Climate Rules Need EM Focus to Avoid Investment Trap, Study Says

(Bloomberg) -- Sustainable finance rules in wealthy countries generally overlook poorer regions that most need access to cheap capital, slowing global efforts against climate change, according to a report by University College London researchers.

Access to low-cost finance is vital for developing economies to avoid a “climate investment trap” and instead transition to renewable energy, which could accelerate Africa's route to net-zero emissions by a decade, the researchers said. They criticized the European Union's sustainable finance rules for overlooking the impact of investment outside Europe and toward emerging markets.

“We don't believe it is fair that regions where people are already losing their lives and livelihoods because of the severe impacts of climate change also have to pay a high cost of finance to switch to renewables,” said lead author Nadia Ameli, an academic at the UCL Institute for Sustainable Resources. “Radical changes in finance frameworks are needed to better allocate capital to the regions that most need it.”

The use of environmental, social and governance factors to screen low-carbon investment tends to penalize countries with low democratic, transparency and human rights standards, the authors said. Investment approaches based on financial risk are also likely to count against regions more exposed to the physical impact of a changing climate.

Yet for the world to limit dangerous global warming, the location of investments in clean energy should matter, they said. While emerging-market sales of green bonds, used to fund projects to cut emissions, are seen doubling by some estimates to $100 billion by 2023, that's a fraction of a global ESG debt market worth over $3 trillion.

The researchers recommended the International Monetary Fund encourage investment in more vulnerable economies through financial assistance to compensate for physical climate risks. They praised China's green finance guidelines, for defining ways in which Chinese investors could finance a low-carbon transition overseas.

Global policy makers have a chance to set a joined-up approach at a United Nations climate summit later this year in Scotland, though Group of Seven leaders this month failed to deliver on a decade-old promise to mobilize $100 billion a year in funding to help poorer countries tackle climate change.

“There is a growing belief that, with the dramatic decline in the global average cost of renewables, it will be much easier for the developing world to decarbonise,” said co-author Michael Grubb, also of the UCL Institute for Sustainable Resources. “Our analysis shows that major obstacles remain, particularly given the difficulties that many of these countries have in accessing capital on the same terms.”

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