Investors have trillions to fight climate change. Developing nations get little of it

One of the thorniest issues at the United Nations' annual climate negotiations in Egypt is how to get money to low-income countries to help them cope with climate change.

Governments of industrialized countries, whose emissions have largely driven global warming, have pledged help. But public funds alone can't cover the trillions of dollars developing countries need to deal with rising temperatures.

Many private investors see big opportunities to propel — and profit from — the fight against climate change. Yet little of their money is going to poorer nations, which already bear the brunt of extreme weather despite contributing little of the pollution that fuels climate change.

"I think there the story is not good. And that's because most of the big funds — pension funds, asset managers, new tech funds — they invest in advanced economies," says Bella Tonkonogy, a director at the Climate Policy Initiative, a nonprofit that works with governments and businesses to promote economic growth while addressing climate change. "There's a lot that needs to be done to make it viable for that kind of big money now being raised to be invested in emerging economies."

A big barrier to private investment is the perception that risks in developing countries are greater than in industrialized nations. To better manage cross-border challenges like climate change, government leaders say it's time to overhaul institutions like the World Bank and the International Monetary Fund, which use money from the public sector to attract private investment to emerging economies.

But world leaders say it's also in the private sector's interest to play a bigger role in helping poorer nations deal with climate change.

"I'm not here to tell the private sector to give up caring about profits," Philip Davis, prime minister of the Bahamas, said at the U.N. climate conference. "I'm here to say that in a world of profound instability, your profits are very much in danger."

World leaders are trying to build a 'highway' for climate finance into developing countries

Investors in private markets and on public stock exchanges plowed $165 billion into climate technology companies in 2021, according to BloombergNEF, roughly equivalent to the gross domestic product of Algeria.

While it's difficult to track and compare sources of climate funding, that's vastly more money than developing countries have been getting from private investors. Of the $83.3 billion in climate financing that went to developing nations in 2020, just $13.1 billion was from private sources, according to the latest data from the Organization for Economic Co-operation and Development.

Experts say the bulk of that private funding is being used for things like energy and transport projects that are aimed at reducing emissions in developing countries. That's because they tend to create more direct revenues for investors than adaptation projects like building flood defenses, which are designed to help countries cope with warming that's already happening.

"The key opportunity area right now for private finance is very much renewable energy," says Amar Bhattacharya, who is part of an independent group of experts that was convened ahead of COP27 to advise conference leaders on how to increase climate financing. "But there isn't a kind of ready-made highway, as yet, for the flow of large private finance into emerging and developing countries' investment opportunities."

Africa, for example, accounts for a large share of the world's potential solar development but attracts just a small fraction of renewable energy investment, says Enja Sæthren, head of government affairs at Scatec ASA, a project developer with a lot of experience in developing countries. Plenty of investors are willing to back projects in Africa that produce reliable profits, Sæthren says. However, those sorts of deals can be hard to come by because they require developers with "strong market knowledge and a network to navigate different stakeholders," she says.

A lack of infrastructure is also a problem. In some places, project developers are finding they can't build at the scale they would like, because there hasn't been enough public investment to expand local electric grids, said Katie Auth of the Energy for Growth Hub, which promotes energy policies that align with countries' development goals, in Washington, D.C. in October.

That underscores the need for governments and development banks to create the right conditions for private investment.

Calls to update development banks grow louder

Multilateral development banks like the World Bank give financial and technical support to developing nations, which can help to reduce risk and attract private investors.

But many say the system needs updating to draw the private investment required to fight climate change. Of the roughly $2.6 trillion needed annually over the next few years to eliminate or offset planet-warming emissions by midcentury, 70% could come from the private sector, says Citi, the U.S. bank.

Despite their mandate to eliminate poverty, development banks tend to focus too much on avoiding risk and earnings profits, says Jacqueline Novogratz, the CEO of Acumen, a firm that invests in developing countries. What they should be doing is trying to attract as much private investment as possible to developing countries to "make real change," she says.

In October, U.S. Treasury Secretary Janet Yellen called for international development banks to rethink how they incentivize investment, especially for global challenges like climate change that span national borders. That could include issuing more grants instead of loans to provide funding. "If the global community benefits from investments in climate, then the global community should help bear the cost," Yellen said in prepared remarks at Center for Global Development in Washington, D.C.

U.S. Special Presidential Envoy for Climate John Kerry has echoed Yellen, saying the world needs to "reimagine" the system of development banks that emerged after World War II.

"Public finance is an indispensable component, mostly to unlock private investment on the scale that is needed in order to finance the energy revolution — to de-risk, to create blended finance," Kerry said in October at the Council on Foreign Relations in Washington, D.C.

"We need a greater synergy between public and private finance," Kerry added. "It's been talked about for a long time; it's got to happen."

In a joint statement at the start of the UN climate conference, a group of 10 development banks including the World Bank and European Investment Bank, said that increasing private investment in low-income countries is among their "critical priorities." The banks say they're focused on reducing financial risk and ensuring countries have plenty of attractive projects to offer investors.

For those looking for a breakthrough at this year's climate conference in the Egyptian resort town of Sharm el-Sheikh, the United Nations meetings often feature big announcements. But turning promises into action has been the problem.

"My frustration is often that we speak with these grand statements: What needs to be done, what we will stand for," Novogratz says. "What we need to do is start to put together real [investment programs], real promises, to enable those organizations that know how to execute on the ground."

A deal unveiled Monday at COP27 offers a glimpse of what that might look like.

Africa's SouthBridge Investments and the Arab Bank for Economic Development in Africa say they're creating a $2 billion fund to offer grants and loans to communities and entrepreneurs that are restoring land in Africa. Most of the money is coming from private investors. The Bezos Earth Fund is chipping in $50 million of philanthropic funding.

Ani Dasgupta, CEO of World Resources Institute, says the new investment fund is a "breakthrough" in getting money directly into the hands of local businesses and nonprofits.

"Africa is a youthful continent," Frannie Leautier, CEO of SouthBridge Investments, said in a statement. "Faced with crises, it has evolved to be the innovation factory of the Earth."