Emerging markets’ sustainable investment paradox

As governments’ environmental ambitions fracture, emerging markets are stepping into a new role, not just as beneficiaries of global capital flows, but as builders of the next phase of the transition to sustainable economies.

Emerging markets are no longer peripheral players in the global climate transition, but are now shaping its future. Yet their policy priorities remain complex and sometimes contradictory. That is a reflection of emerging markets’ growing autonomy as they work on their own transitions.

Such regional divergences are also reflected in recent climate pledges and changed priorities. The first half of 2025 saw ambitions around climate goals diverge, reflecting the scepticism of the US administration and renewed commitments elsewhere, as well as underlining the importance of steering capital allocations with these shifting dynamics in mind.

Emerging markets are no longer peripheral players in the global climate transition, but are now shaping its future

Competing priorities

For investors, the tension between emerging market governments’ ambitions and capacities is central to an understanding of the opportunities of the investment landscape. Increasingly ambitious climate targets are meeting structural constraints such as energy security, industrial competitiveness, and fiscal limitations, all of which can slow implementation.

This is especially true in the largest countries, China and India, where the scale of the climate transition clashes with complex economic priorities, including the need for affordable energy and industrial growth. China’s energy landscape illustrates this paradox. The country remains the world’s largest consumer of coal, and continues to build new coal-fired capacity to meet industrial power demand, 2024 marked the launch of record new coal plant capacity. Yet, as of July 2025, solar and wind accounted for 46% of China’s total power generation capacity. More generally, China is the global leader in renewable energy, battery manufacturing, and electric vehicle exports.

On 24 September, President Xi Jinping announced a 2035 commitment to cut emissions by 7-10%. That falls short of the 20-30% cuts that some analysts say are needed to align China with Paris Agreement objectives. This gradual rather than accelerated decarbonisation plan leaves room for China to beat its targets, as it has managed to do with previous goals. Given the country’s reliance on coal-generated energy - China still accounts for around 30% of global greenhouse gas emissions - the 2035 commitment is potentially impactful. We will have to wait for the next Five-Year Plan, expected in March 2026, to see whether China’s clean energy investments will ensure the structural decline in the use of coal needed over the next few years.

Meanwhile, China accounts for nearly 60% of the world’s solar installations. We expect this share to halve over the next decade thanks to developments in other emerging markets. The sustainability picture in other economies is fragmented but increasingly dynamic. Southeast Asia is scaling up its solar manufacturing, while Brazil is expanding its wind corridors and solar parks and leading developments in sustainable agriculture. In addition, Chile and Argentina are both key to global lithium reserves and are increasing production, while India is electrifying its transport through regional electric vehicle hubs, and the Middle East is channelling sovereign capital into green hydrogen and initiatives around the circular economy.

Mind the gap

Climate finance between emerging markets is also gaining momentum, with China and the United Arab Emirates funding more green projects. These include infrastructure that is critical to long-term decarbonisation, such as solar installations in Africa and electric vehicle infrastructure in Southeast Asia. By mobilising regional resources and expertise, these shifts in global capital flows reduce reliance on traditional donor countries and foster more resilient, locally adapted sustainable solutions.

Climate finance between emerging markets is gaining momentum, with China and the United Arab Emirates funding more green projects

Multinational companies are advancing sustainability in emerging markets by greening supply chains, sourcing low-carbon materials, and enforcing stricter standards - especially in electronics, automotive, and consumer goods. Their efforts support national climate goals through emissions disclosures, circular production, and infrastructure investment in areas like recycling.

Still, many economies, both developed and emerging, face challenges: limited access to green capital, shallow financial markets, and fragmented regulations.

The gap in climate investments remains significant. These countries need approximately USD 2 trillion annually to mitigate the impact of climate change, and USD 400 billion each year to adapt their economies, yet only USD 72 billion was invested in adaptation programmes as recently as 2022, according to the United Nations Environment Programme in 2024.

Financing innovation

The investment landscape in emerging markets is also evolving rapidly. Our current portfolio positioning - overweight emerging market equities and emerging market hard currency debt - reflects the tactical cross-asset valuation appeal, while the broader structural momentum offers opportunities for investors seeking both exposure to companies contributing to the environmental and social transition, and financial returns.

Many economies, both developed and emerging, face challenges: limited access to green capital, shallow financial markets, and fragmented regulations

When evaluating the potential of sustainable emerging market equities, we look for companies and sectors that demonstrate scalable innovation and resilience. These actors are not only responding to global sustainability pressures but also shaping local transitions through technology and resource efficiency. Indiscriminate investments in these sectors have seen high volatility in the past. With very high competition in many sectors, investors need to ensure that firms have the means to maintain high margins and defend market shares. In the electric vehicle market, for example, we remain very selective.

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In sustainable fixed income, investors are increasingly turning to ‘labelled’ green, social, and sustainability bonds, where proceeds are reserved for projects or activities with positive environmental or social outcomes, along with blended finance structures that combine public or philanthropic capital with commercial capital. These innovative tools are also catalysts for real-world change, financing projects including solar farms in North Africa, and sustainable forestry and conservation initiatives in Brazil. They also underline the increasing maturity of emerging market debt markets with environmental and social goals. According to the World Bank, the share of emerging market issuers in the labelled debt market has more than doubled between 2020 and 2024. Meanwhile, solutions in microfinance, while typically less liquid than labelled bonds, are increasingly structured to meet robust financial standards and bring portfolio diversification.

Beyond diversification

For investors seeking to put their capital to work with a purpose, emerging markets offer more than just portfolio diversification and financial opportunities. They can provide access to the next wave of global transformation, where climate ambition converges with innovation, resilience, and inclusive growth.

The next United Nations’ Conference of the Parties (COP) climate summit in Brazil in mid-November is a reminder of Latin America’s growing leadership role. Brazil’s biodiversity, clean energy, and emerging green finance ecosystem all give it an important role in nature-based investment strategies. Carbon markets, forest conservation finance, and circular economy initiatives are all gaining traction, offering investors region-specific opportunities to align portfolios with environmental and social impact.

Brazil’s biodiversity, clean energy, and emerging green finance ecosystem give it an important role in nature-based investment strategies

While progress varies across sectors and ambitions must take economic realities into consideration, the expanding role of the private sector in shaping sustainable finance - through innovation, partnerships, and risk-sharing mechanisms – can provide investors with diversified exposure to the environmental and social transition. These developments complement sovereign commitments and signal a broader evolution in the architecture of sustainable finance across the globe.