Experts have highlighted the significant disparity in private sector investment between high-income countries and emerging/developing countries in renewable energy projects.
In high-income countries, more than 80% of green investments are funded by the private sector, whereas in developing countries, the
share of private sector investment in renewable energy projects is less than 14%. The need to substantially increase private sector finance to support developing and middle-income countries in transitioning to clean energy was a prominent outcome of the recent Summit for a New Global Financial Pact in Paris.
While the agreement to increase private sector finance is crucial, translating this theory into practice is a complex task that requires a collective acknowledgment from policymakers and financial actors that continuing with business-as-usual is not a viable option.
The summit, led by French President Emmanuel Macron and attended by influential figures from the Global North such as U.S. Treasury Secretary Janet Yellen, drew inspiration from ideas put forth by Global South leaders.
However, the journey from high-level discussions to tangible financial commitments remains challenging. One of the central issues is the need to de-risk investments in countries with lower financial ratings, uncertain governance, and limited experience of attracting significant
private investments.
The average interest cost for solar farms in
countries such as Brazil, India, Indonesia, Mexico, and South Africa is 10.6% annually, compared to 4% in the European Union, indicating the cost of capital as a fundamental barrier to investment in
developing countries.
Experts suggest that blended finance and risk-sharing instruments can incentivize private sector participation in climate projects.
Furthermore, collaboration across the entire financial ecosystem, including bilateral development finance institutions and local
development banks, can foster private investment in developing countries. Sharing knowledge, best practices, and expertise is vital to boost investor confidence and create an enabling environment for private investment. New approaches, such as “originate-and-share” and “originate-and-transfer” models, can improve risk distribution and enhance the financial strength and sustainability of climate projects.
To facilitate these changes, better access to well-interpreted and open-source data is crucial to demystify unfamiliar markets for
potential investors.
Additionally, the World Bank should adopt the recommendations of the G20 and adjust the capital adequacy framework to align with this new reality.
Reforming the financial sector requires the full commitment of multilateral development banks, regulators, and philanthropists. Their role should extend beyond de-risking and increasing private sector financing to actively participating in a global framework that acknowledges the world’s transition to a clean-energy economy.
This narrative should be integrated into discussions at climate talks, financial gatherings, and events like Davos. Achieving a net-zero future requires a solid plan that convinces finance institutions and
investors to invest in renewable energy and climate adaptation projects in all countries, regardless of their credit rating.
Dr. Nina Seega, the director of the Centre for Sustainable Finance at the Cambridge Institute for Sustainability Leadership (CISL), has extensive experience in working with financial regulators and central banks on the intersections between climate, nature, and financial stability.
She serves on various advisory boards and councils related to sustainable finance and is actively engaged in promoting the role
of finance in driving sustainable outcomes.