Rethinking clean energy investment in EMDEs is a dual opportunity. Here's why

There is an urgent need for emerging markets and developing economies (EMDEs) to expedite their clean energy investments. This is crucial not only to affordably and securely meet future energy demand, but also to achieve global climate goals.

At the same time, this challenge presents a tremendous opportunity to drive growth and prosperity within these countries and to reshape the narrative around the investment potential they offer.

The scale of the challenge is, however, immense. Clean energy investment in EMDEs (excluding China) must increase five to seven times to support the transition to low-carbon development pathways, from the current $270 billion annually to at least $1.7 trillion by the early 2030s. Although recent investment has grown, this is concentrated in a small number of countries and sectors with more than 90% of the increase occurring in advanced economies and China since 2021.

So far, only one-fifth of global clean energy investment has gone to EMDEs (excluding China), yet these economies currently hold more than one-third of global GDP, about two-thirds of the world’s population and are projected to account for 74% of energy consumption by 2050.

Pledges from COP28 to triple renewable energy, as well as the recent COP29 pledge on storage and grid capacity, are an important North Star, but real progress will only be possible if governments, financial institutions and the private sector work together towards the same objectives and seize the untapped potential that these regions offer.

Historically, investments in EMDEs have suffered from market volatility caused by both external and domestic factors. These factors typically include policy uncertainty, trade tensions, financial market disruptions, spillovers from weaker-than-expected growth in major economies and geopolitical risks. This has created negative return outlooks and a self-perpetuating cycle of underperformance that has deterred investments.

Despite gradual progression, most EMDEs still lack the investment-grade credit ratings necessary to attract large institutional investors and the deep capital markets needed to draw both domestic and international finance. A recent World Economic Forum study highlighted that 74% of EMDEs received a sovereign risk rating of B+ rating or lower from credit rating agencies such as Standard & Poor, Moody’s and DBRS, placing them outside of what most private investors will accept, given their fiduciary and regulatory obligations.

As a consequence, strategies aimed at generating positive impact have come to imply a trade-off between development versus profit. There is a common “aid case” narrative that surrounds the financing of clean energy in these economies. Equally, the cost of borrowing for EMDEs impacts their debt sustainability and fiscal space, which in turn delays the advancement of their green agendas.

Ultimately, as outlined in the Sharm El Sheikh Guidebook for Just Financing, financial solutions need to be equitable, accessible and affordable in order for EMDEs to overcome these challenges and to drive sustainable, inclusive growth.

The assumed dichotomy between development impact and returns does not hold weight as a concept. In fact, investing in clean energy in EMDEs has been shown to present a viable and attractive dual opportunity to enhance long-term performance and returns, while fostering sustainable and inclusive economic growth. While a wide range of research and case studies demonstrate exactly this, the information remains fragmented.

In a collective effort to debunk this misconception and highlight the compelling potential of clean energy investment in EMDEs, the World Economic Forum’s Network to Mobilize Clean Energy Investment in EMDEs that we co-chair has assembled a unique Playbook of Solutions. This platform showcases 100 replicable case studies from across 47 EMDEs that have successfully unlocked clean energy finance while delivering meaningful development impact.

The playbook is built on three pillars – policy measures, de-risking tools and finance mechanisms – each of which highlights solutions for building investor confidence and increasing capital flows by mitigating risks and fostering conditions that encourage stability.

One tangible example of this is the Africa Finance Corporation’s (AFC) initiation of an all-equity bridge financing instrument to advance the Red Sea Power (RSP) 60MW wind farm project in Djibouti. The use of all-equity bridge financing helped reduce risks associated with the project's construction and commissioning, making it more appealing to later investors, and setting the stage for future investments in the region.

Detailed analyses of national approaches also demonstrate how countries have raised billions in clean energy capital by deploying a comprehensive blend of strategies, including tax benefits, auctions, guarantees and debt swaps.

For example, by taking on a holistic approach that mobilizes multiple policy and regulatory levers, Egypt attracted enough financing to multiply its wind and solar electricity production output by 4 and 19 respectively between 2014 and 2021. Furthermore, since its launch during COP27, Egypt’s Country Platform for the Nexus of Water, Food and Energy (نُوَفِّــي) mobilized $3.9 billion of private sector investments to finance 4.2 GW of renewable energy projects, including wind and solar.

Such country-led reforms are critical for creating a conducive environment for investors and are ultimately necessary for driving sustainable development efforts at national and global levels.

EMDEs are at a pivotal point in unlocking their own economic development while ensuring a greener future for the world. With concessional funding and official development assistance still lagging behind, domestic financial resources strained and evolving geopolitical uncertainty, collaboration between three critical stakeholders – governments, financial institutions and the private sector – is crucial.

Aligning policy interventions, deploying de-risking tools and developing innovative financing mechanisms in a coordinated manner will help create attractive risk-return profiles of EMDEs for investors. Tapping into these opportunities and shifting the investment compass towards EMDEs will help stimulate the required investments and lead the way to a greener future and sustainable economic growth.