Emerging Debt Energy Transition

Executive Summary

In this paper we propose a novel approach to financing emerging countries’ transitions toward cleaner energy production. We believe a significant opportunity exists across two dimensions: greenhouse gas (GHG) emissions reduction and investment returns. Using insights from what in 2024 is thirty years of experience in emerging markets fixed income investing, our approach aims to facilitate the goal of energy transition that is consistent with sovereign net-zero commitments, while also offering attractive investment attributes relative to developed market (DM) fixed income analogs.


Emerging market (EM) countries in aggregate contribute disproportionately to global GHG emissions because a substantial portion – approximately 80% – of the installed electricity generation capacity in these nations still relies on non-renewable, fossil fuel-based sources (coal, gas, and oil-based derivatives). To approach the net-zero goal of reducing global emissions by enough to prevent a temperature rise of more than 1.5 degrees Celsius, this non-renewable installed capacity needs to plummet to around 30% within the next 10 years. 1

The energy transition imperative arrives at a time when EM countries are still to varying degrees trying to catch up with their DM counterparts with respect to electrification. Chile, for example, is 50% of the way to renewable electrification currently, while South Africa has progressed less than 5%. In aggregate across EM, with growing populations, increased incomes, and electrification of mobility, an estimated 3,000 GW in capacity is already needed vs. a 1,500 GW installed capacity. Then, there is the need to “green” this 1,500 GW installed capacity. Altogether, this 4,500 GW demand, coupled with a $2.5 billion/GW estimated build cost, 2 translates to an $11 trillion funding need. So far, EM governments have only budgeted $4 trillion, resulting in a $7 trillion shortfall and thus leaving a significant role for the private sector to play in bridging the gap. 3

We believe a thoughtfully chosen investment universe can take investors a long way toward maximizing the energy transition impact of their allocation, therefore it’s important to understand the forces that drive the energy transition process from the top-down (sovereign) and the bottom-up (asset level). Globally, sovereigns influence companies' contributions to net-zero goals from the top-down through regulation. In emerging countries specifically, most of the net-zero agenda will be carried out by the state-owned enterprise (SOE) utilities and financial institutions, as well as privately sponsored corporations and projects with government contracts (a well-trodden risk-sharing framework better known in DM as “Public Private Partnership” or “PPP”). Thus, EM sovereigns wield tremendous influence on the overall EM energy transition.