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Huge gap in sustainability funding for developing countries

António Guterres Reuters
UN secretary general António Guterres says investment in developing countries is essential to ensure energy transition
  • Funding gap hampering global efforts to fight climate change, UN says
  • Developing countries recorded $544bn of FDI in clean energy in 2022
  • Cost of capital, securing project finance among main challenges

Developing countries including those in the Middle East face a combined annual $2.2 trillion investment shortfall in meeting sustainability and energy transition goals set by the United Nations. 

The UN Conference on Trade and Development (Unctad)’s World Investment Report 2023, published this month, says that globally an annual $4 trillion of investment is needed to finance the transition away from fossil fuels.

The largest gaps are in energy, water and transport infrastructure. 

“Energy transition” refers to the global shift from fossil-based fuels such as oil, natural gas and coal, to renewable sources such as wind and solar, which experts have deemed necessary to reverse the effects of climate change. 

Unctad’s report found that the world’s developing countries (a UN umbrella term that includes the whole of Mena and the GCC, among other nations) need renewable energy investments of around $1.7 trillion annually. 

However, they attracted only $544 billion of foreign direct investments in clean energy in 2022, the report said.

The report added that funding needs for the energy transition in developing countries actually exceed the $1.7 trillion figure needed for renewables, and could reach as much as $2.2 trillion.

The additional requirements include investment in power grids, transmission lines, storage and energy efficiency.

More is needed

“We are at least a decade late in our efforts to combat global warming,” wrote UN secretary general António Guterres in a preface to the report.

“Investment in renewable energy in developing countries is therefore essential and often the most economical way to bridge the energy gap. 

“But while the transition to renewable energy is a global priority, investments in energy infrastructure and efficiency still fall far short of what is needed.” 

Unctad secretary general Rebeca Grynspan added: “A significant increase in investment in sustainable energy systems in developing countries is crucial for the world to reach climate goals by 2030.”

To keep temperature increases below the agreed limit of 1.5C, the world needs about 1.5 times today’s global GDP in investment between now and 2050, Unctad said. 

But investment needs are much higher in developing countries. This is because “energy investment is needed not only for the energy transition, but also to ensure access to sustainable and affordable energy for their citizens”. 

Installed capacity in renewable energy needs must increase by 2.5 times in the most advanced countries, but by closer to 25 times in developing countries.

Unequal investment

Securing project finance is another challenge, said Unctad. International investment in renewables has nearly tripled since the adoption of the UN’s Sustainable Development Goals and the Paris Agreement in 2015.

But much of this growth has been “unbalanced”, the report argued, with the rate in developing countries exceeding GDP growth “only marginally”. 

To date 31 developing countries, including 11 “less developed” countries, have yet to register a single utility-sized (large-scale) international investment project in renewables or other energy transition sectors. 

The Middle East is the worst region globally for investment into renewable electricity sources that could aid energy transition, AGBI reported last month.

Africa and the Middle East combined represented just 1.6 percent of worldwide renewables investment in 2022, according to the Renewables 2023 Global Status Report

“The cost of capital for investors in renewables and other energy transition sectors is a major disincentive” even in countries where ambitions are high, the report noted.

It said more support is needed from governments and the private sector to de-risk energy transition investment through loans, guarantees, insurance instruments and equity (from both the private and public sectors).  

“The growth of green finance in global capital markets, with sustainable bonds growing fivefold in five years, shows that the appetite among private investors to fund climate change mitigation is there,” said Unctad.

The sustainability finance market was worth $5.8 trillion in 2022, it added.

“The task now is to channel those funds to where they are most needed to support the transition.”