To achieve the transition to Net-Zero emissions by 2050 will require substantial climate mitigation investment in Africa and other emerging market and developing economies, which currently emit around two-thirds of greenhouse gases.

According to the International Monetary Fund (IMF), these countries will need about $2 trillion annually by 2030 to reach that ambitious goal.

This is based on the international financial institution’s October 2023 Global Financial Stability Report.

The majority of that funding, IMF says, will be flowing into the energy industry, which is a fivefold increase from the current $400 billion of climate investments planned over the next seven years.

About 80 percent of this investment, IMF says, needs to come from the private sector, and will rise to 90 percent when China is excluded.

“We project that growth in public investment, however, will be limited, and that the private sector will therefore need to make a major contribution toward the large climate investment needs for emerging market and developing economies. The private sector will need to supply about 80 percent of the required investment, and this share rises to 90 percent when China is excluded,” IMF says.

“While China and other larger emerging economies have the necessary domestic financial resources, many other countries are missing sufficiently developed financial markets that can deliver large amounts of private finance.

Attracting international investors also faces hurdles, as most major emerging market economies and almost all developing countries lack the investment-grade credit ratings that institutional investors often require. And few investors have experience in these countries and are able to take the higher risk.”

The international financial institution listed reliance on coal-fired plants by these countries as a major  challenge, adding that most of the power plants in emerging market and developing economies are still relatively young and will require huge private investment to retire or re-purpose them.

“Phasing out coal power plants, the single largest source of global greenhouse gas emissions (about 20 percent), is another major challenge. Most of power plants in emerging market and developing economies are still relatively young. Retiring or re-purposing them requires large amounts of private investment and public support. Some countries are highly dependent on coal and would need to develop alternative sources of energy relatively quickly.

“Beyond these challenges, climate policies and commitments at most major banks are still not aligned with net-zero climate targets, even when they do have policies intended to reduce emissions.

“Meanwhile, though a growing number of investment funds prioritize sustainability, this isn’t having much effect on how much money is being provided for large climate needs. Only a small portion of such funds explicitly aim to create a positive climate impact. The much larger number of funds that make investment decisions based on environmental, social, and corporate governance factors don’t necessarily focus on climate issues.

They typically consider ESG scores in their portfolio allocations, but these aren’t necessarily designed to reflect climate impact as we show in our latest Global Financial Stability Report. More impact-oriented investment portfolios could be quite different from the popular ESG-oriented ones.

“Furthermore, lower-middle-income and low-income countries are generally not rewarded for good environmental and climate policies. Credit rating agencies’ assessments of these economies fall short of fully reflecting these countries’ preparedness to a low-carbon transition or their exposure to stranded asset risks because of high level of hydrocarbons. The financial industry still lacks clarity on what constitutes good sovereign performance on environmental issues,” IMF says.

It explains that a broad mix of policies is needed to create an attractive investment environment and unlock the necessary private climate finance in emerging markets and developing economies.

IMF notes that carbon pricing can provide an important pricing signal for investors, but it faces political hurdles of implementing it on a broad-enough scale.

“A number of additional financial sector policies are necessary. Structural policies aimed at strengthening macroeconomic fundamentals, deepening capital markets, and improving governance are a fundamental part of the policies mix. They can help improve credit ratings and lower the cost capital.

And they can increase the domestic financial resources available in a given country. Investors require better climate-related data to make investment decisions. Innovative financing solutions such as blended finance and securitization instruments should be employed to initiate a managed phase out of coal power production,” the international financial institution says