Private sector must cover 90% of climate investment in Ems, says IMF

The IMF said phasing out coal is necessary to reach climate goals, though it is challenging as many EMDEs highly depend on coal

The private sector needs to cover 90 per cent of the climate mitigation investment in emerging markets and developing economies (EMDEs), excluding China, as public investment growth is projected to be limited, the IMF said in its latest Global Financial Stability Report.

“Yet, EMDEs face significant challenges in attracting private capital. Many have sub-investment-grade credit ratings, limiting their potential investor base and resulting in high financing costs. Even investment-grade-rated EMDEs may find it difficult to attract private finance for climate due to several barriers,” it added. Including China, private sector contribution could be 80 per cent of the total climate fund requirement as China has significant domestic capability to generate such funds, IMF said. 

The International Energy Agency (IEA) has estimated that by the end of 2030, climate mitigation investment needs will inc­rease to about $2 trillion per year in EMDEs. This is about 40 per cent of the global inve­stment needs. The IMF said that to achieve net-zero greenhouse gas emissions by 2050, global gross climate mitigation investment will need to reach about $5 trillion annually by 2030.

The independent expert group by G20, headed by N K Singh and Lawrence Summers, in its first report, said multilateral development banks (MDBs) would need to increase their annual spending by $3 trillion by 2030, incl­uding $1.8 trillion for add­itional climate action and $1.2 trillion for achieving ot­her sustainable developm­e­nt goals (SDGs).

The IMF said further struc­tural policies are needed in EMDEs to mobilise domestic and international private climate finance. These policies include structural reforms, str­ong climate policies and commitments, well-designed subsidies, and innovative fin­an­cing approaches to phase out coal.

“High-quality, reliable, and comparable data are a prerequisite to assess and price risks and opportunities and make informed investment decisions. A weak climate information architecture incre­ases the risks of “greenwashing” (investments wrongly marketed or classified as climate-beneficial) and reduces market transparency,” it added.

The Fund said its Resilience and Sustainability Facility (RSF) can help catalyse private capital by enhancing a country’s capacity for climate investments with a combination of policy reforms, capacity development, and longer-term fin­ancing. “Through its convening power, the IMF can bring together governments, MDBs, and the private sector to foster the financing of much-needed climate investments. The IMF can help strengthen public financial and climate investment management to support the development of a pipeline of investable projects and provide capacity development to support the collection of high-quality, reliable, and compar­able climate-related data,” it added.

Current methodologies of credit rating agencies do not reward middle- and lower-income countries that implement better climate policies, the IMF observed. “As long as this practice persists, the potential benefits of climate investments for credit ratings and thereby financing costs are limited,” it added.

The IMF said the phasing out of coal is necessary to reach climate goals, though it is challenging as many EMDEs highly depend on coal. “Phasing out coal-fired power plants in EMDEs implies significant costs in terms of decommissioning, retirement, and social adjustments. Net financial value of coal-fired power plants is lost when such plants are retired before their expected lifespan, as capital expenditures cannot be recovered,” it said.