While advanced economies rebound, the International Monetary Fund has forecast that, by 2024, output from emerging markets outside China will be as much as 8% below pre-pandemic levels.
In a time of historically low yields, the big investments required for clean energy in EMs could be viewed as an equally historic opportunity.
As our work with the International Energy Agency has demonstrated, clean energy shares have outperformed fossil fuel stocks in advanced economies by four times over the past decade.
The UK, not exactly known for its sunny skies, has installed more capacity of solar PV than the entire continent of Africa.
With a spate of warnings that climate-related risks are already priced in sovereign bond markets and will raise the prospect of future downgrades, the capital trap for emerging markets is growing tighter.
Left to its own devices, this process will reinforce a trend towards inequality in the financial system as marginal sovereigns and corporates are pushed into a vicious downward spiral of higher yields and deteriorating economic prospects.
Transition bonds are still in their infancy but comprise a promising innovation that could help bridge the gap between green ambitions and reality for many high-emitting EM issuers.
Longer term, it’s vital that domestic capital markets in EMs build their own green finance ecosystems. The competitive threats to state-owned enterprises from a global low-carbon transition are massive.
EMs cannot afford to be shut out of green finance as they struggle to gain their footing from a lingering public health crisis.