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Juicy US Yields May Sap Funding Desperately Needed in Emerging-Market Climate Finance
(Bloomberg) -- Persistently high US bond yields will force private investors to turn their backs on emerging markets desperately in need of financing to fight global warming.
That’s according to Srini Nagarajan, head of Asia at British International Investment, which is the UK government’s development finance unit.
“If risk-free bonds are giving you 4-5%,” the question becomes “why would anyone take emerging market risk,” he said. “Interest rates have to come down for fund managers to have an emerging market allocation which goes up.”
US Treasury yields have risen since the Nov. 5 election of Donald Trump, as markets digest the steady stream of signals coming from the new president. The US 10-year Treasury rate, a benchmark for global borrowing costs, is now roughly 100 basis points higher than it was back in September.
Nagarajan expects that finding private investors will get harder, especially when it comes to financing early-stage companies working on climate innovation in emerging markets, given high US yields. “How do you justify a mobilization theme when you can’t get commercial investors to work with you?”
And for highly vulnerable economies, such as Pakistan and Bangladesh, the threat of imported inflation is particularly concerning, he added. “At the end of the day, foreign direct investment is needed in all these countries for long-term sustenance,” he said.
Meanwhile, a stronger US dollar has policymakers across Asia’s emerging markets digging deeper into their toolkits to make sure the development doesn’t cause too much local pain.
As emerging markets face a world in which they increasingly struggle to gain access to funding, their need for financing to tackle the fallout from climate change is growing. Moody’s Ratings estimates the developing world requires more than $1.3 trillion by 2030 to finance measures needed to mitigate the effects of global warming. That’s more than twice as much as what’s necessary for the US and European Union, combined.
There’s also concern that funding from development finance institutions such as the World Bank — the biggest provider of climate capital for developing countries — and the Inter-American Development Bank may see a pullback under Trump. That’s because the US is the biggest shareholder country in both institutions.
“There will be tensions” between the US and these multilateral lenders, said Sean Kidney, chief executive officer at Climate Bonds Initiative. “We won’t see any capital increases for the development banks.”
Nneka Chike-Obi, head of Asia-Pacific ESG ratings and research at Sustainable Fitch, said the US probably won’t contribute to some funding mechanisms established under recent global agreements. Those include “the Loss and Damage Fund and the commitment to increase finance to developing countries from $100 billion to $300 billion by 2035.”
The development adds to a broader retreat from climate finance, with global net-zero alliances losing their biggest members amid political attacks in the US.
BII manages about a net £8.5 billion ($10.3 billion) of emerging Asian and African assets, and has 22% of its portfolio in India, Nagarajan said. It’s looking to allocate more to Southeast Asian markets such as Indonesia, Vietnam and the Philippines, where it’s exploring avenues such as electric-vehicle infrastructure, battery recycling and green hydrogen.
With the exception of China, where the government and private sector have invested heavily in the energy transition, climate flows to the rest of emerging Asia stagnated at close to $100 billion annually between 2020 and 2022, with only slight growth in 2023, according to data compiled by BloombergNEF.
Nagarajan said that BII is now beginning to explore blended-finance opportunities, where its presence as a public entity is intended to make projects more attractive to commercial investors. Teaming up with private investors wasn’t “a complete necessity” but that’s changing, he said.
--With assistance from Sheryl Tian Tong Lee, Natasha White and Greg Ritchie.
(Adds reference to strong dollar in seventh paragraph.)