Extreme weather events such as flooding, heat and drought are significantly impacting the businesses of 80 per cent of corporates, financial service providers and investors in Africa, Asia and the Caribbean. This is up from just 68 per cent in 2022, according to the 2023 Emerging Economies Climate Report launched this week by British International Investment.
Approximately 60 per cent of companies, institutions and funds surveyed for BII’s third annual report have experienced an extreme weather event (flooding, drought or heat), but this figure rose to 72 per cent for corporates.
Corporates were impacted the most by climate change, with 86 per cent affected by physical and transition risks today, compared to just 68 per cent of financial services firms, which are one step removed from experiencing climate change’s real economic impacts, according to the report.
Some of the biggest impacts being felt by organisations are financial, with almost half (46 per cent) of respondents to the survey saying climate change had impacted their ability to access capital, down from 59 per cent in 2022. Access to affordable capital will be increasingly challenging for companies who do not take steps to reduce their impact on the climate, BII’s report warned.
Almost half of organisations said climate change had resulted in increased operational costs, up from 30 per cent in 2022, and 46 per cent indicated that climate change was affecting capital expenditure and allocation decisions, down from 55 per cent. In terms of the financial impact of physical risks such as flooding and drought, the report found that almost half of organisations lost on average $200,000 to flooding, while 36 per cent lost more than $1mn to drought.
Domestic finance is vital
Better investment is needed to help transition to net zero or become more climate resilient, said 98 per cent of respondents, up from 92 per cent in 2022. But Michael Jacobs, visiting senior fellow at think-tank ODI, warned that money is flowing out of the developing world and going back to the Global North because of rising interest rates.
In many emerging economies, debt repayments are now exceeding new lending, he said during the launch of BII’s report. “The big picture is negative. Around debt almost nothing is happening. Twenty-five per cent of middle income countries are in debt distress, says the IMF, with a lot of repayments due in the next two years.”
Sectors such as agriculture and farming are being hit particularly hard by climate change and the lack of availability of affordable capital, said Benjamin Njenga, co-founder and chief customer officer at Apollo Agriculture, which helps finance farmers in Kenya and Zambia. “Perceived high risk is embedded in the agricultural business and the seasonal nature of agriculture makes it unappealing to investors,” he said. “Resilience needs to be built to ensure farmers don’t fall below the poverty line.”
The most important source of finance for business in developing countries is domestic, said Jacobs. “While considerable public and private finance is available, private finance only flows to a small number of countries that are considered by investment committees, and concessional lending by multilateral development banks goes to some countries and not others. Where does the rest of the money come from? Domestic capital markets? Are you engaged with public development banks that are national?”
‘ESG rain’
Nick Robins, professor of sustainable finance at the Grantham Research Institute on Climate Change and the Environment, spoke at the launch of the report. He said one of the challenges is that entrepreneurs and investors in emerging economies see it like “ESG rain” coming from the Global North in terms of new requirements that may not be adaptable to the circumstances of these companies. “It’s important for public investors to work with companies and the local financial system to make sure ESG and climate requirements are embodied in those systems.”
Central bank monetary policy will increasingly have a role to play. “If we are seeing these climate shocks leading to increases in inflation, that is going to lead to higher interest rates and [raise] the cost of capital, which will [make it] harder for people to make the investments we need,” said Robins.
BII’s survey reported a year-on-year increase in annual climate finance flows, which reached $1.3tn in 2021/2022, almost doubling compared to 2019/2020, driven by significant acceleration in mitigation finance. But according to the Climate Policy Initiative, an NGO, climate finance needs are expected to increase to $9tn per year by 2030 and then jump to more than $10tn from 2031 to 2050.
Jacobs said pressure is building to increase development and climate finance, with leadership coming from the Global South, as the G20 is set to have four consecutive emerging economy presidencies (Indonesia in 2022, India in 2023, Brazil this year, and South Africa in 2025).
Although northern powers perceive themselves to be financially constrained, he said the pressure for recapitalisation of multilateral development banks is a source of hope. “Over the next two to three years, we’ll see more money going into development and climate finance and innovative new financing mechanisms.”
Part of the MDB reform agenda, said Jacobs, is developing country platforms, which would see different financial institutions meeting at a common place to look at a country’s investment needs.
Njenga said risk guarantees provided by the African Development Bank helped Apollo Agriculture fund smallholder farmers. “Blended financing models are very powerful,” he said. “Guarantees are able to secure working capital, which makes investors more comfortable to lend to us.”
The next few years are crucial, said Robins. “The shape of the investment curve has to be exponential. We need to have the same increase in deployment and impact across all sectors. That is the real challenge.”
