Global clean energy investment surge risks leaving some nations behind
Generation Investment Management
Generation is a pure-play sustainable investment manager. It is all we do. It is all we will ever do.
While China, Europe and the United States lead the way in sustainable finance, many countries in the Global South are struggling with funding and risk being left behind, laying bare an urgent need for innovative financing.
We read and hear so much about sustainable investments and projects that it’s easy to assume progress is being made across the board.
In fact, clean investment is overwhelmingly directed toward three economies: China, Europe and the United States, with positive headlines and successful initiatives in those regions masking a growing global imbalance that needs to be addressed urgently [1].
This investment divide between the North and South is threatening our collective progress toward limiting global warming. While some nations are making considerable headway – channelling unprecedented funds to renewable technologies – others are being left behind, struggling to attract investment. And when they do secure it, those countries face prohibitively high borrowing costs.
What’s needed is careful and creative thinking around different and innovative ways of financing, as our Chairman Al Gore and Senior Partner David Blood write in Generation Investment Management’s latest Sustainability Trends Report.
International investment in renewable energy has increased substantially since 2015 [2], masking this yawning geographical gap.
As huge strides have been made in the biggest economies, more than 30 developing countries haven't received any international investment in utility-sized renewable energy generation since the Paris Agreement entered into force in 2016 [3]. Clean energy investment in emerging and developing economies outside China needs to increase to $1.6 trillion by the early 2030s, from around $270 billion now, according to the International Energy Agency [4].
Making sure developing and emerging economies have the finance they need to transition is essential because our climate goals are already at risk, and meaningful progress can only be achieved with comprehensive action from all corners of the world.
Richer nations have made some pledges of support, but their actions have fallen far short of what is required, and the gap between what’s promised and what’s delivered is often significant. The result is that many countries in the Global South are struggling to finance their energy transitions and at the same time struggling to cope with the impacts of climate change [5].
International investment
The poorest countries rely on international investors and are perceived as higher risk, making them less attractive compared to other regions and pushing up the cost of borrowing.
And while evidence shows investor interest in renewable energy is robust, other critical areas – like power grids, power storage and energy efficiency – are often overlooked, even though they may need more investment [6].
Mind the gap: the North-South divide in investing in clean energy is evident here.
Risk premium
One reason behind the hesitancy to commit capital is the perceived higher risk of projects in developing and emerging markets, which in turn means that most investors demand higher returns.
The result is a higher cost of capital in the Global South, making sustainable projects there less competitive, compared to fossil-fuel alternatives that have more established financing mechanisms and risk mitigation strategies in place.
To illustrate this, the IEA calculated that the cost of capital for a utility-scale solar PV plant in 2021 was between two and three times higher in key emerging economies than in advanced economies and China [7]. It said that many countries are caught in a trap “with less developed financial markets deterring investment, and a lack of projects preventing the establishment of reliable pricing benchmarks.”
Subsidies are another blocker, with data showing that in 2022 global fossil fuel subsidies reached a record $1 trillion, eight times the amount allocated for renewable energy [8].
While investments in clean energy are growing, investment in fossil fuels is also holding strong.
Countries in the Global South can often struggle to present investment-ready or “bankable” projects that meet international standards, and that means delays and missed opportunities for funding.
Cooperation counts
To solve this, international investors, governments and multilateral development banks can pull together. Bringing multiple investors together spreads risk, brings costs down, strengthens multilateral partnerships and allows for sharing of resources and expertise.
Broader knowledge sharing is also crucial, so different regions can exchange best practices to create a more inclusive and efficient transition.
Additionally, developed nations must fulfil and expand their climate finance commitments to support developing countries, something that’s so far proven difficult to achieve.
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Financial innovation
More can also be done to drive finance and close the gap, and this is clear when we look at successful examples.
Combining public and private capital to de-risk investments in a blended finance approach is one way to attract more private sector participation, as are risk-sharing mechanisms that use guarantees or provisions to mitigate potential investor risks. Green bonds can be tailored to specific sectors and regions.
Working toward an agreed set of globally consistent standards and reporting frameworks – something Generation Investment Management has continually advocated for – should also help to shore up investor confidence [9].
Where are the bright spots?
Despite the challenges, some initiatives offer examples of potential paths forward.
The Africa Agriculture and Trade Investment Fund supports climate-resilient agriculture [10]. In India, the Solar Cities programme, supported by the World Bank and the Green Climate Fund, combines concessional loans and technical assistance for rooftop solar projects and energy-efficient street lighting [11].
Another cause for hope is the increasing push for mandatory sustainability disclosures, driven by regulators and initiatives like the International Sustainability Standards Board, which could help steer capital into the developing world.
As companies are required to disclose detailed information on their sustainability-related risks and opportunities, investors will have access to more consistent and comparable data. And this transparency will enable investors to make more informed decisions, directing capital towards businesses that can make the most difference and geographical areas that are most in need [12].
The way forward
An innovative and strategic approach can help address the complexities and disparities in sustainable investing. The global finance community will continue to advocate for policy changes, develop new funding solutions and seek out investment opportunities in underrepresented markets.
Ultimately, for us to reach our climate goals, we need to close this gap, and fast.
Read our full Sustainability Trends Report to find out more about where the world is on its journey to a cleaner future.
[6] Morgan Stanley
[9] PwC