Unlocking clean energy investment: Overcoming perceived risks in emerging markets

It has never been more urgent to direct clean energy investment into emerging markets and developing economies.

These regions, home to more than half of the world’s population, currently receive less than 15% of global clean energy investments despite their growth potential. Infrastructure development plays a key role in enabling a shift.

While the challenge of mobilizing private capital may seem daunting, there are three effective strategies that, if scaled, could move the needle on climate action and sustainable development.

The prevailing challenge is the persistent confidence deficit that overshadows investments in emerging markets and developing economies.

This is rooted in multiple factors, including perceived currency volatility, historical market performance and deeply ingrained narratives that often exaggerate the risks associated with these markets.

They frequently paint a picture of political instability, bureaucratic hurdles and a high probability of project failure at the feasibility stage. However, this perception often diverges significantly from the realities experienced by seasoned investors.

The Private Infrastructure Development Group’s (PIDG) experience in sub-Saharan Africa and South and South-East Asia reveals a more nuanced landscape. While default rates can be potentially higher than in developed markets, they are often counterbalanced by the promise of higher returns.

Between 1994 and 2023, the average default rate in the Global Emerging Markets Risk Database’s (GEMs) portfolio was 3.6%. This is roughly comparable to average default rates observed in non-investment grade companies that receive a B credit rating from S&P (3.3%) and a B3 from Moody’s (4%).

Moreover, recovery rates demonstrate the resilience and viability of well-structured infrastructure project transactions.

When you look closely at the delta between perceived and actual risks, you can see an enormous pool of opportunity for not only impact on communities and the environment but also for financial returns, especially as emerging markets and developing economies are expected to account for an estimated 70% of global real gross domestic product growth by 2050.

Investors must move beyond broad generalizations and embrace a granular understanding of the specific risks associated with individual projects and sectors. Doing so will allow them to deploy effective de-risking tools to create a pipeline of bankable, return-safe opportunities.

One such tool is “guarantees.” For example, PIDG, through its guarantee solution, GuarantCo, helped unlock clean energy investment by providing Africa GreenCo with an eight-year, $27 million framework guarantee facility to support its payment obligations to the independent power producers (IPPs) supplying clean energy.

Although the guarantee framework was established between Africa GreenCo and GuarantCo, the guarantees are issued directly to the IPPs. This gives the IPPs and their lenders the confidence to enter contracts and build renewable energy projects across Southern Africa.

The $27 million guarantee is expected to mobilize up to $270 million in private capital for IPPs, leveraging a ratio of approximately times 5.45. As a result, 200-300 megawatts of renewable energy will be added to the grid, improving electricity access for businesses and end users.

Similarly, blended finance structures can make projects, otherwise not commercially viable, more appealing to private investors through different equity instruments.

The Climate Finance Partnership provides a prime example of this. With an initial $130 million in catalytic capital, it successfully leveraged $540 million in private investment. The fund targets renewable energy, energy efficiency, energy storage and low-emission mobility projects across Southeast Asia, Latin America and Africa, delivering significant impact.

One notable success is its investment in Ditrolic Energy, a Malaysian renewable energy developer, where the fund helped advance 1 gigawatt of solar projects across South-East Asia.

Misperceptions are often further fuelled by a lack of quality accessible data. Confidentiality concerns, fragmented information silos and the absence of harmonized standards sometimes hinder the ability to accurately assess risk.

To bridge this gap, a concerted effort is required to enhance transparency and foster data-sharing. Initiatives such as the GEMs consortium, which provides open-source credit risk data, represent a significant step in the right direction.

However, the goal should be to create comprehensive, publicly accessible databases that empower investors with the information they need to make informed decisions.

At the same time, we must draw lessons from capital markets to unlock the potential of available de-risking solutions, including guarantees and blended finance. Standardized products, clear impact metrics and transparent reporting have driven the growth of multi-trillion-dollar markets such as the green, social and sustainability bonds market.

De-risking tools need to move towards greater standardization and aggregation, allowing asset managers to calibrate their performance against globally recognized indices. This requires creating standard forms of risk mitigation instruments that are easily analysed and compared, fostering greater investor confidence.

Blended finance instruments such as PIDG’s Emerging Africa and Asia Infrastructure Fund demonstrate the potential of this approach. Industry should strive to establish a homogenous asset class of such vehicles, applying common standards to enhance transparency, liquidity and investor confidence.

This would create a more predictable and accessible investment landscape, attracting a wider range of capital.

Another critical element of scaling clean energy finance is adopting replicable practices. Rather than reinventing the wheel, we should harness what already exists. Here, holistic country approaches can inspire governments and financiers alike.

For instance, between 2000 and 2020, Chile implemented a range of legislations, policies, programmes and renewable energy institutions to increase clean energy integration into the national grid, reduce carbon emissions and promote inclusivity in the energy market.

This led to Chile attracting over 50% of Latin America’s renewable investment in 2015 and in 2021, the country secured $3.4 billion in renewable investment. By 2022, renewable energy accounted for 55.1% of Chile’s power generation, solidifying the country as a leading destination for renewable energy investment.

Similarly, through a structured approach – anchored in strong institutions, long-term planning, regulatory frameworks, energy investments and international collaboration, and supported by innovative auction mechanisms – Brazil successfully doubled its renewable energy capacity between 2001 and 2023.

Replicating such approaches at a country level could significantly push the clean energy investment levels in the right direction. By leveraging the blueprints available, countries can independently take strides towards transforming their national energy landscape.

Ultimately, de-risking clean energy finance requires a collaborative effort involving investors, development finance institutions and governments.

To overcome existing misperceptions and truly redirect capital into emerging markets and developing economies, scaling innovative and effective de-risking tools, increasing and promoting data-sharing and replicating best practices are vital.

By embracing a more intentional, collaborative and data-driven approach, we can move from overstated risks to understood opportunities, unlocking the capital needed to drive the clean energy transition in emerging markets and developing economies.