The need to establish a bespoke climate finance initiative for emerging markets couldn't be greater.
CETFI: Catalysing Climate Finance for the Global South
The global climate crisis presents a profound challenge, demanding urgent and coordinated action across all sectors of society. Nowhere is this need more critical than in the Global South, where the impacts of climate change are most acutely felt, yet financial resources for mitigation and adaptation remain woefully inadequate. The Climate and Energy Transition Finance Initiative (CETFI) emerges as a beacon of hope in this context—a multi-stakeholder alliance dedicated to accelerating the flow of climate finance into emerging markets, where it is needed the most.
The Urgency of Climate Finance in the Global South
The Global South, encompassing many developing countries in Africa, Asia, and Latin America, is on the front lines of climate change. These regions are experiencing more frequent and severe climate events, from devastating floods to prolonged droughts, which threaten lives, livelihoods, and economic stability. Despite this, access to climate finance remains a significant barrier, with most financial flows being directed towards developed nations.
The Global South, encompassing regions across Africa, Asia, and Latin America, represents a significant portion of the world’s population and economy. Collectively, these regions are home to over 6 billion people, accounting for nearly 80% of the world’s population. The economic potential of the Global South is immense, with these regions expected to drive a substantial portion of global economic growth in the coming decades.
Moreover, the Global South is poised to be the epicentre of new sustainable infrastructure development. According to the International Energy Agency (IEA), emerging markets will account for nearly 70% of the $94 trillion needed in global infrastructure investment by 2040. This includes investments in renewable energy, sustainable transportation, and resilient urban infrastructure—critical sectors for mitigating climate change and adapting to its impacts.
According to the United Nations Environment Programme (UNEP), the annual climate finance needs of developing countries could reach $300 billion by 2030, and up to $500 billion by 2050, just for adaptation measures alone. This number of was revised during the last G20 in 2023 to well over $4 trillion per annum. However, current financial flows fall far short of this target, with only around $79 billion mobilised globally for adaptation in 2019 and 2020. This gap underscores the urgent need for initiatives like CETFI to step in and bridge the financing divide.
Given this massive demand, CETFI’s focus on the Global South is not just about addressing local needs but also about recognising the region’s pivotal role in the global transition to a low-carbon economy. The development of sustainable infrastructure in these markets will have a significant impact on global efforts to meet the Paris Agreement’s targets.
The Critical Role of Concessionary Finance
One of the key pillars of CETFI’s strategy is improving access to concessionary finance. Concessionary finance refers to financial products provided on more generous terms than the market, often with lower interest rates, longer repayment periods, or grants that do not need to be repaid. This type of finance is essential for climate projects in the Global South, where traditional financing models are often inaccessible due to high costs and perceived risks.
Emerging markets often face challenges such as limited access to capital, higher borrowing costs, and the lack of financial infrastructure needed to support large-scale climate projects. Concessionary finance can help overcome these barriers by making it easier for governments and businesses in the Global South to invest in renewable energy, sustainable agriculture, and climate resilience projects. For instance, the Green Climate Fund (GCF) has played a pivotal role by providing over $10 billion in concessional finance to projects across developing countries, supporting initiatives that would otherwise struggle to attract investment.
Tapping into Global Capital: The $120 Trillion Opportunity
Globally, asset managers control an astonishing over USD120 trillion in assets. This pool of capital represents a significant opportunity for financing climate action in emerging markets. Yet, only a small fraction of this wealth is currently directed towards these regions. The reasons for this are multifaceted, but a key barrier is the lack of structured vehicles that can effectively channel institutional capital into emerging markets.
Structured vehicles, such as green bonds, blended finance, and dedicated climate funds, can help de-risk investments and provide a clearer pathway for asset managers to allocate capital towards climate projects in the Global South. For example, the issuance of green bonds has grown rapidly, with cumulative issuance surpassing $1 trillion globally by 2020. However, the majority of these bonds are issued in developed markets, leaving emerging markets underrepresented.
CETFI aims to address this by developing and promoting financial instruments tailored to the unique needs and conditions of emerging markets. This includes creating investment vehicles that can pool resources from multiple investors, offering diversified portfolios that reduce risk and enhance returns. By doing so, CETFI seeks to unlock a significant portion of the $120 trillion managed by global asset managers, directing it towards the critical climate projects that will drive sustainable development in the Global South.
Addressing Inherent Challenges: Foreign Exchange Volatility
One of the inherent challenges in financing climate projects in emerging markets is foreign exchange volatility. Many emerging economies have currencies that are prone to fluctuations, which can significantly impact the cost and feasibility of long-term projects. This volatility adds another layer of risk for international investors, who may be hesitant to commit capital to projects in these regions.
To mitigate these risks, CETFI advocates for the development of hedging mechanisms and financial instruments that can protect against currency fluctuations. For example, the use of local currency bonds or the implementation of foreign exchange swap agreements can help stabilise returns and make investments in emerging markets more attractive. Additionally, international financial institutions, such as the World Bank and the International Monetary Fund (IMF), can play a role by providing guarantees or insurance products that cover currency risk, further incentivising investment in the Global South.
The Global Imperative: Climate Finance and International Commitments
The critical need for climate finance has been a recurring theme at major international forums, including the COP (Conference of the Parties) meetings and the G20 summits. Both platforms have repeatedly underscored the importance of scaling up financial flows to support climate action in developing countries. For instance, at COP26 in Glasgow, developed countries reaffirmed their commitment to mobilise $100 billion annually for climate finance, a target originally set for 2020 but which has yet to be fully realised.
Despite these commitments, progress has been slow, and no significant breakthrough has materialised. The lack of coordinated global efforts, coupled with the complex financial and political landscapes of emerging markets, has hindered the effective mobilisation of resources. CETFI recognises that without targeted action and innovative financial solutions, the Global South will continue to be left behind in the global transition to a low-carbon economy.
CETFI: An Initiative Led by Emerging Markets, For Emerging Markets but in partnership with the Global North
CETFI stands out as a unique initiative, not just because of its ambitious goals, but because it is led by emerging markets themselves. This bottom-up approach ensures that the solutions developed are tailored to the specific needs and realities of the Global South. By enabling collaboration among governments, financial institutions, and private sector actors within these regions, CETFI aims to build the financial architecture necessary to support large-scale climate investments.
For example, CETFI is working to establish regional climate finance hubs in Africa, Asia, and Latin America, which will serve as centres for innovation, capacity building, and the development of tailored financial instruments. These hubs will also facilitate the exchange of knowledge and best practices, helping countries within these regions to learn from one another and scale successful initiatives.
CETFI’s focus on emerging markets is not just about addressing the financial needs of these regions, but also about recognising the critical role they play in the global climate fight. Emerging markets are home to some of the world’s most biodiverse ecosystems, largest populations, and fastest-growing economies. How these regions develop in the coming decades will have a profound impact on the global climate.
Leveraging Cooperation with Developed Nations
CETFI understands that the scale of the climate challenge requires a collaborative approach, where developed and developing nations work together rather than in competition. The combined market size of the Global South and the need for infrastructure development present a unique opportunity for partnership with developed nations.
Developed countries bring to the table extensive financial resources, cutting-edge technology, and institutional experience. For instance, the Organisation for Economic Co-operation and Development (OECD) countries alone manage over $40 trillion in pension fund assets, which can be a crucial source of long-term investment capital for sustainable projects in emerging markets. At the same time, emerging markets in the Global South offer vast opportunities for impactful investments, with their rapidly growing economies, large populations, and abundant natural resources.
By partnering with developed nations, CETFI aims to leverage the strengths of both the Global South and the Global North, creating a financial ecosystem that supports sustainable development worldwide. This cooperation ensures that climate finance is mobilised at the scale needed to meet global goals, while also recognising the critical role that emerging markets will play in the future of our planet.
Conclusion: Unleashing the Power of Climate Finance
The Climate and Energy Transition Finance Initiative (CETFI) represents a bold and necessary step towards unlocking the full potential of climate finance for the Global South. By addressing the critical challenges of concessionary finance, creating structured investment vehicles, and mitigating risks such as foreign exchange volatility, CETFI aims to bridge the financing gap that has long hindered climate action in emerging markets.
As the world stands at the crossroads of climate action, initiatives like CETFI are essential for ensuring that no region is left behind. By mobilising global capital and directing it towards the areas where it is needed most, CETFI can help catalyse the transformative change required to achieve a sustainable, low-carbon future for all. With the combined efforts of governments, financial institutions, and the private sector, the promise of a resilient and climate-secure Global South can become a reality.
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