To support emerging market climate transitions, developed countries and private investors are drawing up an ambitious blueprint, but is it working?
At COP26 in 2021, the first Just Energy Transition Partnership (JETP) was signed, signalling a historic step-change in the developed world’s focus on funding the climate transition in emerging markets and developing economies (EMDEs).
The International Partners Group (IPG) – specifically the governments of France, Germany, UK, US and EU – pledged US$8.5 billion in grants, concessional loans, investments and risk-sharing instruments over three to five years toward South Africa’s energy transition, intended to unlock larger, and therefore more impactful, private capital flows.
South Africa’s electricity system currently depends on coal for more than 80% of its power; the partnership is estimated to prevent between one to 1.5 gigatonnes of carbon emissions over the next 20 years.
This JETP has been followed by new partnerships between developed countries and Indonesia, Vietnam and Senegal. The Glasgow Financial Alliance for Net Zero (GFANZ) will be delivering half of the financial commitments made to Indonesia and Vietnam.
The schemes are explicitly designed to ensure that those directly affected by a country’s shift away from fossil fuels are not left behind.
“The intent behind JETPs is empowering and indeed vital for the acceleration of the energy transition,” Megan Lawson, Country Managing Partner for Vietnam at sustainability consultancy firm ERM, tells ESG Investor.
“Without the momentum that the JETPs will trigger, the pace will inevitably be too slow.”
Experts speaking to ESG Investor further note that JETPs are a working example of the potential positive impact a multi-billion-dollar blended finance instrument can have on the Global South’s transition to net zero.
Although JETPs are still in their infancy, questions are arising around their complexity, opacity and ultimately whether they will serve as effective instruments to upscale the level of private finance needed to make a tangible difference to EMDEs’ climate transition efforts.
Research by the BlackRock Investment Institute has estimated that around US$1 trillion a year is needed for climate mitigation efforts if EMDEs are to achieve net zero by 2050.
The UN Environment Programme’s 2022 Adaptation Gap report noted that climate adaptation costs in developing countries are five to ten times greater than current public adaptation finance flows into these countries, with estimated annual adaptation needs reaching US$160-340 billion by 2030 and US$315-565 billion by 2050, thus underlining the importance of increasing levels of private investment. JETPs are not yet designed to address climate adaptation concerns.
The International Monetary Fund (IMF) said that EMDEs account for two-thirds of global greenhouse gas (GHG) emissions, yet they struggle with high debt and constrained budgets following the Covid-19 pandemic, as well as higher government borrowing costs amid rising interest rates around the world. Collectively, this makes it “especially difficult for public finance to meet pressing climate financing needs” without additional support from the private sector.
“The practical implementation [of JETPs] is challenging due to a variety of economic, technological, socio-political, and infrastructural issues,” acknowledges Lawson.
“Success will be reliant on strong leadership, mutual respect, and a genuine commitment to shared goals.”
Drawing up public plans
Before the implementation phase, which will involve private investors, it’s crucial that governments involved in JETPs iron out the details to maximise subsequent impact.
The initial focus on primary public finance is “somewhat necessary”, says Mahesh Roy, Investor Strategies Programme Director at the Institutional Investors Group on Climate Change (IIGCC).
“For many investors, particularly asset owners like pension funds, the ability to address individual country risk and focus on specific projects across multiple countries and regions is beyond current resourcing and capability.”
Working out these specifics takes time, adds Katherine Stodulka, Chair of the Blended Finance Taskforce, a global coalition housed by Systemiq and launched in 2017 to tackle barriers to net zero.
“The JETP funding mechanism must work for the country [in question],” she says.
Each of the four JETPs in development are experiencing different growing pains.
In South Africa, Jeroen Huisman, Programme Director at the Blended Finance Taskforce, says the JETP needs to focus on upscaling grid capacity, which has become “one of the major blockers of progress”, including the planned 30 gigawatts (GW) of wind power over the next ten years.
“Building out renewables will require creating more capacity on the grid, which requires significant investment,” says Huisman.
“But the timeline for building renewables is around three-to-five years, compared to at least five-to-seven years for grid infrastructure.”
Since the establishment of the JETP, South Africa’s state-owned utility ESKOM, which has an important role to play in the country’s climate transition efforts, has also been in hot water, due to corruption scandals and financial mismanagement, as well as its insufficient investment in grid capacity, which has prompted frequent power cuts.
“Balancing the demands of such a large and diversified group of stakeholders with equitable funding and environmental outcomes is challenging,” says Melissa Cheok, Associate Director of ESG Investment Research at data and research provider Sustainable Fitch.
The JETP with Indonesia, which was concluded at the Bali G20 summit last year with a total financial commitment by the IPG of US$20 billion, aims to reduce CO2 emissions from the power sector to 290 million metric tonnes (MT) by 2030. To achieve this, one of the focus areas of the JETP is on the early retirement of the country’s relatively young fleet of coal-fired power plants.
While South Africa’s coal plants are close to retirement, Indonesia’s average nine years old, meaning that compensating the owners to shut them down early will be more costly.
Cheok notes that “determining equitable funding solutions” has been challenging for the JETP’s stakeholders.
Indonesia’s US$20 billion JETP Investment Plan was expected to be signed off in August, but has been delayed until later this year, with the country’s finance minister highlighting that talks with international partners have been complicated by rising borrowing costs.
The JETP with Senegal concluded in June 2023 with a total financial commitment by the IPG of US$2.7 billion. The partnership aims to achieve a 40% renewable energy share in Senegal’s electric mix by 2030, while recognising the country’s plans to expand the use of natural gas as a bridge between coal and clean energy.
However, a policy brief published by the independent think tank International Institute for Sustainable Development (IISD) argues that shifting from coal to fossil gas through JETPs, or any other international public finance, does not constitute a sustainable and just transition.
The IISD warned that transitioning from coal to gas to renewables, rather than ‘leapfrogging’ to renewables, is “technically unnecessary, economically disadvantageous, and dangerous for the climate”.
Meanwhile, concerns surrounding Vietnam largely centre on human rights issues. The JETP negotiations were concluded in December, with the IPG pledging US$15.5 billion to bring forward peak GHG emissions from 2035 to 2030 and to increase the renewables share in the electricity mix to at least 47% by 2030.
“In Vietnam, the ‘just’ aspect can be considered a somewhat sensitive topic given the political landscape and constraints to active participation of communities, NGOs and the media in public policymaking and discussion,” says ERM’s Lawson.
Climate advocates and human rights experts across the country have been jailed as part of a crackdown on civil society groups in recent years by Vietnam’s ruling Communist Party. This highlights a broader challenge for IPG members and private investors looking to support all EMDEs in their climate transition efforts, while ensuring human rights are upheld.
Failure to ensure a just transition can have far-reaching consequences, according to Laura Hillis, Director of Climate and Environment at the Church of England Pensions Board.
“If a just transition isn’t handled correctly, it could spark dire outcomes such as civil war or famine,” she says.
“We can’t get JETPs wrong or there’s a risk of destabilising entire countries or regions, which is terrible from both a social and economic perspective.”
Despite their differences, there is much JETPs can learn from one another.
The Global Energy Alliance for People and Planet (GEAPP) is a collective movement working to unlock renewable energy access in emerging economies.
“South Africa, as the first JETP, has lent us many lessons,” Simon Harford, GEAPP’s CEO, tells ESG Investor.
“We’re now helping share learnings between South Africa, Indonesia and Vietnam.”
In South Africa, GEAPP funded and supported the Presidential Climate Commission (PCC), a multistakeholder coalition outlining why a just energy transition is important to different stakeholders and society.
“South Africa has crucial experience in this type of collective dialogue given its background with similar commissions. The benefits of the PCC model have led us to recommend a similar approach in Vietnam and Indonesia, tailored to their own needs,” says Harford.
Turning the plan into action
A paper published by the Ecologic Institute, a transdisciplinary research organisation focused on environmental issues, noted that JETPs now need to “spell out a plan” for how they want to mobilise private finance, which is a crucial step to leverage the capital needed for the transformation of EMDE energy systems.
The JETP agreements with Indonesia and Vietnam depend on half the financing coming from GFANZ, but the paper says there is currently no clear plan for how this private finance will be delivered and on what terms.
GFANZ was launched in April 2021 and has more than 650 financial institution and provider members across its alliances, including the Net Zero Asset Owner Alliance (NZAOA), which are committed to transitioning to net zero.
As part of its efforts, GFANZ has established working groups to support Indonesia’s and Vietnam’s JETPs to focus on the mobilisation of private capital, uncovering barriers to sourcing investment, advocating for the reforms necessary, and identifying approaches to crowd-in private finance at scale.
“GFANZ has supported the Indonesia and Vietnam JETPs to help ensure that they stand the best chances of crowding in private finance at scale across these priorities, and is encouraged by the early progress,” Alice Carr, GFANZ’s Head of Public Policy and JETPs, tells ESG Investor.
“These are multi-year efforts which start with planning, alongside a building need to focus on projects and financing.”
Other observers suggest there are a lot of hard yards yet to be covered.
“The discussion to date has been high-level and conceptual, with few discussions on actual implementation, which need to happen urgently,” says Monica Bae, Director of Investor Practice at the Asia Investor Group on Climate Change (AIGCC).
“Understandably, being the first movers in the market, there is nervousness and caution amongst [JETP] stakeholders to get it right.
“Investors face heightened concerns on the credibility of these transactions and potential greenwashing criticisms,” she says.
Cheok from Sustainable Fitch adds that a comprehensive investment and policy plan outlining the deal structure and financing terms for each agreement is needed to “prevent vague or watered-down stipulations from being included”.
IIGCC’s Roy says institutional investors would benefit from “active secondary markets and the aggregation of projects and finance into products that are familiar to them”, such as green bonds, securitisations and debt funds.
This can be facilitated by multilateral development bank (MDB) reform and moving from an “originate and hold” model to an “originate and distribute one – where the large financial resources in capital markets can help to replenish balance sheets and support capital structures through de-risked investment vehicles that meet their fiduciary duty to provide risk adjusted returns to their beneficiaries”, he says.
Alignment between JETP countries’ standards and definitions is also necessary to instil private investors with more confidence in prospective JETP-aligned investments, according to CoEPB’s Hillis.
She points to Indonesia’s plans to revise its green taxonomy – which outlines which economic activities can be considered for sustainability-focused investments – to align with the Association of Southeast Asia Nations (ASEAN) taxonomy, which includes coal power plant retirement as a sustainable activity.
“It’s not all about de-risking investments, but about building private investor confidence, too,” Hillis says.
“[JETPs] need to map out a clear decarbonisation pathway – complete with targets and climate policies – that will incentivise [sustainable] developments.”
South Africa is the only JETP country so far to have published its investment plan, which was unveiled at COP27 last year and sets out the scale of need and investments required to achieve its nationally determined contribution (NDC) targets between 2023-27.
Stodulka notes the investment plan has been “explicit about disaggregating the types of funding and investment needed”, which is “critical to private investors looking to deploy capital at a large scale”.
The plan includes strategies to create quality jobs in low-carbon sectors like electric vehicles and green hydrogen and increase South Africa’s energy security and end load shedding through the rollout of domestic sustainable energy sources.
Fulfilment of the plan in its entirety will require US$98 billion in investment, over 11 times more than the JETP’s financing commitments, thus highlighting the scale of change needed to achieve a just energy transition and the requirement to draw in private capital.
However, it is unclear whether South Africa’s JETP investment plan has yet to move the dial.
Clarity and cohesion for private investors sooner rather than later is imperative, especially as it’s likely more countries will begin pushing for JETPs beyond coal phase-out, according to Stodulka.
She says they may be future ‘country packages’ or funding programmes for nature and the green industry or a combination, noting that Egypt has already pioneered the NWEFE package for clean energy, food and water.
“Fundamentally, a successful JETP needs capital to be fit for purpose,” she says.
“Public or catalytic money shouldn’t be going into what the private sector can do, and private money shouldn’t be expected to invest where philanthropy or donor funds can make a difference.”
Beyond the JETP club
JETPs are only part of the solution to upscale blended finance solutions for climate mitigation and adaptation efforts in EMDEs.
“It’s worth celebrating the JETPs for the additional political emphasis they have given to the just energy transition,” says Stodulka from the Blended Finance Taskforce.
Further political emphasis on upscaling blended finance has been generated thanks to a communique published earlier this month by the Group of 20 (G20) leaders, which emphasised the importance of accelerating climate finance flows to support the renewable energy transition in developing countries.
Following the publication of the United Nations Framework Convention on Climate Change’s Global Stocktake report, the G20 said that it recognises the need for developed countries to deliver on their goal of jointly mobilising US$100 billion in climate finance per year.
Stodulka notes that JETPs are contributing to this by creating a ‘club’ of sorts, adding that many GFANZ banks hadn’t been considering developing a project pipeline in Indonesia until the agreement was formed.
“The JETPs allow private investors collectively to talk about more tricky issues, like coal phase-out, creating a space for a dialogue and innovation around the financial mechanisms needed to support the transition,” she adds.
“But [they] don’t replace due diligence, the development of smart de-risking mechanisms, and project pipeline development.
“They don’t replace the relationships private investors need to have with governments and development banks.”
Progress is being made.
Last year, Allianz Global Investors announced its plans to launch the US$1 billion Allianz Climate Solutions Emerging Markets (ACSEM) strategy with parent Allianz Group and a regional development finance institution, adding to the asset manager’s US$2.5 billion in commitments across five blended finance vehicles since 2017.
Also in 2022, the Investor Leadership Network (ILN), representing 14 global institutional investors managing US$9 trillion in assets, called for the creation of a rolling pool of funds offering first or second loss guarantees to blended finance vehicles funding EMDE projects.
Earlier this year at the summit for a New Global Financing Pact, new World Bank President Ajay Banga announced the launch of the Private Sector Investment Lab to develop and scale solutions that address the barriers preventing private sector investment in emerging markets.
Hillis says the group aims to provide a public update “in or around COP28 later this year”.
“JETPs are live examples of how to do development finance better,” says Stodulka.
“They need to address accusations of being debt traps – they need to be unlocking private capital, whether it’s through the pipeline or risk mitigation – in a more strategic way, and they need to be partnering much more actively with national and regional development banks, civil society, and government bodies, because that is how you direct private investment.”