Finance inequities hobble environmental funding

2021 was a banner year for sustainable finance, with the creation of the Glasgow Financial Alliance for Net Zero (GFANZ) managing over $140 trillion in assets; sustainability bond issuance up to $1 trillion and record inflows of more than $120 billion to Environmental, Social and Governance (ESG) targeted funds. There seems to be no shortage of funds today for ESG. Does this mean that the global transition to a low carbon economy is now on track? Yes and no.

For sure, mobilizing finance to reward ESG-compliant companies through financial markets is necessary. However, simply classifying financial assets as ESG does not deliver better outcomes if those funds cannot land where they are most needed. Critically, they must overcome two built-in imbalances in global finance. The first imbalance is between emerging markets and developed markets.

Over half of the global investment towards net zero needs to happen in the developing world – Asia alone requires $3 trillion annually from now until 2030 to achieve the UN Sustainable Development Goals (SDGs). And yet, critically, most of the ESG tagged assets are in Europe, and only 10% are in Asia. So, Asia still lacks ESG funding. The second imbalance is between large and small companies or projects.

The shortage of funds for micro, small, and medium-sized enterprises (MSMEs) is a sad story of market failure. MSMEs create over 80 per cent of all jobs in developed or emerging markets, and contribute significantly to…