By Zula Luvsandorj
Clean energy is essential to addressing climate change, but many countries face serious challenges in making the transition. In frontier and emerging markets, where economies are smaller and institutions are less developed, attracting the necessary investment is difficult. One major reason is the way environmental, social, and governance (ESG) standards are currently applied in “high-risk” markets.
These standards were designed to ensure that investments support sustainable and responsible outcomes. In theory, this helps direct funding toward clean energy and protects against harmful practices. In practice, however, strict ESG requirements can slow or block investment in the places that need it most.
The ESG Hurdle
Investors increasingly rely on ESG criteria to guide decisions. But these frameworks often assume stable governments, clear regulations, and well-developed reporting systems. In many high-risk markets, those conditions are not present. Meeting ESG demands can require legal advice, detailed documentation, and regular monitoring – resources that small or early-stage projects often lack.
A small hydropower or solar project in a rural area may have strong local impact, but if the team behind it cannot provide quarterly ESG updates or meet international compliance standards, they may be overlooked by investors. This doesn’t mean the project is weak. It means the system is not built for their context.
Misaligned Models
Traditional financing models were built for stable environments. They often favor large-scale infrastructure with clear revenue models and long-term policy guarantees. This creates a mismatch when applied to newer, smaller, or more local clean energy solutions in high-risk areas.
Instead of asking local projects to fit into rigid frameworks, financing strategies need to become more adaptable. The key is to build models that understand and respond to local conditions without lowering standards.
What Needs to Change
1. Scaled ESG Requirements
Apply ESG standards in proportion to project size and risk. Small community energy projects should not be judged by the same criteria as large corporate ventures.
2. Blended Finance
Combine public, private, and philanthropic capital. Public or concessional funds can take on more risk, making it easier for private investors to get involved.
3. Local Involvement
Work directly with local organisations and governments. They understand the landscape and can help shape solutions that are realistic and effective.
4. Capacity Support
Fund training and tools that help local developers understand and meet ESG standards. Don’t just expect them to already have this capacity, help them build it.
5. Risk Guarantees
Expand the use of insurance and guarantees to cover political or regulatory risks. This gives investors more confidence to work in uncertain environments.
Looking Forward
Financing green energy in high-risk markets will require more than just good intentions. It will require changes to the way capital is structured and how success is measured. Emerging economies cannot be expected to follow the same path as wealthy nations. Their needs, challenges, and opportunities are different.
ESG goals remain important, but they must be applied in ways that allow meaningful progress in places where the need is greatest. More flexible, context-aware financing will not only support clean energy in these markets, it will also bring the world closer to its climate goals.
