Introduction

The OECD’s 2023 report provides an analysis of investment requirements and risk management for green transitions in emerging markets (EMs). It underscores the urgent need for significant green finance, highlighting that EMs account for two-thirds of global greenhouse gas emissions despite low historical and per capita emissions. To facilitate a smooth transition to low-emission economies, substantial investments in sectors like energy, agriculture, transport, and infrastructure are essential.

Context

The report was discussed at the G20 International Financial Architecture Working Group in June 2023 and revised based on feedback. It highlights the lack of green investment flows to EMs, a priority for the Indian G20 Presidency. The study uses data from Morningstar, focusing on the role of global capital markets, especially investment funds, in financing climate transitions in EMs.

Green investment flows to EMs

• Sustainable investment increase: Global sustainable investment has risen, but EMs have yet to benefit significantly.
• Defining green funds and assets: The report analyses green funds’ investments in EMs, finding these investments scarce and unevenly distributed. Only a small share of total equity and bond investments in green funds goes to EM companies.
• Diversification: Broader EM equity funds, while geographically diversified, invest little in green companies.

Drivers of low allocation of green investment to EMs

• Risk perceptions: Investments in EMs are seen as riskier due to various factors, including weaker institutions and governance, higher political and economic instability, and inadequate ESG ratings and disclosures.
• Structural trends: Structural issues in global capital markets, such as ownership concentration and index-driven investing, hinder green investments in EMs.

Further Areas of Work

The report outlines several policy recommendations to enhance green investments in EMs:

• Capital flows and financial market structure: Conduct granular analysis to understand green investment drivers in EMs, evaluate capital flow volatility, and accelerate capital market development in EMs.
• ESG ratings: Improve data quality, disclosure, and transparency of ESG ratings. Enhance methodologies to align financial and environmental materiality.
• Capacity building: Build capacity among financial sector actors, ESG rating companies, and institutional investors.

Recommendations

The report suggests fostering data quality and transparency on ESG and green investments. It also recommends developing domestic investor bases in EMs, sharing risks through public financing, and improving the transparency and methodologies of ESG ratings.

By addressing these issues comprehensively, the report aims to create a conducive environment for attracting and managing green investments in EMs .