Why is investing in emerging markets critical to mitigating the impacts of climate change worldwide?
Emerging markets represent 48 percent of global emissions, are home to six billion people – 85 percent of the world’s population – and are on the front lines of the climate crisis. They also accounted for 67 percent of global GDP growth in the past 10 years. For these reasons, investing in emerging markets is critical if we want to mitigate the environmental, social and economic costs of climate change and create a more sustainable world. Forward-thinking companies, impact investors and entrepreneurs are developing innovative business models that are providing essential, affordable goods and services to underserved consumers, and helping society adapt to climate change.
Investing in emerging markets is generally higher risk. Is sustainable investing in these markets a different proposition?
At the current rate, climate inaction will cost the global economy $178 trillion by 2070. If we accelerate efforts towards net zero, however, we could add $43 trillion instead. Investing in emerging markets is crucial to making this happen. Our interconnected world collectively shares water and climate risks and rising energy and food prices. Investing in emerging markets can mitigate these issues, diversify investment portfolios and present uncrowded investment opportunities.
Emerging market funds with a sustainability emphasis have delivered slightly better returns, on average, than their traditional counterparts. For business leaders ready to solve global problems and generate long-term profitability, emerging markets are essential to their strategy.
What about sustainable infrastructure in particular?
The spectrum of climate risks requires investments in energy, digital and community infrastructure, water infrastructure, sustainable mobility and the circular economy. Infrastructure investments have grown by 350 percent over the past decade. Global investment in clean energy last year grew to $350 billion – more than twice the amount invested in coal and gas-fired power generation.
Farmers are investing in more climate-resilient agricultural practices and the green buildings market has doubled every three years for the past decade. We still have a long way to go, though. For example, only 1.9 percent of commercial finance has gone to water and sanitation infrastructure, despite the fact that two-thirds of the world’s population will face water scarcity by 2025.
What are the key barriers to entry in this space, and what can be done to create more opportunities for institutional investors?
- Barriers range from cost to lack of market knowledge to cultural and behavioural change. There’s a lot we can do to incentivise investment in sustainable infrastructure and delivery, including:
- Align fiscal policy with climate goals, and prioritise action at the intersection of ESG and impact investing.
- Remove subsidies that incentivise producing and using emissions-intensive fossil fuels, reform other energy pricing and put a price on carbon emissions.
- Forge bold public-private sector partnerships that will crowd in investments and incentivise performance standards and measurements that drive greater adoption and demand for energy-efficient, low-carbon products and services. This includes shifting focus from past performance to forward-facing risk to inform institutional investment decisions.