While many countries are gearing up to combat climate change, financing these large projects may pose a challenge. ----- Transcript -----Simon Waever: Welcome to Thoughts on the Market. I'm Simon Waever, Morgan Stanley's Global Head of EM Sovereign Credit Strategy. Carolyn Campbell: And I'm Carolyn Campbell, Head of Morgan Stanley's ESG Fixed-Income Research. Simon Waever: On this special episode of the podcast, we'll discuss the credit impact of climate finance in emerging markets. Carolyn Campbell: It's Monday, June 26, at 10 a.m. in New York. Simon Waever: We believe that the ramp up in climate mitigation and adaptation financing from developed markets can be a key credit positive for emerging market countries, if executed correctly. The amounts of financing required in low and middle income countries to adapt to and mitigate the effects of climate change is likely to be over 1 trillion per year by 2030. Carolyn, let's start with that 1 trillion figure and the scale of the challenge. How are low and middle income countries positioned for climate change? Carolyn Campbell: So when we think about climate change, there's two sides of the coin. There's climate change mitigation, which is everything that will slow or prevent the temperature from rising more than a degree and a half above pre-industrial levels, which is the goal of the Paris Agreement. And on the other side, we've got adaptation, which is financing projects that will build resiliency to physical risks, for example, or to help transform the economy away from dependency on industries that are likely to be harmed by climate change. So on the mitigation side, we've seen energy consumption in emerging markets steadily rise over the past couple of decades as their economies continue to develop and their populations grow often at faster rates than we see in developed countries. Now, while we've seen absolute levels of renewable energy usage tick up in these countries, on a proportional basis we're not seeing a material change, and that's because of this absolute rise in energy usage overall. So that leaves a lot of scope for the expansion of low carbon technologies such as wind and solar and so on, and that's obviously very expensive. On the adaptation side, a lot of the emerging markets are located in areas that will bear the brunt of climate change, whether that's through worsening storms or increased droughts, rising sea levels and so on, and they don't have the same infrastructure or economic diversity to deal with these climate impacts. So it's an immense amount of capital required for both types of projects, as you said, likely to be greater than a trillion dollars per year by 2030. And so far, developed markets have actually come up short on their promise to deliver $100 billion annually in climate finance. So all this being said, I think it begs the question how will they pay for it without incurring an unsustainable debt load? Simon Waever: Yep, that is the question. And I would say the good news so far is that more and more sources are being made available with some being more targeted than others. The first main source is loans. So these generally come from either bilateral agreements, so from other sovereigns, or from multilateral institutions such as the World Bank. An example of a new facility being made available just in the past year is the resilience and sustainability trust from the IMF, which has now already made disbursements to six countries with more on the way. And the advantage of this facility, compared to others from the IMF, is that it comes at a lower cost and a longer maturity. The second main source is the capital markets. The instruments people will be most familiar with here are the labeled bonds, such as green, sustainable or even sustainability linked bonds that see their coupons change depending on various targets being met. But today, there's also an increasing use of the debt for nature swaps such as used in Belize and Ecuador recentl