Boosting Financing Transitions in Emerging Markets: The Why and How

Boosting Financing Transitions in Emerging Markets: The Why and How

In a growing number of emerging markets and developing economies (EMDEs), population growth is contributing to a significant increase in energy demands. This trend is primarily driven by factors such as industrialisation, urbanisation, and population growth, as these markets undergo rapid transformation.

Historically, these markets have received less investment compared to developed markets. However, the growing energy demands necessitate a substantial shift in this trend. The private sector is now mobilising capital at unprecedented levels to address these needs and curb future emissions growth.

The article, first published on NZI Spark, highlights the crucial role of private sector capital mobilisation in addressing the growing energy demands and emissions in these markets. The private sector's involvement is essential for sustainable and long-term development, given the significant contributions these markets are predicted to make to future emissions growth.

To mobilise this capital, the article proposes a combination of strategies. These include:

1. Government Leadership and Enabling Environment
2. Governments must take an active role in fostering private sector growth by implementing regulatory reforms, streamlining bureaucracy, and creating transparent legal frameworks. This will help establish a conducive environment for fair competition and investor protections.
3. National-level commitment signals credibility to investors, as demonstrated by specialised agencies like Morocco’s MASEN, which streamline renewable energy project development by removing bottlenecks and coordinating stakeholder efforts.
4. Mobilising Multilateral Development Banks and Catalytic Finance
5. Multilateral development banks (MDBs) play a critical role in preparing early-stage projects, acting as anchor investors, and providing guarantees and blended finance to reduce perceived and real investment risks.
6. Instruments such as guarantees, first-loss capital, green bonds, and sustainability-linked bonds are catalytic tools that lower financing costs and mitigate risks, thereby unlocking more private capital.
7. Risk Mitigation and Innovation in Financial Instruments
8. Innovative arrangements like blended finance lines encourage financial institutions to bid for funding aligned with ecological transformation plans, including clean energy and nature-based solutions.
9. Proposed global facilities, such as the EMCIC, aim to mobilise $100–500 billion over 10 years through comprehensive loan guarantees for clean energy infrastructure, enabling institutional investors to invest with reduced due diligence.
10. Developing Local Capital Markets and Ecosystems
11. Strengthening local capital markets and infrastructure, improving data transparency, and developing workforce skills and supplier networks build local capacity and reduce reliance on foreign contractors, lowering costs and facilitating follow-on investments.
12. Private equity, venture capital, and private credit markets are vital for flexible, innovative, and rapid funding of small and medium-sized enterprises (SMEs) that drive job creation and growth, especially in regions like Africa experiencing rapid urbanisation and demographic shifts.
13. Attracting Foreign Direct Investment (FDI)
14. FDI acts as a gateway to technology transfer, productivity gains, and integration into global markets. Policies focused on attracting FDI, removing regulatory bottlenecks, and developing digital infrastructure contribute to sustainable and diversified growth.

In conclusion, mobilising large-scale private capital for EMDEs' emissions-related development requires coordinated efforts involving proactive government policy, MDB catalytic roles, innovative finance instruments, local market development, and FDI attraction, all aiming to de-risk investments and build robust investment ecosystems aligned with sustainable growth and climate goals.

For more details, please refer to the full article available through the provided link.

1. The private sector's role in addressing climate change and energy demands in emerging markets and developing economies (EMDEs) is crucial for sustainable and long-term development, as the growth in these markets is predicted to significantly contribute to future emissions.
2. To mobilize private capital in EMDEs, it is essential to foster private sector growth through government leadership, such as regulatory reforms, streamlining bureaucracy, and creating transparent legal frameworks, while also leveraging the roles of multilateral development banks, innovative financial instruments, local capital markets development, and attracting foreign direct investment.

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