Some of the finance world’s biggest climate champions may be undone by a relatively small part of their portfolios: emerging market debt.
While many of the world’s poorest countries struggle with the economic devastation from Covid-19 and limited access to vaccines, some of the biggest asset managers and their clients continue to earn high returns on emerging market bonds. Those profits are partly why it’s so hard for developing nations to make fast progress on cutting emissions.
A new paper by researchers at University College London showed that Africa and other developing regions tend to pay a much higher cost of financing for green energy relative to fossil fuels. This creates a “climate investment trap”: Countries that must pay a higher price to green their economies might forego such investments, even if they’re the ones that will suffer the most as the planet warms.
Yet, as lead author Nadia Ameli notes, few of the sustainable finance measures in practice today, even in progressive places like the European Union, address how to get capital to poor countries. She argues that “radical changes” are needed to address this disparity.
The pandemic has made the problem more urgent as the high cost of borrowing for developing nations coincides with a plunge in state revenues. Last year, 62 countries spent more on debt servicing than healthcare, and at least 36 spent more on bond payments than education, according to Eurodad, a network of civil-society organizations that advocates for financial reforms.
The great irony is that the investment world is bursting with ESG and climate-oriented products and services hunting for assets. There is so much money chasing “green” assets, and so few opportunities, that many ESG funds are loaded with tech stocks rather than companies dedicated to the energy transition or climate adaptation.