Why green investments in emerging markets offer distinctive opportunities for investors

Investors and governments focused entirely on reducing the carbon footprint of the US, Europe, and China overlook one critical factor – climate change knows no geographical boundaries. While these economies have generated the most carbon emissions and are pursuing ambitious targets for decarbonisation, rising consumption in developing countries threatens to undo all progress.

If a green transition only happens in the West and China, modelling suggests that South Asia, Southeast Asia and Africa will account for 64% of global emissions by 2050. This figure could grow to 73% if these economies experience higher-than-expected GDP growth. In short, unless these markets transition to greener economies and growth, it will be impossible to achieve the goals of the Paris Agreement.

No one country or industry is at fault nor responsible for finding a solution. Global leaders from all fields must chart a path towards a common goal. The recent Climate Finance Mobilisation Forum is a key example. The Forum convened around the meeting of King Charles III with US President Joe Biden, focused on how to “turbocharge the net zero, resilient transition” in developing countries.

Led by the US Special Envoy on Climate, John Kerry, and the UK Secretary of State for Energy and Net Zero, Grant Shapps, it brought together 23 global business and philanthropic leaders and highlighted that major economies and financial institutions are waking up to the challenge of supporting a truly global green transition.

Private capital can play an enormous role in tackling this challenge. By 2050, there will be four billion emerging consumers, 1.4 billion of whom will have ascended to the middle class. The spending power of these consumers will grow from $2.3 trillion to more than $12 trillion and their purchasing decisions will increasingly drive global emissions.

Despite this, green solutions in these markets have been vastly overlooked by private capital. Just 14% of green investments in emerging and developing countries are funded privately, versus over 81% in developed economies. The Climate Finance Mobilisation Forum took some important steps to tackle this challenge, galvanising capital commitments from a range of global institutions.

Builder’s Vision, Mitsui & Co and Renewable Resources Group Partnership pledged to identify over $ 1 billion of nature-based solutions projects in emerging markets, while the Tony Elumelu Foundation launched a $500 million coalition for African entrepreneurs. LeapFrog also announced a plan to commit $500 million to companies delivering climate solutions in Africa and Asia, with the ambition to deliver green tools and technologies to 50 million low-income people. To mobilise more capital, institutional investors need the reassurance that such investments will deliver both profit and purpose.

Fortunately, investing in climate solutions across emerging markets is not just the right thing to do, but also a highly compelling commercial opportunity. At LeapFrog, we have modelled climate investment opportunities across four broad sectors – the built environment, energy, food and transportation – and found numerous examples where green businesses are already at a commercial advantage.

From electric scooters in India and rooftop solar panels in Nigeria to data-driven farming software in Vietnam, a growing universe of clean technologies are now cheaper than incumbent carbon-intensive alternatives. In many cases, the ‘green discount’ of these innovative new products is significant, as high as 30-40%, according to LeapFrog modelling based on the McKinsey Transition Finance Model, McKinsey Center for Future Mobility, 2022, McKinsey India Mobility Consumer Survey and press research. As investment in research and development in these sectors grows, such products will become even more cost competitive.

Take rooftop solar in Nigeria, where high energy costs and grid inefficiencies mean millions of households use dirty diesel generators. By installing roof-top solar systems to replace these heavily polluting generators, the average Nigerian household can save $500 per year or $10,000 over the life of the solar system, based on LeapFrog modelling using figures from Jumia, AliExpress and the National Bureau of Statistics (NBS).

Sun King, the global market leader in off-grid solar energy, has already provided 102 million people in Africa and Asia with clean energy access and saved households $6 billion on energy expenditure, while avoiding 27.9 million metric tons of CO2 emissions.

In India, our modelling shows electric scooters are already 30% cheaper than petrol two-wheelers across ten years of ownership. Ratan Tata, SoftBank and others have already invested over $ 1 billion in market-leading start-up Ola Electric and the opportunities to invest in complementary products, such as finance, insurance, charging stations and battery-swapping businesses, to support this green transition are immense.

Data-driven fertilisation in Vietnam, powered by smartphones that are now commonly distributed across agricultural producers, is another highly investible green business opportunity that can reduce fertiliser application by 13%, while increasing production by 20%, based on LeapFrog modelling using USDA, McKinsey analysis, Yara, Mobile Marketing Association and press research.

In these examples, as well as many others across the world, accelerating advances in technology coupled with broadening regulatory support is driving green solutions to a commercial tipping point and prompting a major reallocation of capital towards sustainable business models.

By 2030, clean investment across these four sectors alone could help low-income markets to avoid more than eight gigatonnes of greenhouse gas emissions, putting the world on a low-emission pathway without sacrificing economic growth. Our modelling suggests these investments could also generate 90 million new jobs.

Still, while private capital markets are waking up to these enormous opportunities, deal flow represents less than 5% of the required ~$330 billion annual investment to support a full transition to clean alternatives. This presents an opportunity and a challenge for private investors.

There is much more we must do as investors, enabling governments and other stakeholders to bridge this transition funding gap. Analysing the demand-side drivers of green consumption and targeting green industries that are already cost-competitive is key to unlocking more private capital to power the green transition in emerging markets.

Investors also need the willingness and resolve to course correct at this important moment in history to help chart a path of sustainable global growth in all countries, not just wealthy ones. Our shared climate is a global challenge, and investors and governments can and should adopt global strategies to solve it.