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Emerging Markets & The Transition to Net Zero - Can We Make it?

Reaching Net Zero globally is no easy feat, in which Emerging Markets will struggle the most and many of these countries will require financial and technical support from more developed markets across many sectors.


This decade is regarded as the decisive decade; global temperatures have already risen by 1.1 - 1.3 degrees (IPCC 2021). The actions taken now to help Emerging Markets make the transition to net zero will contribute in determining the fate of our climate.

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Many Emerging Markets within developing nations currently exist on the front line of the climate crisis. These countries are often subjected to extreme environmental and climate conditions, such as excessive heat, droughts and poor air quality. Consequently, it is no surprise that these markets have become a desired destination for impact investment projects, many of which aim to provide environmental, social and economic benefits domestically and regionally.


Financial barriers act to prevent sustainable development, one of which is the use of ‘adaptation’, or 'adaptive technologies' that alter current infrastructures to mitigate the climate crisis. Technologies, investments, infrastructures and innovations which encourage climate adaptive measures such as natural solutions projects often receive much attention in the sector.


However, the benefit of these technologies is limited as some of these investments reflect a ‘growth first, green up later’ model which does not provide long term sustainable development, by its very nature. Investments and innovations of this type and scope are still important in mitigating the effects of climate change but these investments aren’t necessarily created with long term sustainability as a priority and therefore will not provide optimal long term benefits.


Natural solutions projects are generally considered as more successful adaptation projects that provide low cost risks as well as providing climate benefits and are often situated in Emerging Markets to provide a buffer against the physical effects of climate change. However, out of 1700 surveyed adaptive investments including those other than natural solutions, only 3% reported definite environmental benefits to their local communities. (United Nations Environmental Programme 2021).


Whilst this could be because the benefits of natural solutions may only be seen long term (for example, a tree planting project may not see the benefits for 20 years), some faults can be related to the legitimacy, management and instances of 'green washing’ of these projects.


Not only is adaptation a large feat, but it is expensive. The current cost of adaptation to net zero for emerging markets is a significant barrier and in 2018 was valued at around 70 billion USD. The funding gap in 2018 for this transition summed around US$53 billion which needed to be met in order for emerging markets to successfully make the transition to net zero. Mobilising finance of developed markets in order to meet this gap and overcome the financial barrier is key, alongside additional policy guidance and cooperation and capacity development support from other countries.



The Paris Agreement led to the creation of Nationally Determined Contributions (NDCs) which are voluntary actions or targets which parties plan to undertake and communicate the progress of in order to tackle climate change (European Capacity Building Initiative 2018). These NDCs require outside finance and investment in order to be fully achieved, further stretching funding gap within the sustainability sector. Mobilising private sector finance and using impact investment to the advantage of emerging market countries may aid relief of the funding gap as these investments may not only contribute to the NDCs but will also provide other socio-economic and environmental benefits to domestic Emerging Markets.


Unsurprisingly, current investments in Emerging Markets are largely falling short in terms of what money is required to make the transition for net zero.


It is estimated that US$1 trillion will have to be mobilised and invested, from both public and private sectors, in order for Emerging Markets to successfully make the transition to net zero by 2050, whereas the current U.N. target is to utilise US$100 billion to solve the same issue will be comparatively insufficient (Black Rock Investment Institute 2021).

Many impact investees, particularly innovative ones such as the likes Mr. Green Africa (MGA) , a sustainable development-related investment run through the coordination of Water Unite Impact, often reap benefits across multiple sectors and multiple Sustainable Development Goals (SDGs).


MGA’s business model uses the logic of a circular economy to remove plastic from the environment, process and repurposes the plastic into usable materials and allow access to the products through a tech enabled platform. Furthermore, through international cooperation with organisations such as Unilever, MGA has worked to review its entire end to end supply chain in order to produce a product that can be recyclable, even at the end of its 'life cycle'.


Through its model, MGA has positive contributions for 10 SDGs which can be divided into 4 factions of impact:

  1. Environment – removing plastic waste from the local environment by creating domestic job opportunities for plastic pickers (SDGs 13, 14 & 15)

  2. Waste workers – legitimises employment into a formal value chain with fair pay and safety measures (SDG 1, 3 and 8)

  3. Fast moving consumer goods (FMCG) customers - stabilising the price and ensuring the quality of the product whilst allowing access through its tech-enabled platform (SDGs 8, 9 and 17)

  4. Impact on consumers - responsible consumption leading to economic growth (SDGs 8, 11 and 12)


These forward thinking, multi-dimensional and multi-sectoral investments are vital in providing long term, sustainable benefits to emerging markets and will be a necessity in the transition to net zero.




 

Author: Charlotte Macdonald

Editor(s): Neil Sandy


Wellers Impact is a UK-based, FCA-Regulated Impact Investment Manager which works to unlock community-focused impact through SDG-focused impact investing. Through innovative investment models that utilise fair economics, Wellers Impact originates investment opportunities across three core business activities; real estate developments in partnership with local land-owning not-for-profits in East Africa, financial support for agriculture firms and supply chains globally through sustainable development finance and direct investment into private water, sanitation and plastics recycling firms globally. Investment involves risk. Suitable for Sophisticated, Professional and High Net Worth Investors only.


References

Black Rock Investment Institute, 2021. How to finance the net-zero transition in emerging markets. [online] Black Rock Investment Institute. Available at: <https://www.blackrock.com/corporate/literature/whitepaper/bii-the-big-emerging-question-2021.pdf>.


IPCC (Intergovernmental Panel on Climate Change), 2021. Climate Change 2021 - The Physical Science Basis (Summary for Policy Makers). [online] IPCC, p.7. Available at: <https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf>.


Mr. Green Africa. 2021. [online] Available at: <https://www.mrgreenafrica.com/>.


Taibi.F-Z, Konrad.S,. 2018. Pocket Guide To NDCs Under The UNFCCC. [online] ECBI, NDC Partnership, GIZ, UNEP DTU Partnership. Available at: <https://pubs.iied.org/sites/default/files/pdfs/migrate/G04320.pdf>.


United Nations Environment Programme. 2021. Step up climate change adaptation or face serious human and economic damage – UN report. [online] Available at: <https://www.unep.org/news-and-stories/press-release/step-climate-change-adaptation-or-face-serious-human-and-economic>.