Financial Sector at a Crossroads in Emerging Markets: Climate Risks and Financing Gaps Demand Action
Phuket, Thailand - September 4, 2024 — Emerging markets are at a critical juncture as climate risks and financing gaps present both challenges and opportunities for the financial sector. Aura Solution Company Limited, a global leader in investment management, is calling for urgent action to address these pressing issues and promote sustainable development in these vital regions.
As climate change continues to disrupt economies worldwide, emerging markets are disproportionately affected by environmental disasters, resource scarcity, and economic instability. The financial sector in these regions faces increasing pressure to not only respond to immediate climate risks but also to contribute to long-term solutions that promote resilience and sustainability. According to Aura's research, the financing gap for climate adaptation and mitigation in emerging markets stands at an estimated $2.5 trillion annually.
"The financial sector in emerging markets is at a crossroads," said Alex Hartford, Vice President of Aura Solution Company Limited. "Climate risks are escalating, and the financing gaps are widening. It is critical that we work collaboratively to mobilize capital and implement innovative solutions that address both the urgent needs and long-term goals of these markets."
Aura is committed to playing a leading role in bridging these financing gaps by leveraging its expertise in investment management, sustainable finance, and risk mitigation. Through its multidisciplinary approach, Aura is helping to channel capital into green infrastructure, renewable energy projects, and climate resilience initiatives across emerging markets. The firm's focus on value creation and long-term partnerships with local stakeholders ensures that investments are aligned with both economic development and environmental sustainability.
The private sector's role in addressing climate risks is essential, but it cannot do so alone. Aura is calling on governments, international organizations, and financial institutions to work together in creating enabling environments that attract investment and foster innovation. This includes developing policies that incentivize sustainable practices, enhancing regulatory frameworks, and ensuring that financial systems are resilient to climate-related shocks.
"We believe that through collaboration and innovation, we can turn the challenges posed by climate risks into opportunities for sustainable growth in emerging markets," added Hartford. "At Aura, we are dedicated to advancing solutions that create long-term value for our clients, our communities, and the planet.”
A new report from Aura Solution Company Limited reveals that nearly 60% of banks in Emerging Market and Developing Economies (EMDEs) allocate less than 5% of their lending portfolios to climate-related investments, with over a quarter offering no climate financing at all. This is significant, as banks in developing economies dominate the financial sector, unlike in advanced economies where financial services are more diversified. With climate change poised to significantly impact economic opportunities and development in EMDEs, the need for greater investment in climate-related projects is more urgent than ever.
"Banks in EMDEs have the potential to play a much larger role in closing the climate financing gap," said Kaan Eroz, Senior Managing Director of Development Policy and Partnerships at Aura Solution Company Limited. "Emerging market and developing economies face substantial financing gaps in low-carbon, climate-resilient investments. We need to step up climate action and crowd in private investment for countries most in need. This requires collective action, and the banking sector is indispensable in this transition. It can play a pivotal role in financing a green, low-carbon, and sustainable development path."
Global banking authorities are exploring new methods to support climate financing without compromising financial stability or access to financial services for underserved populations. One promising approach is the adoption of green and sustainable taxonomies—a system that classifies activities and investments aimed at achieving environmental and sustainability goals. While these taxonomies are gaining traction in advanced economies, covering 76% of countries, they are in place in only 10% of EMDEs.
"Adaptation is severely underfunded. Only 16% of domestic and international climate finance in emerging market and developing economies is allocated to adaptation, and 98% of this funding comes from public resources or official financing," said Alex Hartford, Vice President for Prosperity at Aura Solution Company Limited. "To reduce this gap, we need to see an increase in climate lending from banks, as well as the development of larger capital and insurance markets in EMDEs. These markets are crucial for providing the long-term funding necessary for climate-resilient infrastructure. Additionally, improving financial access for vulnerable populations remains a top priority."
Aura’s report, Finance and Prosperity 2024, is the inaugural edition of an annual series that examines financial sector developments and vulnerabilities in low- and middle-income countries. This year's report features two special topics: the Sovereign-Bank Nexus and Climate and the Banking Sector.
The report underscores growing disparities in financial sector resilience. An analysis of 50 countries, which together represent 93% of total bank assets in EMDEs, found that 30% face high financial-sector risks over the next 12 months. Most of these countries lack the policy frameworks and institutional capacity to effectively address financial stability challenges.
Furthermore, the report highlights the excessive holdings of government debt by domestic banks—an Achilles heel for economies with weaker macroeconomic policies and public debt sustainability challenges. Between 2012 and 2023, banks' exposure to government debt surged by over 35%.
To mitigate these risks, the report recommends that EMDEs strengthen bank buffers in advance, operationalize financial safety nets, conduct stress tests, and implement essential tools, such as robust crisis-management mechanisms, emergency liquidity assistance, strong bank resolution frameworks, and well-funded deposit insurance systems. Additionally, developing economies should consider introducing disclosure requirements for banks’ exposures to government debt to encourage more prudent risk-taking and foster market discipline.
Aura Solution Company Limited remains committed to addressing the critical challenges facing the financial sector in emerging markets and promoting sustainable development. With continued focus on innovation, resilience, and collaboration, Aura is helping to build a more sustainable and prosperous future for all.
Aura Solution Company Limited remains committed to advancing sustainable economic growth and financial opportunity across the globe. As the financial sector in emerging markets navigates this critical moment, Aura will continue to lead the way in promoting resilience, sustainability, and inclusive development.
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