The Institute of International Finance (IIF)'s annual membership meetings bring together a wide range of stakeholders to discuss economic, regulatory, and geo-political risks and opportunities for financial institutions. Participants include representatives from central banks, regulatory bodies, and the private sector.

Why it matters:   Sustainability was a key topic at this year's IIF meetings. There was general consensus about ongoing challenges in addressing the climate financing gap, the lack of comprehensive regulation and standardization on transition planning, and differing approaches to sustainability in the banking sector. Here, S&P Global Ratings highlights five key takeaways on sustainability from those meetings.

1. The climate finance gap in emerging markets and developing economies is widening and is unlikely to close without the concerted efforts of multiple stakeholders, including private capital at scale.  Participants acknowledge the growing climate financing gap in emerging markets and developing countries (excluding China). According to the U.N.'s 2024 Financing for Sustainable Development Report, the Sustainable Development Goal investment financing gap has increased 56% since 2020, amounting to $4 trillion annually through 2050.

The financing gap is largest in middle-income countries but, in the least developed and low-income countries, it is larger in proportion to domestic resources, ranging between 15% and 30% of their annual GDP. According to figures from the Joint Report on Multilateral Development Banks' Climate Finance, multilateral lending institutions (MLIs) provided a record $125 billion of climate finance in 2023, including $74.7 billion to low- and middle-income countries and $50.3 billion to high-income countries.

These figures still pale in comparison to the amounts cited by the U.N. as needed to achieve a comprehensive global transition. The magnitude of investment needed for the transition far exceeds public financing capabilities, which highlights the need to mobilize private capital on a larger scale. When looking at investment needs, it was acknowledged this is increasing in importance at a time when low- and lower middle-income countries are seeking to align with developed markets on the transition.

As foreign capital flows into lower-income countries for green and transition-related projects, governments especially have a responsibility to ensure that these do not come at the expense of vulnerable populations and actually raise overall standards of living. Boosting investment across the globe will require increased and more effective coordination across the ecosystem, including MLIs, governments, philanthropic capital, private investors, financial intermediaries, rating agencies, and other relevant stakeholders.

2. Supportive local institutional frameworks, including transparency and predictability of policies, as well as more transparency on local risk data, are essential to attracting private investment.   Availability of more risk data and supportive local institutional frameworks were mentioned as key to increasing investor confidence in lower-income countries. The transparency and predictability of government policy were seen as critical to creating a more hospitable environment for global capital.

MLIs and other international financial institutions' can play a role in these areas by offering technical assistance, helping to bring projects to a bankable state, and providing enhanced disclosure about their own risk data. The recent release by the Global Emerging Markets Risk Database Consortium of enhanced data on defaults and recoveries across developing economies is a positive step toward increasing transparency and investor confidence.

3. MLIs' move toward loan origination and distribution was mentioned as a way to allow private market participants to leverage MLIs' unique local underwriting capacity, expertise, and risk experience.  This would represent a departure from MLIs' primary focus on an originate-to-hold model. In addition to allowing investors to benefit from MLIs' local expertise and underwriting capabilities, such an approach could free up resources for additional projects while simultaneously developing local debt markets. The latter was mentioned as being a way to address the significant foreign exchange risks that often undermine the creditworthiness of many projects.

4. In lower-income countries impediments to blended finance capital include a dearth of catalyst capital, standardization, scale, and speed.   Greater velocity and replicability were often cited as key ways to enable scalability. Transactions tend to be bespoke, and time to completion can be significantly longer than for other structures. The lack of size of individual blended finance transactions was also mentioned as a roadblock to private-capital mobilization at scale.

More risk mitigation tools, such as credit guarantees and first-loss loans for lower-income countries could help bridge the gap between financing needs and institutional investors' risk appetite, while increasing investor confidence. Overall, the need for more effective coordination and cooperation across stakeholder groups was a primary focus of the discussions.

5. Transition planning has begun to take center stage in sustainable finance markets, posing potential challenges for banks.   Private-sector participants, in particular, discussed how sustainable finance markets seem to have gradually moved past vague, generic actions or statements that do not demonstrate efforts to quantify the environmental benefits of projects or investments.

For nonfinancial corporates, stakeholders appear to be looking for green projects to be positioned in the context of issuers' wider transition plans. Investors in this space are typically seeking quantifiable targets with detailed action plans, and short- or medium-term interim targets may be an effective way to demonstrate this. Transition plans can be seen as a roadmap that guides issuers toward organizational resilience, be it to physical climate risks, or financial, policy, or other risks. A lack of standardized disclosure, sector-specific transition nuances, and global fragmentation in defining the transition are still pertinent issues to be addressed, in our view.

Measuring banks' progress on the climate transition can be difficult because banks' impact rests primarily on the activities they facilitate through loans, investments, or guarantees. One way to assess a bank's transition efforts is to compare its progress to that of the real economy in which it operates; for example, is the bank leading in terms of transition, is it in line with the market, or is it lagging the rest of the economy?

Overall, participants expressed the opinion that financial institutions must be deeply engaged in sustainability issues to fully understand the transition. It is equally important to understand the actions that accompany public statements, both from the standpoint of banks' relationships with their clients and that of regulators supervising financial institutions. Banks are increasingly looking to governments to set the guardrails and rules of the transition.

Divestment is one way to reduce climate risk exposure but may not be an ideal solution. That's because this does not always encourage decarbonization, and sold assets may be purchased by investors with little interest in pursuing climate goals. This is especially true in lower-income countries that may already have difficulty accessing capital.