Developing companies seeking to transition to clean energy can't get enough money

• Developing countries want to reduce carbon emissions but need funds for clean-energy infrastructure.
• There are large gaps in capital, and the need is expected to grow to $300 billion by 2030.
• In a panel discussion at Climate Week NYC, executives from Barings highlighted financing challenges.

Developing countries are often at higher risk from the effects of the climate crisis, including flooding, drought, and extreme heat. For many governments and companies in these countries, the business of sustainability has become a major issue, with concerns about the high cost of decarbonization and the financing needed for the transition to cleaner energy sources.

In a panel discussion at Climate Week NYC on Tuesday, several executives from the investment firm Barings highlighted the financing challenges for this green transition in many developing countries (also known as emerging markets or lower-income countries).

A major issue is insufficient funding for large-scale adaptation projects aimed at reducing carbon and increasing renewable power generation. While the Paris agreement has carbon-reduction commitments from countries, it doesn't provide a plan or guidance for how to achieve them.

"We need more global coordination because it's difficult for them to face these shocks by themselves," said Kawtar Ed-Dahmani, Barings' managing director of emerging-markets debt. Developing countries that want to attract capital from private sources also don't have an organized framework to operate in, said Fergus McCormick, the director of sovereign research for the Emerging Markets Investors Alliance.

Some other factors that limit the interest for these green-transition infrastructure projects from private investors and financing issuers include a large amount of existing debt and a lack of standard measurement for how countries are mitigating and adapting to climate change. There is also the tension between the long-term horizon for installing a project and getting it running and the short-term window in which investors estimate the profitability of a loan or bond.

Two nonprivate sources of financing are transfers from wealthy developed donor countries (known as bilateral funding) and loans and grants from developmental finance institutions like the World Bank or the International Monetary Fund (known as multilateral funding). But McCormick said these aren't enough, even with promises like the $100 billion climate-finance commitment from private and public sources.

"Developing countries received only $17 billion in 2018 compared to adaptation costs of $70 billion, and these costs are expected to grow to as much as $300 billion by 2030," he said during the panel, adding that while $80 billion was raised this year, there was still a $20 billion shortfall.

One opportunity is the growing interest in "green finance." In addition to climate, green, and sustainable bonds, green finance includes investments focused on environmental, social-impact, and governance factors, known as ESG. The business of sustainable assets is growing rapidly - the Global Sustainable Investment Alliance estimated that ESG investing grew to more than $30 trillion in 2018.

But when asked about these new lending products in helping fund the transition to lower-carbon economies, McCormick was blunt in his assessment of the lack of enforcement for their claims. "The impact, the actual effectiveness of these bonds, has been absolutely minimal," he said. "It's been a huge amount of disappointment and greenwashing."

There's also a concern that developing countries aren't getting enough access to these new bonds and increasingly popular ESG funds because of low scores in one or more assessment areas. "Are we doing enough to open the market to allow emerging markets to access this pool of money, or is this a framework being set up by developed markets for developed markets that excludes emerging markets?" said Omotunde Lawal, the head of emerging-markets corporate debt at Barings. "Should we be pushing for more transition bonds?"

Ultimately, the nature of carbon emissions and how the global economy functions mean funding for clean-energy infrastructure in developing countries will only become a bigger topic for investors and developed nations. El-Dahmani said that beyond the moral imperative for rich countries to assist poorer ones, issues like global insecurity, migration, and shocks to commodities and the supply chain affect everyone.