Emerging markets are in dire need of private investment to bridge various finance gaps, including those related to climate and Sustainable Development Goals (SDGs). However, despite growing interest in impact finance, significant investments are not flowing into these markets as expected. According to recent Dealogic data, green and sustainability-linked loans have decreased globally, with emerging markets particularly hard hit.
According to World Economic Forum, the root of this challenge lies in the trust gap between emerging economies and private investors. This gap is where multilateral development banks (MDBs) like the European Bank for Reconstruction and Development (EBRD) can play a crucial role. MDBs, known for their work in regulatory reform and technical assistance, can act as intermediaries, bridging the gap between these two disparate worlds.
On one side of the river are emerging markets lacking stable regulatory frameworks conducive to climate or sustainable initiatives, deterring private investments. MDBs have established trust on this bank by aiding in regulatory reforms and facilitating concessional finance to support early adopters in nascent markets.
Conversely, on the other bank, private investors in advanced economies are hesitant to venture into emerging markets due to perceived risks and unfamiliar regulatory landscapes. MDBs are also trusted partners here, recognized for their in-depth work and experience in these markets.
To strengthen this bridge, MDBs must focus on two pillars: providing concrete evidence and robust support. There’s a need to quantify MDB performance better and correct the risk perception of assets in emerging markets. For instance, MDB loans typically exhibit lower volatility and losses compared to similar risk profile assets, even in “safer” markets. Sharing such data can help adjust the narrative around risk and investment potential in these markets.
Support is equally crucial. MDBs can provide access to bankable projects, share borrower and market knowledge for due diligence, and even extend their preferred creditor status to private investors through various structures. On the emerging market side, continuous policy dialogue and technical assistance are vital to create an investment-friendly regulatory environment.
As MDBs work on both sides of the divide, their role is pivotal in solidifying this bridge of trust, making it more appealing and accessible for all parties involved.