IMF says private sector needs to shoulder most of climate investment burden

Most of the $2 trillion in annual climate investments in developing countries needed by 2030 will have to come from the private sector, the IMF said, warning that governments risk high debts if they try to reach net-zero goals with public funds.

The take

Climate finance will be one of the dominant topics at the International Monetary Fund and World Bank annual meetings next week in Marrakech, Morocco, and two chapters of the IMF's forthcoming Fiscal Monitor and Global Financial Stability Report (GFSR) both point up the need to pave the way for private investors to shoulder the burden. Government finances in emerging market and developing countries are already strained by years of COVID-19, spillovers from Russia's war in Ukraine, drought and natural disasters.

By the numbers

Of the $5 trillion in annual investments needed globally by 2030 to meet net-zero emissions goals, $2 trillion will need to be made in emerging markets and developing economies.

The IMF's GFSR estimates that the private sector will need to provide about 80% of these investments. This share rises to 90% when China is excluded, due to Beijing's ample state resources.

The Fund's Fiscal Monitor estimates that relying on public spending to fund de-carbonization investments on this scale would cause a massive, unsustainable run-up in debts, possibly to 45% to 50% of gross domestic product for a large, high-emitting emerging market.

Key quotes

"We project that growth in public investment, however will be limited, and that the private sector will therefore need to make a major contribution toward the large climate investment needs for emerging market and developing economies," authors of the GFSR said in a blog post.

"While no single measure can fully deliver the climate goals, carbon pricing should be an integral part of any policy package," Fiscal Monitor authors said.

Next steps

The IMF recommends that to mitigate the debt run-up caused by public climate investments, countries develop carbon pricing schemes to raise revenue and encourage more private investments. In countries where carbon pricing is a political non-starter, such as the United States, alternative measures such as emissions taxes should be enacted.

While investment funds dedicated to environment, social and governance (ESG) investing are growing, funds dedicated to climate impact, including retiring high-emitting sources, are small. Regulators need to tighten rules for ESG labels to better align with climate objectives, the Fund said.

The IMF also recommended that countries take steps to improve their overall investment climates by strengthening macroeconomic fundamentals and deepening domestic capital markets to improve credit ratings.