International capital markets as a means of financing climate action: smooth sailing or stormy waters?

Launch of a new study on International Capital Markets as a Means of Financing Climate Action: Smooth Sailing or Stormy Waters?

While capital markets hold great potential for mobilising the vast sums required for climate mitigation and adaptation – estimated at $3 trillion annually by 2030 for emerging and developing economies (EMDEs) excluding China – their volatility presents significant risks to EMDEs.

At this event, Alex Dryden and Ulrich Volz will present the findings of a new study on the role that international capital markets can play in financing climate action in EMDEs as well as the risks associated with this. Their analysis highlights the risks that EMDEs face when borrowing from international capital markets and how these are further compounded by climate change.

The study also discusses potential solutions to mitigate these risks, including enhanced bond structures to bring down the cost of capital, and the establishment of a sovereign debt restructuring mechanism to enable swift resolution of sovereign debt problems when they arise. Still, they argue that for many low-income and lower middle-income countries, the financing of climate action through international capital markets will be too large a risk to take. 

As an alternative, they propose to use existing multilateral institutions like multilateral development banks or international climate funds to tap international capital markets at scale to on-lend to vulnerable EMDEs at rates that are more sustainable than what international capital markets would charge when lending directly. 

A further option would be the establishment of a new Finance Facility against Climate Change that would raise capital from financial markets on behalf of low-income and lower-middle-income countries and pass it on as grants or at highly concessional loans. Additionally, strengthening domestic financial resource mobilisation via local currency bond markets and public development banks could reduce dependency on foreign currency financing and address the structural problems behind the high cost of capital facing EMDEs.

The study is the outcome of a research project supported by GIZ on behalf of the German Federal Ministry for Economic Cooperation and Development.

Speakers

• Alex Dryden, Doctoral Research Fellow at the Centre for Sustainable Finance at SOAS, University of London
• Ulrich Volz, Professor of Economics and Director of the Centre for Sustainable Finance at SOAS, University of London

Header imagre credit: Roan Lavery via Unsplash.