Without help from developed economies, improvement in emerging market prosperity could be halted, says Winters
India faces insurmountable challenges for net zero goals, a huge US$12.4 trillion investment on its efforts to stave off the worst of climate change, according to a study by Standard Chartered.
Comparatively, emerging markets, overall, will need an additional US$94.8 trillion – a sum higher than annual global GDP – if they are to meet climate goals without hitting citizens’ cost of living, said the study released by Standard Chartered on 5 April 2022. This is on top of the capital already allocated by governments under their current climate policies.
According to ‘Just in Time’, which investigates the transition financing gap for emerging markets and how to close it, developed market funding, where capital is provided through grants and loans, will be critical to ensure that emerging markets are able to transition without impacting their growth or household spending.
The study found that:
If the finance India needs is provided by developed markets, Indian household spending could increase by US$7.9 trillion compared to self-financing;
Indian household spending could fall by a total of US$5.8 trillion if it has to self-fund its journey to net zero;
If emerging markets fund their own transition, without help from developed markets, household consumption in these markets could fall by 5% on average each year.
Private investors can contribute US$83 trillion of the US$94.8 trillion that is required – underscoring the urgent need for financial institutions to fulfil green and transition finance pledges.
However, as shown in the bank’s previous report, The US$50 trillion Question – encouraging investment in emerging markets is a difficult task. The world’s top 300 investment firms with total assets under management of more than US$50 trillion, have just 2%, 3% and 5% of their investments in the Middle East, Africa and South America, respectively.
The bank’s ‘Just in Time’ argues that to transition in the fairest way possible, greater collaboration is required in strategy, policy and financing.
More importantly, banks need to live up to the pledges made during COP26 if ordinary households are to avoid bearing the costs of their market’s transition to net-zero.
Closing the transition finance gap
‘Just in Time’ looks at two pathways to closing the emerging market transition finance gap, self-financing by emerging markets and developed market financing, where capital is provided through grants and loans.
Emerging markets’ self-financing would lead to higher taxes and an increase in government borrowing, meaning that some of the world’s poorest people will have less to spend on their everyday needs. Households in these markets would be US$2 trillion poorer on average each year.
In total, between now and 2060, household consumption in emerging markets could be reduced by US$79.2 trillion.
However, developed market financing could see emerging market household spending increase by US$1.7 trillion on average each year (compared to self-financing) and would also stimulate global growth – GDP could be US$108.3 trillion higher cumulatively between now and 2060 if developed markets finance the transition. Emerging markets being able to reach net-zero without hampering their growth or prosperity would represent a just transition.
Standard Chartered Group CEO Bill Winters said, “Emerging markets need a great deal of investment to transition to net zero and the stakes have never been higher. Without help from developed markets, improvement in emerging market prosperity could be halted or reversed, which would not only be unjust but would have a hugely negative impact on the world economy.
“However, even more crucially, failure to deliver emerging market transition finance could mean climate goals are missed, triggering an environmental catastrophe. Governments and the financial sector need to come together to help facilitate the flow of investment into emerging markets urgently. Developed market funding could help prevent the worst of global warming, as well as stimulating global GDP.”
Standard Chartered has committed to reaching net zero in financed emissions by 2050, with interim targets for the most carbon-intensive sectors by 2030.
“We plan to mobilise US$300 billion in green and transition finance by 2030 to support the transition to net zero in the markets we can home, supported by our own Transition Finance Framework.
“We are accelerating new solutions, including through a new dedicated Transition Acceleration Team to support clients in high-emitting sectors,” said Winters. fiinews.com
