As our planet faces the threat of climate change, the need to accelerate decarbonization has never been more pressing. But what exactly is decarbonization? There are two main aspects to decarbonization – prevention and sequestration. Prevention involves the process of stopping or reducing carbon dioxide (CO2) being released into the atmosphere from the burning of fossil fuels. While sequestration involves the process of capturing and storing CO2 from the atmosphere to reduce the effects of climate change.
In finance, decarbonization efforts often involve either redirecting financial resources away from fossil fuel-intensive industries toward cleaner and more sustainable alternatives, such as renewable energy, or investing in carbon sequestration. This will cost a lot – but the capital is there. There is up to USD 120 trillion dollars of assets under management with banks and institutional investors. Consider the transformative impact this capital could have if it was redirected towards low-carbon and nature-positive investments.
Emerging markets: the missing link to achieve global decarbonization objectives
Investing in emerging markets and developing economies is critical to reduce carbon emissions to net zero by 2050, limit the average temperature increase to 1.5°C, and prevent worsening and potentially irreversible effects of climate change. According to The United Nations Conference on Trade and Development, USD $1.7 trillion annually is required in clean energy investment in emerging markets alone to stay within 1.5°C, yet there are not enough public funds available to fill this investment gap.
Despite recent increases in investments in emerging markets, they receive only a fraction of investment volumes needed. This is partly due to additional considerations that go beyond climate when investing in emerging markets – from macroeconomic stability, political stability, policy consistency, foreign exchange, capital repatriation, and adherence to the rule of law.
The private sector, with its capital and its innovation, is critical to accelerating decarbonization in emerging markets. And for the private sector to invest, they need clarity and stability. This then brings us to the question: What can the public and private sector do to accelerate the pace of decarbonization and bridge the clean energy investment gap?
1. Governments need to establish policies, regulations and market incentives to accelerate decarbonization by creating a supportive framework that encourages private sector investment.
We can’t look at decarbonization policies and incentives in insolation. They exist in a broader set of policy, legal and regulatory, as well as institutional frameworks. How emerging markets create a predictable and stable market will go a long way towards enabling the success of its climate policy.
The suite of tools available includes implementing renewable energy targets, energy efficiency standards, climate goals, carbon pricing, investment subsidies, carbon tax credits, sustainability reporting, and disclosure requirements.
Different emerging countries are at different parts of their journey in terms of putting in place policies and regulations. For example, countries like Costa Rica and South Africa are forging ahead with innovative policies and incentives. Costa Rica's national decarbonization plan leverages carbon taxes and incentives to encourage businesses to reduce their carbon footprint, to mobilize private investment and support the country's goal of becoming carbon neutral by 2050. Meanwhile, South Africa's Renewable Energy Independent Power Producer Procurement Programme supports private investment in renewables, reducing the country’s reliance on fossil fuels. Additionally, South Africa’s Climate Change Act sets out a national climate change response, including mitigation and adaptation actions, enabling the country’s fair contribution to the global climate change response.
2. Private sector capital and innovation is needed for these policies and regulations to work.
The decarbonization of finance presents unique opportunities for growth, innovation, and sustainable development across sectors – offering a strong business case for private sector investment. Let’s delve into two key focus areas of opportunity for the private sector to invest.
- Sustainable infrastructure: With an increasing population and rate of urbanization, buildings, transportation, and sustainable cities are needed more than ever. Today, there are over 80 cities with a population of over 5 million people, and 34 cities with populations exceeding 10 million. By 2050, 7 out of 10 people are expected to live in urban centres and the global population is expected to reach 9.7 billion. Sustainable infrastructure is needed to support these people, and most of it has not yet been built. Clean and renewable energy is needed particularly in the generation, storage, and distribution of solar, wind, hybrid/battery storage, and geothermal power. This is an investment opportunity.
- Technological innovation and solutions can also be used to help reduce carbon emissions, as well as adapt and become more resilient to climate change. These solutions include energy efficiency, carbon capture and storage, electric vehicles, sustainable agriculture, circular economy practices – and resilience and climate risk management to better adapt to climate change. Investing in these technologies can lead to new business opportunities, job creation, and competitive advantages for companies in the green economy.
These investment gaps are what drive the work we do at FinDev Canada. We recognize the critical role of cities and see an opportunity to support mid‑market infrastructure where needs remain unmet. For example, we invested in Maranatha Energy Investment, to increase the domestic production of renewable energy in the Dominican Republic and contribute to the country’s transition to clean energy.
We also recognize the financial industry’s pivotal role to support global decarbonization. For example, we invested in Produbanco, Ecuador’s third largest private commercial bank, to support the financing of local small and medium‑sized enterprises and green lending for local low‑carbon projects, including energy efficiency and renewable energy initiatives to reduce CO2 emissions and promote climate mitigation efforts.
Decarbonization is only one chapter of the story
While decarbonization is critical to stay within 1.5°C, we must acknowledge that it is only one chapter of the story. There is also a chapter on adaptation and resilience, nature, and the interplay between social progress and economic prosperity. Each chapter plays a pivotal role in shaping a better story moving forward – to help drive the transition towards a low-carbon economy and create a more sustainable future for businesses, communities, and the planet.