South African household spending could fall by a total of USD281.8 billion between now and 2060 if the nation has to self-fund its journey to net zero, a new study by Standard Chartered has revealed.

According to Just in Time: Financing a fair transition to net zero, which looks at the transition financing gap for emerging markets and how to close it, South Africa will require USD833.6 billion to transition to net-zero and will need assistance from developed markets to meet its goals.

The study found that…

-          If the finance South Africa needs to transition to net zero is provided by developed markets, South African household spending could increase by USD311.1 billion between now and 2060 compared to self-financing

-          If emerging markets fund their own transition, without help from developed markets, household consumption in these markets could fall by 5 per cent on average each year

-          If developed markets finance the transition, global GDP could be USD108.3 trillion higher cumulatively between now and 2060

The transition finance gap

While South Africa needs investment of USD833.6 billion to transition to net zero, Just in Time reveals that emerging markets as a whole need to invest an additional USD94.8 trillion – a sum higher than annual global GDP – to transition in time to meet long-term global warming targets.  This is on top of the capital already allocated by governments under their current climate policies.

However, as shown in our previous report, The USD50 Trillion Question, encouraging investment in emerging markets is a difficult task. The world’s top 300 investment firms with total assets under management of more than USD50 trillion, have just 2 per cent, 3 per cent and 5 per cent of their investments in the Middle East, Africa and South America, respectively.

Closing the transition finance gap

Just in Time looks at two pathways to closing the emerging market transition finance gap, self-financing by emerging markets and developed market financing, where capital is provided through grants and loans.

Exclusive emerging market self-financing would lead to higher taxes and an increase in government borrowing, meaning that families in emerging markets, including South Africa, will have less to spend on their everyday needs. However, developed market financing has the opposite effect.

Making developed market financing a reality

However, to transition in the fairest way possible, collaboration is required in strategy, policy, and financing. Emerging markets need to put net-zero strategies and roadmaps in place in order to help financing flow to products within their borders. Enabling policy and regulation is crucial, and policy frameworks that prioritise interoperability and do not hold all markets to the same standard are important in the short-term. 

In addition, the public sector must play a more strategic role in mobilising real economy capital, but the private sector needs to step up and take the lead with innovative financing products for emerging market investments, especially as around USD83 trillion of the USD94.8 trillion would be expected to come from private sector investors.

Bill Winters, Group Chief Executive, Standard Chartered, said: “Emerging markets need a great deal of investment to transition to net zero and the stakes have never been higher. Without help from developed markets, improvement in emerging market prosperity could be halted or reversed, which would not only be unjust but would have a hugely negative impact on the world economy.

“However, even more crucially, failure to deliver emerging market transition finance could mean climate goals are missed, triggering an environmental catastrophe. Governments and the financial sector need to come together to help facilitate the flow of investment into emerging markets urgently. Developed market funding could help prevent the worst of global warming, as well as stimulating global GDP.”