As the leaders of the World Bank and the International Monetary Fund meet this week, they have the opportunity to reimagine how the world can use finance to reduce the risks of climate change.
For economies working towards the goal of achieving a net zero world by 2050 – a world where we have eliminated as much of our carbon emissions as we produce – a huge obstacle will be mobilizing enough private investment to help developing countries do their part. Over the next decades, emissions from fast-growing emerging markets such as Brazil, India, Indonesia and South Africa are expected to grow faster than those from wealthy countries like the United States, members of the United States. the European Union and Japan. If this happens, the whole world will be overwhelmed by the effects of climate change.
Achieving the net zero transition will require unprecedented levels of investment in technology and infrastructure. Investments in low carbon projects in poor countries will have to total more than $ 1 trillion per year, more than six times the current investment rate of $ 150 billion.
Governments cannot finance this scale of investment on their own, and emerging markets have struggled to attract private capital. Institutional investors, such as pension funds and insurance companies, fear placing people’s savings in markets where there may be concerns about political stability, credit risk and the enforceability of contracts. These types of investors have a duty to act in the best financial interest of their stakeholders. Making emerging markets a viable option for institutional investors will require structural reforms that take many years – time that the world does not have.
So how do you get the necessary investment levels on time?
Rich countries need to spend more taxpayer dollars driving the net zero transition overseas. Their current efforts, though growing, are insufficient – the current level of climate investment in emerging markets includes only $ 16 billion in grants per year from governments in developed countries.
According to research from my company, BlackRock, stimulating $ 1 trillion per year in public and private investment to reduce emissions will require nearly $ 100 billion in subsidies or subsidies from countries that can afford it. enable, such as members of the Organization for Economic Co-operation and Development and China. While the figure seems daunting, especially as the world recovers from the Covid pandemic, failing to invest now will result in higher costs later.
The climate catastrophe will not respect national borders. Without global action, every nation will bear enormous costs due to global warming, including damage from more frequent natural disasters and supply chain failures. Investing $ 100 billion in public funds every year for the next 20 years would avoid costs of at least 10 times that amount – the likely consequence if we fail to meet the 2050 target for zero net.
A key part of increasing the scale of capital needed to bring emerging market economies to net zero will be to use public finances to raise more private capital. Public funding in the form of grants and subsidies can absorb some of the risks associated with investing in emerging economies. They can make climate projects a viable option for institutional investors.
Today, the amount of private capital raised for each grant or grant is dismal. The World Bank and other multilateral development banks estimate that for every dollar of public capital they have lent, they attract, on average, less than a dollar of private finance. By sharing some of the risks that deter private investors from investing, public finance can help make emerging markets a realistic proposition for private investors.
Multilateral institutions like the IMF and the World Bank are often criticized for being slow to adapt to crises. An alternative is to design new financial institutions to deploy capital to fight climate change.
But I believe it is possible to reinvent existing multilateral development banks, multilateral agencies and climate funds so that they can more effectively channel grants and subsidies from developed countries. We need to leverage the local knowledge of these institutions and invest in solutions such as green banks that can take that capital and mix it with international public and private funding.
My hope is that the leaders meeting now in Washington are ready to be bold and push international bodies to reconsider their approach to climate finance for poor countries. Hurry up.
Larry Fink is the President and CEO of BlackRock.
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