Green Finance Engagement Team
The energy transition is a global challenge, but when it comes to financing, not all regions are on equal footing. While investments in clean energy continue to grow in advanced economies, emerging markets and developing economies (EMDEs) are being left further behind.
This growing disparity between regions threatens to undermine global climate goals, leaving billions of people increasingly vulnerable to the worsening impacts of climate change and energy insecurity.
In this post, we explore the regional investment gap, the barriers hindering progress in EMDEs, and how green finance can help level the playing field.
A World of Unequal Investment
The International Monetary Fund’s World Economic Outlook database divides the world into advanced economies and emerging market and developing economies, based on the main criteria of 1) per capita income level, 2) export diversification and 3) degree of integration into the global financial system.
Emerging markets and developing economies account for the majority of the global population, yet receive only a small share of global clean energy investment.
The share of clean energy investment in emerging market and developing economies outside of China accounted for just 15% of the total, even though these economies account for two-thirds of the global population and one-third of global GDP, according to the International Energy Agency (IEA)World Energy Outlook 2024.
Investment in clean energy projects increases in all parts of the world in the IEA’s Net Zero Emissions by 2050 (NZE) Scenario, but the regional imbalances mean that the required increase is particularly steep in emerging market and developing economies other than China.
In the NZE Scenario, annual spending on clean energy doubles in advanced economies as well as China by 2035 compared with 2023 levels. For other developing economies, clean energy investment needs to grow more than six-fold during the same period.
Source: IEA World Energy Outlook 2024
This means that achieving the Net Zero Emissions by 2050 (NZE) scenario requires a dramatic increase in clean energy investments in EMDEs, where the needs are the greatest.
However, several barriers hinder investment in EMDEs. Political instability, weak regulatory frameworks, and currency volatility make projects in these regions riskier for investors. Access to affordable capital remains one of the largest barriers to investment in clean energy projects and infrastructure in many EMDEs, with financing costs in these regions at least twice as high as in advanced economies and China, according to the IEA’s World Energy Investment 2024 report.
The lack of local-currency lending pushes up borrowing costs, and high hedging costs often make this financing unaffordable to many of the least-developed countries, according to the IEA.
Many EMDEs also lack the grid infrastructure needed to integrate renewable energy at scale, while inconsistent or unclear energy policies create uncertainty that deters private investment.
Without targeted action, these challenges will deepen the divide between developed and developing economies, slowing the global energy transition. International collaboration will be essential to mobilise the necessary investments in these regions.
How Green Finance Can Bridge the Gap
To close the investment gap in
EMDEs, green finance must play a central role. Here are some key solutions that
could bridge the gap:
Blended finance mechanisms can reduce risks for private investors in EMDEs by combining public and private capital. For example, concessional loans from development banks can make projects in high-risk regions more attractive to private investors.
International climate funds like the Green Climate Fund (GCF) and the Climate Investment Funds (CIF) are designed to channel funding to countries and sectors most in need. These funds help EMDEs finance renewable energy projects, grid upgrades, and energy access initiatives.
Policy and regulatory support from governments in EMDEs can attract investment by creating stable, transparent regulatory environments. Policies like feed-in tariffs and tax incentives, as well as power purchase agreements, can reduce investor uncertainty.
Private sector engagement is crucial, with institutional investors such as pension funds and asset managers increasingly allocating capital toward sustainable investments. Encouraging more private sector participation in EMDEs will be critical to scaling clean energy financing.
Capacity building is essential. Beyond financing, EMDEs need technical assistance to develop bankable clean energy projects. International organisations and development banks can provide expertise to help countries design and implement effective projects.
The Cost of Inaction
Failing to close the investment gaps in EMDEs will have global consequences. Without sufficient funding, these regions risk being locked into fossil fuel dependency, which would make it virtually impossible to achieve global climate targets. Furthermore, the energy inequities between developed and developing economies would deepen, leaving billions without access to clean and affordable energy.
Green finance offers a pathway to address these disparities. By mobilising capital at scale and directing it toward high-impact projects in EMDEs, the world can ensure that no region is left behind in the energy transition.
Key Takeaways:
- EMDEs outside China receive only 15% of global clean energy investment despite representing two-thirds of the global population
- Investment in clean energy must grow more than six-fold in developing economies (excluding China) by 2035 to meet net-zero goals
- Policy reforms and capacity building are crucial for attracting private investment into EMDEs
Looking Ahead
The investment gap is just one piece of the puzzle. In the next post, we’ll explore how green finance is driving the rapid expansion of renewable energy, from solar farms to wind turbines, and the critical infrastructure upgrades needed to support them.
Stay tuned as we continue to uncover the transformative power of green finance in achieving the global energy transition.
