Now or Never for Sustainable Development: The Imperative of Raising Capital for Shared Global Sustainability Goals

By Rebecca Ray

Emerging market and developing economies (EMDEs) need an immediate, stepwise infusion of investment for climate and conservation goals: $1 trillion in international capital for climate investment and over $2 trillion annually to meet the United Nations 2030 Sustainable Development Goals (SDGs), according to the International High Level Expert Group on Climate Finance.

While these sums may appear ambitious, their importance cannot be overstated, raising a critically important question of the era: how and in what form will this capital be raised?

A new report by the Boston University Global Development Policy Center explores this question using newly available data on existing external public and publicly guaranteed (PPG) debt. I, along with coauthor B. Alexander Simmons, find that an unfolding debt crisis is severely limiting the amount of new capital that can be raised through borrowing.

Indeed, we find that most EMDEs do not have space for additional borrowing, or they face limitations in their access to credit markets. Furthermore, the vast majority of EMDEs with capital market limitations have strong needs and opportunities for climate and conservation investment. Thus, environmental goals will require capital to be raised through routes other than new debt. Instead, a combination of debt restructuring for countries currently facing debt stress, measures to reduce the cost of capital for other countries and across-the-board reforms in the global financial architecture will be needed if global sustainability goals are to be met.

This blog summary reviews four main aspects of the report’s findings. The first section classifies EMDEs according to their relative access or barriers to capital markets and shows that those countries facing significant capital constraints are overwhelmingly likely to also have high levels of needs and opportunities for climate and conservation investments. The second section explores EMDEs’ existing debt burdens and shows that they are widely distributed among four main classes of creditors – multilateral development banks (MDBs), bondholders, the Paris Club and China – with MDBs in particular accounting for a significant share of EMDE debt burdens. The third section examines each of these creditor classes to show where each one can make a significant difference in debt restructuring and lowering the cost of climate and conservation finance. The blog post ends with recommendations for all creditor classes, as well as broader reforms of the global financial architecture.

The overlap of environmental investment needs and capital market limitations

This report classifies 108 EMDEs into three categories based on their access to capital markets:

• 62 countries are currently facing debt stress, defined as being in debt distress or at high risk of distress, and therefore have extremely limited access to capital markets.
• An additional 33 countries face significant capital market constraints, as their dollar-denominated sovereign bonds are either restrictively expensive, with rates above their gross domestic product (GDP) growth projections, or rated below “investment grade” by major credit rating agencies.
• Only 13 EMDEs have relative capital market access, though even these countries face limitations such as domestic bond rates above GDP growth.

Figure 1 shows the distribution of these three categories, with countries facing debt stress shown in red, those with capital market constraints in grey and those with capital market access in blue. Most of Africa and Oceania are facing debt stress, though every region has countries in this category.

Figure 1: EMDEs by Debtor Category

Worryingly, the countries facing debt stress and capital market constraints are also those most in need of investment toward climate and conservation goals. The report includes four types of investment needs and opportunities. Although countries may seek sustainability investments through many different avenues, this report uses four representative indicators:

• Climate change mitigation needs, based on each country’s projected 2030 carbon emissions per capita under a business-as-usual scenario;
• Climate change adaptation needs, based on countries’ climate vulnerability through six sectors (food, water, health, ecosystem services, human habitat and infrastructure) as measured by the Notre Dame Global Adaptation Initiative;
• Land conservation opportunities, based on the potential for expansion of the network of natural protected areas as measured by the share of intact land (defined as land with less human impact than pasture) not currently protected; and
• Marine conservation opportunities, based on the potential for the expansion of marine conservation areas as measured by the average Cumulative Human Impact (CHI) of coastal waters for countries that have not yet met the “30×30” goal of protecting 30 percent of their marine exclusive economic zones (EEZs). Lower CHI levels indicate higher opportunities for expansion.

Countries can be classified as being above or below the global median for each of these needs and opportunities. Figure 2 maps the 95 EMDEs with debt stress or capital market constraints, according to their climate investment needs and conservation investment opportunities. Countries shown in red are above the global median for at least one type of climate investment need and at least one type of conservation investment opportunity. On the other extreme, countries shown in blue are below the global median on all climate and conservation investment needs and opportunities. Countries shown in orange and yellow have intermediate situations: orange indicates above-median climate investment needs but below-median conservation opportunities, while yellow indicates above-median conservation opportunities but below-median climate investment needs. Most countries in debt stress or with capital market constraints have climate investment needs above the global median, and about half also have conservation investment opportunities that are above the global median.

Figure 2: Sustainability Investment Needs and Opportunities Among EMDEs with Debt Stress or Capital Market Constraint

Mobilizing capital for climate and conservation

For debt stress countries, immediate debt restructuring is needed and, in many cases, ongoing. In these processes it will be particularly important to include the creditors who are expecting the largest share of near-term debt service payments. As Figure 3 shows, from 2024-2028 about half (31) of debt stress countries predominantly owe their debt service payments to MDBs, 13 predominantly owe China, eight predominantly owe bondholders, five predominantly owe Paris Club creditors and another five predominantly owe creditors not in one of these categories.

Figure 3: Debt Stress Countries’ Debt Service Payments, 2024-2028: Share Owed to Major Creditors

For countries not facing debt stress, major creditors may work with debtors on debt swaps or other methods of reducing the cost of capital. In these processes, it is crucial to include the creditors who hold the largest share of each debtor’s debt stock. Figure 4 shows the distribution of external PPG debt stock among major creditor categories for capital market constraint and capital market access countries. Most of these countries predominantly owe MDBs (20) or bondholders (20), while three predominantly owe Paris Club creditors, and two predominantly owe China.

Figure 4: Capital Market Constraint and Access Countries’ Debt Stock: Share Owed to Major Creditors

Opportunities for action across creditor classes

As Figures 3 and 4 show, every class of creditor is significant for at least one borrowing country. Figure 5 shows all 108 EMDEs who report their data through the World Bank International Debt Statistics, highlighting their top creditor when measured by total debt stock (Figure 5A) and debt service payments over the 2024-2028 period (Figure 5B). While the two maps are similar, a few changes exist due to differences among creditors in the terms of outstanding loans and the varying extent to which creditor classes have already restructured existing debts. For example, Argentina’s top creditors by stock are bondholders, but as Argentina has already reached a restructuring agreement with bondholders, its top creditor class by upcoming debt service is MDBs. Similarly, the Democratic Republic of the Congo’s top creditor class by debt stock is MDBs but its top creditor by upcoming debt service payments is China.

Figure 5: EMDEs’ Top Creditor Classes

5A: Top Creditor Classes by Debt Stock

5B: Top Creditor Classes by Debt Service, 2024-2028

The greatest opportunity is for each lender to work with their major borrowers. For this exercise, a country is considered a major borrower if its debt stock to a particular creditor class is above 5 percent of its GDP, or if its 2024-2028 debt service payments amount to over 1.5 percent of projected government revenue or 1.0 percent of projected exports (these thresholds are roughly in line with global medians). As Figure 6 shows, MDBs have the highest number of major borrowers (93), followed by bondholders (57), Paris Club creditors (45) and China (41). Each creditor class’s portfolio of major borrowers is comprised by a majority of debtor countries with high climate investment needs and high conservation investment opportunities. Thus, each creditor class has a crucial role to play in mobilizing finance for achieving global sustainability goals.

Figure 6: Creditor Classes’ Major Borrowers, by Levels of Sustainability Investment Needs and Opportunities

Figure 7 shows more detail for each creditor class, through the geographic distribution of its major borrowers and their climate investment needs and conservation investment opportunities. Every creditor class has major borrowers in every region. Nonetheless, bilateral lenders (China and Paris Club lenders) show a concentration of major borrowers in Africa, while bondholders are more heavily represented in Latin America and Asia. MDBs are the creditor class with the broadest distribution of major borrowers across all regions with EMDEs.

Figure 7: Creditor Classes’ Major Borrowers, by Levels of Sustainability Investment Needs and Opportunities

7A: Major borrowers from MDBs (93):

7B: Major borrowers from bondholders (57):

7C: Major borrowers from Paris Club (45):

7D: Major borrowers from China (41):

However, as Figure 8 shows, each creditor class’s major borrowers are also comprised by a majority of countries in debt stress, who are either currently undergoing debt restructuring or are in need of doing so. Thus, climate and conservation finance cannot effectively be mobilized by more lending alone. Furthermore, every creditor class must participate in debt restructuring to avert a global debt crisis and mobilize finance for shared climate and conservation goals.

Figure 8: Creditor Classes’ Major Borrowers, By Access Level to Capital Markets

Among major creditor classes, MDBs stand out as having by far the greatest number of major borrowers. Their importance is particularly acute among countries facing debt stress. As Figure 3 shows, half of countries facing debt stress owe more in near-term debt service payments to MDBs than to any other creditor class. In fact, 21 of these countries owe MDBs over 50 percent of their debt service payments. Thus, any effective debt restructuring mechanism will need to include the participation of MDBs in order to be relevant to the needs of countries facing debt stress. Furthermore, MDBs also have the largest number of major borrowers who may not be currently facing debt stress but do contend with significant capital market constraints (28). Thus, potential MDB reforms such as capital increases and increasing credit enhancements would be particularly helpful in lowering the cost of climate and conservation finance for this group of countries.

On the other extreme, China has the fewest number of major borrowers (41), but China’s participation is nonetheless crucial for debt restructuring and lowering the cost of climate and conservation finance. As Figure 6 shows, China’s major borrowers are disproportionately likely to have high needs and opportunities for climate and conservation investment. But as Figure 8 shows, China’s major borrowers also face the highest overall barriers to capital markets and thus can take on the least amount of new debt on average.

All major creditor classes – including MDBs, bondholders, Paris Club creditors and China – have important roles to play in debt restructuring and mobilizing capital for sustainable development.

Now or never: policy recommendations

As the needs for debt relief and capital market reform touch all major classes of creditors, and environmental needs are worldwide in scope, action is needed on a multilateral scope, through global initiatives such as the Global Sovereign Debt Roundtable (GSDR), rather than ad hoc deals with specific debtors and groups of creditors.  To that end, the report recommends reforms on a global scale, including the following major steps:

• New issuances of the IMF’s Special Drawing Rights (SDRs) and re-channeling a proportion of those SDRs into the IMF and development banks;
• Extending advanced economy central bank swaps, further increasing the quotas of the IMF and expanding regional financial arrangements across the world; and
• Reinstating and reinvigorating the G20 Debt Service Suspension Initiative, including all classes of creditors and all income levels of borrowing countries.

Development finance can be rapidly expanded to provide guarantees, grants and potentially broker debt for nature/climate swaps to reduce the cost of capital and finance investment needs through the following steps:

• Across the board capital increases at the MDBs;
• Improving the capital adequacy frameworks of MDBs, especially through hybrid capital methods, such as re-channeling SDRs and issuing Sustainable Future Bonds;
• Coordinating as a system with the more than $18 trillion in assets among all public development finance institutions.

Comprehensive debt relief is also paramount for those countries facing distress. The G20 Common Framework will need to be reformed through the following steps:

• Calibrating the level of debt relief to meet the investment needs cited by the International High Level Expert Group on Climate Finance;
• Compelling all creditors to the negotiating table to participate in comprehensive debt relief; and
• Deployment of a ‘fair’ comparability of treatment principle across all creditors, adjusting the amount of debt relief provided by various creditors according to the level of ex ante debt relief in initial loan commitments.

These reforms are broad and ambitious in scope, as they must be in order to meet the global imperative of mobilizing capital for climate and conservation. The choice facing international financial institutions is truly “now or never” on meeting shared global sustainability goals.

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