Net zero readiness spotlight: Islands

Small island economies (SIEs) are at the forefront of climate change. Their economies and livelihoods are already impacted by the effects of a changing climate due to rising sea levels, increasingly frequent and more powerful storms, reduced access to drinking water and damage to ecosystems.

This spotlight edition of the KPMG net zero readiness series highlights SIEs and how they can attract private capital on their journeys toward net zero. It assesses 36 countries and territories on their relative preparedness and ambition to achieve net zero, and their ability to attract private capital to fund the transition to a sustainable economy — while highlighting examples of practices that are already being deployed.

The capital markets can play a key role in funding the net zero ambitions of SIEs. Survey participants — comprised of decision makers at 24 large institutional investors and pension plans together managing USD28.7 trillion in assets — have provided insight into the reasons global investment portfolios are underweight in SIEs and the actions SIEs may take to create change.

Small Island Economies (SIEs) are working to respond to the threat of climate change, yet funding remains a challenge for many...

• Small Island Economies (SIEs) are on the front line of climate change. All economies have a national ministry or department focused on climate change, however, they are at various levels of preparedness.
• Most economies in this research have policies in place for sustainable development and many are taking innovative approaches to climate change, including being early adopters of sustainable finance.
• More than half of the economies in this research get less than 10 percent of electricity from renewable sources, with electrification of transport being an area of focus.
• Among the economies in this research only Fiji, Guernsey and the Isle of Man have a net zero commitment in law. A further seven have a net zero target as a declaration, pledge or policy: Antigua and Barbuda, Bahrain, Barbados, Jersey, Maldives, Malta and Singapore.
• Barbados and Maldives have the most ambitious net zero target dates of 2030, with Antigua and Barbuda setting a date of 2040. More than half of the economies in the research have set 2050 as their target date.

The global capital markets could help to provide SIEs with a solution, though action is needed to enhance their appeal...

• Global capital markets are turning their attention to climate investing. Yet, SIEs do not currently feature in the investment portfolios of global capital market players, despite this being a USD3 trillion opportunity.
• SIEs are caught in a Catch-22: they can’t attract private capital because they have a limited track record, and they have a limited track record because they can’t attract enough private capital. There remains a mismatch between what private capital requires and what these island economies can deliver.
• The challenges that SIEs face cannot be resolved by capital market players alone. They need other players to act as flywheels that generate and accelerate private capital inflows over time. This would require a twin-track ‘build back bluer’ development strategy.
• A twin-track ‘build back bluer’ development strategy should aim to de-risk opportunities for private investors in climate adaptation and mitigation projects via two avenues: bonds with backstops from multilateral institutions and blended finance vehicles that also involve philanthropists willing to provide catalytic finance.
• Climate adaptation and mitigation projects could be part of an overarching strategy that aims to enhance three key enablers that can attract the inflow of private capital; a more conducive political environment, a credible national strategy on net zero and favourable business practices.