Investors: Finance Can Help Achieve Climate Goals
By Esther Pan Sloane, Guest Contributor / October 4th, 2021
Esther Pan Sloane, a U.S. national, joined UNCDF as the Head of the Partnerships, Policy and Communications in October 2016.
Prior to joining UNCDF, Esther was a U.S. diplomat for 10 years. As Adviser at the Permanent Mission of the United States to the United Nations in New York, she was on the U.S. team that negotiated the 2030 Agenda and the Sustainable Development Goals. She also served on the Executive Boards of UNDP, UNICEF, UNOPS, and UNFPA, pushing the agencies to become more efficient, effective, and accountable for results.
Esther previously served as a U.S. diplomat in China and the United Kingdom, as well as at the State Department Operations Center in Washington.
Prior to joining the U.S. Foreign Service, Esther worked as a journalist in print, radio, and magazines. Esther graduated from Stanford University with a BA with honors in English and International Relations and earned an MA in Theater and Performance from the University of Cape Town, which she attended on a Fulbright Fellowship.
Climate Week Brings Us Eye-Catching Pledges from Industry and Government
The recently concluded Climate Week at the United Nations saw eye-catching pledges from governments and companies for financing to address climate change impacts. Jeff Bezos pledged $1 billion to preserve nature; eight foundations pledged $4 billion for the “30×30” initiative to protect a third of the earth’s land and oceans by 2030.
The United States was among the governments making large pledges, with President Joe Biden pledging to direct $11.4 billion per year to vulnerable nations to combat climate change by 2024.
However, there are promises made in international meetings, and there is action. In 2009, rich countries pledged $100 billion per year to help developing countries address climate change impacts; that figure has never been met.
Poorest Countries Lack Capital But Show Great Promise for Investors
The Decade of Action to achieve the Sustainable Development Goals began with an unforeseen and unprecedented global pandemic that impacted everyone, but hit the Least Developed Countries the hardest. The more than 1 billion people who live in the LDCs already face a range of challenges. Then COVID-19 hit, causing LDC economies to shrink significantly in 2020 even while their external debt burdens and debt service obligations rose. Extreme poverty jumped from 32.2% to 35.2%, an increase of more than 32 million people, wiping out hard-won gains in poverty eradication. The pandemic reversed progress towards sustainable development in LDCs, which was uneven already before the crisis and not on a pace to achieve the SDGs by 2030.
Between October 2019 and October 2020, the economic growth forecast for LDCs fell from 5% to -0.4%. This led to a 2.6% reduction in per capita income in LDCs in 2020, with 43 out of 46 LDCs experiencing a fall in their average income levels, the worst result in 30 years.
The LDCs need capital to invest in infrastructure, human development, productive capacity and climate resilience. Yet capital is exactly what they lack. The 46 poorest countries in the world account for only 1.3% of global GDP, 1.4% of global foreign direct investment (FDI), and just 1% of global merchandising exports.
LDCs face multiple structural impediments, including low levels of productive capacity and largely undiversified, informal economies heavily reliant on agriculture and natural resources. Only 53% of the LDC population has access to energy, with this rate falling as low as 10% in rural areas in some countries.
And, in this time of ongoing health threats from the pandemic, the LDCs have an average of 3 doctors and 6 hospital beds per every 10,000 citizens.
Obstacles for Private Investors Exist in LDC Markets
LDCs face significant obstacles in attracting the private sector investments they need. Underdeveloped local capital and financial markets severely limit domestic and foreign capital for productive investments, and most LDCs lack solid pipelines of bankable enterprises and projects with SDG impacts. The international financial architecture is not designed to support the smaller and riskier investments essential to building a thriving private sector in the LDCs. Domestic and international investors alike see key barriers to investment, including high transaction costs, local currency risk, and undifferentiated perceptions of political risk, along with a lack of local market knowledge.
Shifting Global Economy, Expanding Regional Diversification
At the same time, the global economy is shifting, with private consumer markets growing throughout the developing world and increased South-South and triangular cooperation. LDCs— with their youthful populations, growing labor forces, and access to natural resources –represent markets with enormous untapped potential for economic growth.
If we consider portfolio-level climate risks in this context, the LDCs – and emerging markets more generally – offer an opportunity for both geographic diversification and innovative ways to invest for impact. Investments in frontier markets – to build digital infrastructure, expand access to clean energy, boost climate resilience and support local entrepreneurs – can lead to both financial and social gains for the people and regions that most need support.
Corporations Pressed to Address Climate Change
As investors assess the many risks climate change poses to their portfolios – including physical, transition or stranded asset risk – there is also the significant reputational risk for organizations or companies to be seen as laggards on addressing climate change, an issue that investors and consumers, particularly young people, are increasingly passionate about.
We are seeing this movement reflected in the markets. Nearly 2,000 businesses have committed or set science-based targets to reduce their carbon emissions. And over 250 asset owners, asset managers and banks — with combined assets over $80 trillion — have committed to transitioning their portfolios to net zero emissions by 2050 at the latest. They have agreed to use science-based guidelines to reach net zero emissions, cover all emission scopes, include 2030 interim targets and commit to transparent reporting and accounting.
Investors Should Reward Companies Taking Action Against Climate Change
Investors can and should reward those companies that make measurable progress on Net Zero commitments. As just one example: UNCDF has worked with the UN Secretary General’s Global Investors for Sustainable Development Alliance (GISD)— a group of 30 CEOs of some of the world’s biggest asset managers, insurance companies and pension funds— to create an Exchange Traded Fund that tracks the performance of a global equities index but contains no fossil fuels of any kind. The ETF, ticker NTZO, which will be launched October 19 at the GISD CEOs conference, is managed by Impact Shares, a nonprofit fund manager. UNCDF partnered with Impact Shares to launch the first UN-affiliated ETF in 2018, SDGA. This holds companies that create positive economic impacts in LDCs and donates its net management fee to UNCDF. The climate ETF has a similar fee donation, which UNCDF will use to help LDCs mitigate the impacts of and adapt to climate change.
As another example, UNCDF has launched blended finance funds to support small and medium enterprises in LDCs and help developing country municipalities tap the capital markets to build the critical infrastructure they need to cope with climate change. Increasingly, there are more and more financial vehicles that investors can choose to align their money with their values and create the change we all want to see.
Most Impacted, Least Responsible, Yet Key to Global Success
One of the great inequities faced by LDCs is that, while they have done so little to contribute to climate change, they are the most vulnerable to its impacts while having the fewest resources to deal with them. The latest UNFCCC report released last week raises the risk that emissions could actually increase 16% by 2030, which would cause a 2.7 degree rise in global warming by the end of the century. The report says there is “an urgent need for a significant increase in the level of ambition” of climate commitments by countries and stakeholders and identifies net zero CO2 emissions as a prerequisite for halting warming at any level. To halt global warming, to achieve the SDGs, and to ensure a better life for the 1 billion citizens of the LDCs, we must act.
The time is now. We have the tools, and there is no time to waste.