Are emerging countries to blame for climate change?
A skewed vision of the global energy transition
Mathieu Quenechdu, ESG analyst at IVO Capital Partners
The vision of IVO Capital Partners
- For several years, emerging countries have been accused of being the main emitters of greenhouse gases.
- (GHG). A reading in absolute terms reinforces this image, obscuring several realities.
- On the one hand, developed countries have historically been the main beneficiaries of fossil fuels and the biggest contributors to GHG emissions. On the other hand, per capita emissions remain much higher in the United States and Europe (excluding China).
- One of the key challenges of the COP is to direct capital to these economies to accelerate their transition. However, these countries face a double constraint: coping with the effects of climate change while lacking the resources to respond to it.
Far from being idle, emerging countries are deploying ambitious policies to green their energy mix.
An emerging market conducive to sustainable investment
Sustainable investment in emerging countries is often perceived as limited, due to the lack of sufficiently green alternatives. However, this reasoning is biased: in emerging countries, the energy mix is changing and electricity is becoming less carbon-intensive . The electricity and heat sector is the world's leading source of GHG emissions, but also the one where the transition is most accessible thanks to existing technologies (solar, wind, hydroelectricity, etc.).
Some emerging countries are already emerging as key players in this transformation. In Latin America, over 50% of electricity generation comes from renewable energies. Replacing carbon-intensive energies with renewable energies has a direct and substantial impact. A number of emerging countries are leading the way in this transition, particularly in Asia. India, for example, is accelerating its transition with an ambitious investment plan of USD 13.3 billion by 2024 (+40%).
% in one year, Ember, Navigating risks to unlock 500 GW of renewables by 2030, February 2025) to diversify its energy mix and thus reduce its dependence on coal. Investing in renewables is like arbitraging against coal and gas, resulting in a net reduction in emissions - 665 times and 98 times respectively, for equivalent generation - by redirecting capital to lower-carbon solutions.
What's more, the emerging world is following a dynamic of energy expansion, with a growing need for access to electricity to support its growth and develop its infrastructures. Indeed, 80% of the world's additional electricity demand by 2030 is expected to come from emerging countries. We need to supply this surplus with low-carbon (renewable) energy and limit the environmental impact of this energy expansion.
Thus, emerging countries are playing a key role in the energy transition, with players such as Latin America, where a large proportion of electricity already comes from renewable sources, and India, which is actively building its transition and additional energy demand through massive investment in clean energy.
ESG reporting aligned with international standards:
Contrary to popular belief, emerging companies' lack of transparency is becoming less and less of a problem. While ESG disclosure requirements are increasingly being called into question in developed countries - with the ESG-hostile Trump administration and the Omnibus law in the EU - emerging countries, on the other hand, are increasingly aligning their corporate environmental and social impact disclosure requirements with international standards. In Brazil, the Brazilian Securities Commission has issued a resolution requiring listed companies to comply with the IFRS Sustainable Development Standards (ISSB). Mexico, meanwhile, has imposed the same requirement on companies listed on its markets, with effect from January 2025. Colombia also developed its own green taxonomy within its legal framework in 2022, detailing the criteria for issuing green and sustainable bonds.
In fact, there is no shortage of sustainable investment opportunities in emerging countries, and their institutions are putting in place regulatory frameworks conducive to sustainable investment. So, what are the dynamics of sustainable investment in emerging countries?
Investment gap in MS: Stimulating international financing for a sustainable global energy transition
The latest report from the International Energy Agency (IEA) highlights the lack of investment in clean energy in emerging economies. These countries currently attract less than 20% of global investment in this sector, despite accounting for almost two-thirds of the world's population and a growing share of energy demand.
In the face of insufficient local funding, international financing needs to be stepped up, with the aim of tripling it by 2035. Public players, such as Development Finance Institutions (DFIs) like the World Bank and the African Development Bank, play a key role. However, private players and capital markets are also essential.
In this sense, we are seeing strong growth in green bonds in emerging markets, with a 50% increase between 2022 and 2023, now representing 40% of the global primary green bond market in 2023, but these amounts are still not sufficient(World Investment report 2024 - UNCTAD).
So what are the obstacles to attracting more investment?
A high cost of capital: an obstacle or an investment opportunity?
Today, the main obstacle to sustainable investment in emerging countries is the cost of capital (WACC). The cost of capital reflects the return on investment expected by shareholders and creditors. This cost is higher in emerging countries than in developed countries.
Source: International Energy Agency
Indeed, investors demand a yield premium to finance companies operating in emerging economies, due to the specific risks associated with these markets (currency, political, regulatory, etc.). This requirement slows down the inflow of investment. In addition, the credit rating of these companies, often classified as "high yield", reduces their attractiveness to new investors.
By way of example, if we take a solar energy project, this cost can be up to twice as high as in developed countries for an equivalent project. Note that the capital cost of a solar project is mainly borne by debt (65% on average).
Source: International Energy Agency
As a result, the cost of capital is hampering the dynamics of project financing, despite a real need for it. In fact, a reduction in this cost would ease the annual financing needs of emerging countries (-100 basis points would be equivalent to around $150 billion less each year) and thus facilitate the achievement of energy transition objectives.
It's true that a high cost of capital reflects a higher risk premium. However, it also represents an attractive investment opportunity for investors seeking higher returns.
Navigating the emerging universe requires expertise and a detailed "bottom-up" analysis of issuer quality.
and the resources they deploy in response to identified risks.
For over 13 years, IVO Capital Partners has been analyzing these opportunities in emerging markets.
Investment case of a renewable electricity generation company in Turkey: Aydem Renewables
Turkey's energy mix is still dominated by fossil fuels, which account for 60% of total production, of which 36% comes from coal.
However, renewable energies account for 40% of the mix, with marked growth in recent years. Historically focused on hydroelectricity, Turkey is now seeking to exploit its wind and solar potential by quadrupling its installed capacity, with the aim of reaching 120 GW by 2035(Reuters, Turkey aims to quadruple wind and solar energy capacity by 2035).
Source: International Energy Agency
Aydem Renewables is part of this dynamic. Aydem is a recent player with a limited size (1.2 GW / 1% market share) and little track record in terms of the operational quality of its assets. Present only on the Turkish market, Aydem was originally a specialist in hydroelectricity. The company is now expanding its portfolio to include solar and wind power generation capacities.
Aydem issued a dollar bond maturing in 2027, with a credit rating of B, a coupon of 7.75% and a leverage of 6.3x when it was issued on July 19, 2021. At first sight, these factors could deter some investors.
However, a number of creditor protection mechanisms can reduce the risk associated with high leverage to a minimum.
time of issue.
Aydem plays a strategic role at the heart of Turkey's energy transition, drawing on several strengths:
- Essential assets for the State, both tangible and strategic.
- Project bond financing, secured by key operating assets, with an amortizable structure that progressively reduces debt leverage. This offers strong credit advantages for bondholders, limiting refinancing risk and protecting against impairment.
- Protective covenants, including a strict dividend policy to preserve the bond's repayment capacity.
- Stable electricity prices indexed to the dollar thanks to the Feed-in-Tariff mechanism, reducing exposure to the risk of depreciation of the Turkish lira.
- A high EBITDA margin guarantees robust profitability and contributes to strengthening the issuer's credit profile.
Aydem has an attractive risk/return ratio and a structurally advantageous bond for creditors. Indeed, this company suffers from the poor quality of the Turkish sovereign rating (B+), which impacts its cost of credit. Its "zip code" imposes a credit risk premium 1.5 times higher (311 bps vs. 208 bps) than for an equivalent project in the USA, despite a leverage 2.5 times lower. Today, the Aydem 2027 bond offers an attractive yield of 7% in USD (5% in EUR), in line with our "Bad country / Good company" investment philosophy. What's more, Aydem 2027 is a green bond, aligned with international sustainability standards and complying with the European taxonomy's investment definition.
This case illustrates the challenges and opportunities of financing the energy transition in emerging markets, where credit risk remains a key factor.
Conclusion
The need for financing in emerging markets is clear, and there are opportunities for sustainable impact investing. However, this dynamic is hampered by the high cost of capital specific to emerging countries. Yet financing sustainable development in these regions also represents an opportunity to capitalize on long-term investment trends in strategic infrastructure, which have historically offered greater return visibility and stability for credit investors than more cyclical industries.
IVO Capital Partners has been investing in emerging markets for over 13 years, with a team of 11 highly experienced professionals.
The IVO EM Corporate Debt Short Duration SRI fund is part of this dynamic, providing sustainable financing for companies operating in emerging markets, while at the same time seizing investment opportunities offering attractive yields. Currently, the power and heat sector represents 20% of the allocation (in 6 countries), with 100% renewable generation and a yield of 7.3% in USD as at 28/02/2025.
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