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The private sector needs to cover 90 per cent of climate mitigation investment needs in emerging market 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 climate private finance 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, the IMF said.
The International Energy Agency has estimated that by the end of 2030, climate mitigation investment needs will increase to about $2 trillion per year in EMDEs—about 40 per cent of global investment needs. The IMF said to achieve net zero greenhouse gas emissions by 2050, global gross climate mitigation investment will need to reach about $5 trillion annually by 2030.
An independent expert group by the G20, headed by N.K. Singh and Lawrence Summers, in their first report said multilateral development banks (MDBs) will 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, including structural reforms, strong climate policies and commitments, well-designed subsidies where fiscal space allows, and innovative financing approaches to phasing out coal.
“High-quality, reliable, and comparable data are a prerequisite to assess and price risks and opportunities and thus 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 phasing out 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.
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