gap is wider than what development aid can bridge and is ten times larger than current total flows of foreign direct investment to developing countries. However, according to the OECD, if investment in global financial assets shifted a mere 1% in support of the SDGs in developing countries this gap could be closed.
Above all, it is imperative to support developing countries to leverage investment financing in areas critical to the green transition. While there is no apparent single best solution, working to find innovative uses of public financing mechanisms has the potential to unlock private capital and catalyze climate-aligned investment flows. Key examples of this are partnerships between the public sector, multilateral development banks and international financial institutions, and private investors, as well as the use of blended finance models or instruments for green investments, including through the Green Climate Fund and other initiatives, such as the Global Innovation Lab for Climate Finance.
The regulatory environments of developing countries also have a role to play. The OECD report indicates that developing countries with clean energy policies are seven times more likely, on average, to attract investments in that area than those countries without such policies in place. Developing countries can work to promote and facilitate investments for the transition to a low-carbon, climate-resilient and resource-efficient economy through identifying investment barriers and strengthening their domestic regulatory environments. The recently concluded text of the WTO Agreement on Investment Facilitation for Development, by over 110 WTO members, provides a global framework to assist developing economies in their efforts to facilitate sustainable investments.
These mechanisms and tools can help to de-risk green investments in developing countries and significantly contribute to reducing financing costs – which are the major obstacles to attracting these kinds of investments – and consequently mobilize additional funds and private capital to assist in the green transition.
