Art by Valeria Petrone
Investors seeking clean energy investment opportunities globally are eyeing a new initiative announced at the World Economic Forum’s annual gathering in Davos, Switzerland, last month that could help put a spotlight on developing economies’ clean energy needs and their potential projects.
The WEF outlined the creation of a new platform designed to aid developing economies. In the “Network to Mobilize Clean Energy Investment for the Global South,” more than 20 CEOs and government ministers from countries including Colombia, Egypt, India, Malaysia, Nigeria and South Africa, will work together in an attempt to “accelerate clean energy capital solutions in emerging market contexts,” according to the announcement.
The WEF further described a collaborative approach that includes “innovative policies, new business models, de-risking tools and finance mechanisms,” as well as a place to “exchange best practices for attracting sustainable flows of clean energy capital.”
Whitney Sweeney, an investment director for sustainability at Schroders who is based in New York City, is hopeful that attempts such as the WEF’s platform can help investors better understand, and potentially mitigate, investment risks that could eventually lead to greater interest in clean energy investments in developing countries.
“It’s early and a little light on details, but it’s absolutely a positive step toward accelerating the speed and scale of the energy transition,” Sweeney says. “There are opportunities, of course, but there are always risks when we’re talking about emerging markets. For while the potential for high returns exists, emerging markets also come with risks, including political instability, regulatory changes and currency volatility.”
WEF Seeking Triple the Investment
While clean energy investing has increased in recent years, it has been concentrated geographically and focused more on developed countries and China, with developing economies accounting for less than one-fifth of global clean energy investments, Sweeney notes. Such investing in developing countries in the Global South needs to triple and reach a range estimated from $2.2 trillion to $2.8 trillion annually by the early 2030s, up from the roughly $770 billion per year currently focused on such countries, according to the WEF.
While specifics have not yet been outlined, the WEF published a report at the same time the new platform was announced, “Building Trust through an Equitable and Inclusive Energy Transition,” that highlighted the importance of focusing investment in “countries, regions and communities where it can have maximum positive impact.” It also called for reimagining “established financing and investment approaches to bridge the gap between available capital and the needs of emerging and developing economies, as well as addressing energy poverty in advanced economies.” The report also suggested there may be a need for the creation of “regulatory and fiscal policies, and targeted interventions that address the needs of vulnerable communities.”
“If we’re going to have a successful realization of the energy transition, it’s going to rely very heavily on inclusivity,” Sweeney says.
Addressing risks is part of the aim of the new platform, according to Samaila Zubairu, president and CEO of the Africa Finance Corp., who together with Rania Al-Mashat, Egypt’s minister of international cooperation, will chair the network.
“The perception of high risk has deterred investments in emerging markets, particularly in Africa, over the years; yet, from where I sit, there is no shortage of de-risking instruments and bankable projects that not only deliver profitable returns but also accelerate development impact,” said Zubairu in a prepared statement. “Mobilizing investment for the energy transition is now more urgent. It is time for us to shift the narrative surrounding the financing of clean energy in the Global South from an aid case to a viable investment opportunity, without which we will not reach global net zero.”
Minimizing Increased Risks
Bruce Usher, a professor at the Columbia Business School and the faculty director of the Tamer Center for Social Enterprise, also sees the need to focus on boosting investment in developing countries, since the developed world is farther along in both reducing current emissions and limiting further emissions.
“The challenge is that in developing countries, commercial capital is not available for decarbonization,” Usher says. “The risks are greater in developing countries, as sovereign risk is high, especially foreign exchange risk.”
When it comes to climate change solutions, given the long-term nature of most clean-energy investments, a commensurate long-term currency risk is the most critical for investors to grapple with, Usher says. One of the challenges in the developing market is not just that the risks, such as sovereign and currency, may be higher, but also that there is a lack of experience for most commercial institutions. He sees the opportunity for blended finance or a public-private partnership to help ease concerns, should such an effort emerge from the new platform that could help attract capital while potentially reducing risks. While it is not clear exactly how the new platform will function, he suggests that a foreign exchange guarantee, for example, could match the life of renewable energy project investments.
“I would keep an eye on it, because when those tools are available, they’re going to open up some attractive opportunities,” Usher says.
Tags: Africa Finance Corp., Bruce Usher, Clean Energy, Climate Change, Emerging Markets, energy transition, Rania Al-Mashat, Samaila Zubairu, Schroders, Tamer Center for Social Enterprise, Whitney Sweeney, World Economic Forum