Moody’s: More Net Zero Targets Could Increase Transition Risks in Emerging Markets

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Net zero ambitions are no longer limited to advanced economies, but such commitments in emerging markets could lead to carbon transition risks, especially in emissions intensive sectors such as steel and oil and gas, according to a report by Moody’s.

The report finds that in order to meet the International Energy Agency’s scenario to reach net zero by 2050, more than $1 trillion in clean energy investments by 2030 will be needed in emerging markets. The IEA says those investments were less than $150 billion in 2020. That growth in funding will be critical as emerging markets will also account for the most growth in energy demand.

In order to help reach those transitions and meet that energy demand, Moody’s says greater public-private collaboration as well as collaboration between different sectors will be needed. Adjusting to low carbon economies will require balancing economic issues with decarbonization goals, according to Moody’s.

Oil and gas, steel, and airlines are the most exposed to risk due to transitions in emerging markets. On the other end the report finds industries with scalable technologies such as electric utilities and automakers have the least amount of risk.

According to the report, Latin American electric utilities and Asia-Pacific refiners have the strongest positioning in terms of their transition risks. Overall, widespread access to affordable clean energy by 2030 in emerging markets would enhance productivity.

Last year BloombergNEF outlined a roadmap for emerging markets to take on energy investment. It found that funding is especially important since those markets will account for nearly 70% of global energy demand by 2050. Another report by Manulife Investment Management found that emerging markets could provide a significant ESG investment opportunity.

To help with investing in low carbon and energy efficient transitions, sustainable debt issuance in emerging markets will continue to see significant growth. Emerging markets accounted for 14% of the global green, social and sustainability bonds in 2021.

Half of the Eurobonds issued last year in emerging markets were from carbon-intensive sectors. With the expected growth in energy demand in these economies, Moody’s says a big increase in sustainable debt issuance will be needed to finance the carbon transitions there.

Sustainable debt surpassed $1.6 trillion in 2021, according to BloombergNEF, more than doubling what it was in 2020. Asia-Pacific and Latin America accounted for nearly 90% of all the sustainable debt issued in emerging markets last year, according to the Moody’s report.