EMs face dearth of private capital amid slow gains in transparency

Flows have dropped 22%

Private capital flows to emerging markets and developing economies (EMDEs), excluding China, have dropped 22% since 2019 despite the ESG market growing 15% to $22trn in 2022 – and $1trn of that invested for positive impact.

According to State of Play 2023, a study by Impact Taskforce (ITF), these figures show the need for greater transparency in impact investing.

The report noted there have been transparency improvements in this area, citing the formation of the International Sustainability Standards Board (ISSB) and the Taskforce for Inequality and Social Related Finance Disclosure as examples.

Funding gaps

However, progress does not match the urgency of the situation, according to ITF. It stated only 10% of the $40.3bn of private sector capital mobilised by development finance institutions (DFIs) in 2021 reached low-income countries and the annual funding gap for achieving the Sustainable Development Goals (SDGs) and climate goals in EMDEs has increased to at least $4trn.

Further, total deal volume decreased by around 45% in 2022 and climate blended finance fell by some 55% – marking a 10-year low in total financing.

Inflexible to risk

Despite structural shifts towards ESG investment products and major commitments to climate finance and net zero from institutional investors, there are still barriers built into the system preventing private capital flows to EMDEs.  

“…It is clear that these institutional investors struggle to reconcile investments in EMDEs within their prudent regulatory frameworks, and very few have the flexibility to adjust their risk and capital charge frameworks,” the paper stated.


The group argued along with greater transparency, there needs to be a transformation in the opportunities to invest for impact.

State of Play 2023 recommended DFIs and multilateral development banks (MDBs) help mobilise more private investment for impact in emerging economies by giving greater priority to smart impact partnership models with national and regional EMDE actors.

Example actors include domestic pensions funds, national public development banks, regional development institutions and emerging domestic impact fund managers which all have deep local knowledge and experience FX risk as less of a barrier.

“In this context, we encourage prioritising better solutions for increased access to affordable finance for job-creating SMEs (a critical issue in most EMDEs), as well as for narrowing the gap between providers of institutional capital and local capital providers,” the report stated. 

There are also a set of recommendations for government donors and shareholders around how they can boost private investment in EMDE, including increasing the supply of catalytic capital for sub-investment grade EMDEs and finding quicker ways of hedging FX risk.

Capitalism under threat

There must be pivotal change in 2024, the authors argued: “As the climate crisis deepens, inequality widens, and a shift in geopolitics brings increased pressure for change – not to mention societal pressures that are challenging the status quo – there is no doubt that 2024 needs to bring about pivotal change.

“Failure to respond adequately poses a systemic threat to our prevailing capitalist system and the liberal democracies that depend on it.”

To get there, State of Play 2023 recommended incentives for private capital investment be revisited and current practices in public, private, and philanthropic sectors be challenged.

“Fragmented efforts are inefficient; the next cycle of leadership in the G7 and G20 needs to align key public and private actors behind a single transparent plan to mobilise private capital for impact on the SDGs in EMDEs with a level of accountability that will incentivise delivery,” it continued.

Critical role

Nick Hurd, chair of the ITF chair and the Global Steering Group for Impact Investment and former UK government minister, said the SDG funding gap was unacceptable MDBs and DFIs have a critical role in bridging it.

“Public investment matters but it will never be enough. We need a concerted effort to make it easier and more compelling for private investors to narrow the unacceptable SDG funding gap. Impact transparency is important and tracking in the right direction, but needs to move faster.

“Much more needs to be done to help institutional investors get comfortable with the opportunity to combine acceptable risk-adjusted return with positive impact in sub-investment grade countries. We set out a change agenda that will help DFIs and MDBs be more effective in their critical near-term role.”