Green finance for developing countries: Needs, concerns and innovations

This briefing outlines key concerns and needs of developing countries in relation to green finance, particularly focusing on developing countries that are not members of the G20. It also highlights emerging innovations, drawing in particular from engagement with practitioners and regulators from Bangladesh, Colombia, Egypt, Honduras, Jordan, Kenya, Mauritius, Mongolia, Morocco, Nigeria, the Philippines, Thailand and Viet Nam, and the findings from the UNEP Inquiry’s country studies.1 Green Finance is a strategy for financial sector and broader sustainable development that is relevant around the world. But the context differs considerably for different countries. Developing countries, notably those with underdeveloped financial systems, face particular challenges in financing national development priorities. Financial Development shapes the context for green finance. Different sources of capital and financial institutions are particularly relevant in different countries. Financial systems in developing countries tend to be characterized by a dominant banking sector, and have large areas of the economy that remain unserved by the formal financial sector. Public finance and foreign direct investment can be particularly important as sources of long-term investment. Broadly, concern and action to align financing to sustainable development is concentrated in three areas: Preventing The Financing Of Illicit Practices Or Profiting From Weak Enforcement. Weak enforcement of environmental, economic and social policies and regulations can lead to social conflicts and market impacts resulting in losses to lenders and investors, and even macroeconomic stability risks. Unlocking Opportunities For Green Investment. In many countries, opportunities for green finance such as renewable energy, energy efficiency, agricultural development and Small and Medium-sized Enterprises (SMEs) productivity, as well as insurance markets, are potentially commercially viable, but inadequate owing to barriers in demand or supply. Exploring Solutions To Dilemmas And Trade-Offs. Many developing countries face a tension between the need to expand the electricity supply and reduce fossil fuel intensity. Similarly, SME finance is an area where regulators must be careful that lending requirements do not result in reduced overall lending or higher rates of non-performing loans and financial instability.