Now or Never: Mobilizing Capital for Climate and Conservation in a Debt-Constrained World

A cycle of extreme weather, financial instability, unsustainable debt levels and high costs of capital are limiting fiscal space at precisely the moment that a dramatic, stepwise increase in environmental investments is needed if shared climate and development goals are to be met in emerging markets and developing economies (EMDEs).

What is the fiscal picture of EMDEs in terms of their access to capital markets, and how does that contrast with their environmental investment needs?

A new report by Rebecca Ray and B. Alexander Simmons examines the ability of 108 EMDEs to mobilize foreign capital and juxtaposes those capabilities with the level of environmental investment needs to 2030, finding that the unfolding debt and development crisis is a serious obstacle for 91 countries to meet their necessary environmental investments.

Using newly available data on external debt and environmental investment needs, the authors chart the fiscal and environmental needs of 108 EMDEs across three categories:

1. Debt stress: countries that are either in debt distress or at risk of debt distress.
2. Capital market constraint: countries that are not facing near-term debt stress but do face capital market constraints in the current macroeconomic context.
3. Capital market access: countries with access to capital markets.

Main findings:

• Big picture: 95 countries are either facing debt stress or high capital costs that will significantly impede their ability to mobilize foreign capital flows to meet their investment needs.
  • Of these, 91 EMDEs have environmental investment needs or opportunities that are above the global median for at least one of four categories: their climate change vulnerability, the need to reduce emissions to meet Paris Agreement targets and opportunities to expand protected conservation areas on land or in coastal waters.
• Debt Stress: 62 countries are either currently undergoing debt restructuring or are in immediate need of restructuring and have higher debt service burdens on aggregate as a share of projected government revenue and projected exports. This group includes most of Africa and Oceania, but also includes countries in every region of the world. These countries need new liquidity, significant reductions in the net present value of their external public and publicly guaranteed debt, and new financing at a very low cost.
  • Countries within this group have higher climate change vulnerability (particularly among African countries such as Chad, Niger and Guinea-Bissau), but also greater opportunities for both terrestrial and marine biodiversity conservation (particularly island nations such as Cabo Verde, the Solomon Islands and Papua New Guinea).
  • 33 countries owe over half of their projected 2024-2028 debt service payments to just one creditor or class of creditor. The largest share of these – 21 countries – are expected to pay over half of this debt service to multilateral development banks (MDBs), while eight are in the same situation with China, two with bondholders and two with Paris Club creditors. Thus, any effective debt restructuring arrangements must include all classes of creditors.
• Capital Market Constraint: An additional 33 countries may not need immediate restructuring but do face capital market constraints. For this group, borrowing costs in capital markets surpass growth projections and new capital flows are hampered by sovereign bond ratings below “investment grade.” This group includes many countries in Central and Western Asia, as well as Latin America.
  • • Many of these countries will need new liquidity and credit enhancements to ensure that new financing does not jeopardize future debt sustainability.
• Capital Market Access: Just 13 countries have relative capital market access, defined as having “investment grade” bond ratings and/or dollar-denominated borrowing costs below growth projections, though in most of these cases, countries still face domestic borrowing rates exceeding growth expectations and therefore need new forms of affordable capital.
• Environmental Investment Needs: 91 of the 95 EMDEs with debt stress or capital market constraint have above-median climate investment needs or conservation investment opportunities, while only four countries have below-median levels of both when compared with countries around the world: Albania, Dominican Republic, North Macedonia and Tajikistan.

Immediate action is necessary to secure comprehensive debt relief for countries facing debt distress and to reduce the cost of capital for countries not in debt distress. As first order reforms, a stepwise increase in levels of both liquidity and development finance are needed, as well as comprehensive debt relief linked to climate and development investments.