COP28 made strides in highlighting finance’s role in achieving Net Zero, but global players now must embrace the sustainable finance momentum says Allegra Ianiri, Research Analyst at MainStreet Partners, as she shares her latest analysis
Money is arguably the most important factor in tackling climate change and COP 28 made impressive steps towards installing the finance cog into the proverbial Net Zero machine.
The pledging of $87 billion within the initial five days of the climate-focused conference was a significant achievement, especially given the COP presidency was held by petrostate the United Arab Emirates (UAE).
The launch by the conference’s host nation of the $30 billion ALTÉRRA fund to invest in climate friendly projects across the globe was undeniably a landmark moment, while the establishment of the Global Climate Finance Centre (GCFC), an Abu Dhabi-based knowledge hub that will help pioneer new forms of climate finance, was also a major achievement.
Galvanising investment behind existing, emerging and future technologies that can help mitigate the impact of climate change and help reduce the world’s emissions is vital if progress is to be made.
Getting this far was a significant feat given the complexity of the COP system, which relies on unanimity.
The next time your small group of friends can’t decide which restaurant to go to, spare a thought for the delegates representing the 199 COP member countries who have to agree on the precise wording of any agreement, navigating inevitable frictions to try and herd the disparate group onto common ground.
The unimaginable amount of compromise required here means it was little wonder that the public pledge to transition away from fossil fuels secured the biggest headlines, but it’s the funding announced at the event that will be the key catalyst for this and other ambitions.
First steps
Most commentators’ optimism where funding is concerned inevitably centres on the amount raised.
But while this was impressive, arguably the more important factor was the clear momentum in sustainable finance.
The UAE presidency has essentially helped point the world in the right direction when it comes to how finance is galvanised to hasten efforts to mitigate climate change.
Crucially, the developments at COP28 essentially indicate that the whole finance ecosystem will inevitably shift towards sustainability, suggesting positive momentum.
The results of the first climate stock take, which assessed how well the world was progressing towards reducing global warming, did, however, show a $40 trillion investment gap that must be addressed to hit Net Zero.
Essentially, this means that far larger sums of money need to be directed towards climate-related projects by the world’s leading countries, or used to help incentivise collaborations between public and private finance to act as a catalyst for sustainable investment.
This is because the challenge of achieving Net Zero is actually far greater than the generation of green energy, which tends to attract the most focus: what actually needs to happen is the greening of the whole economy.
Getting creative
To do this, a major enhancement of the sustainable finance ecosystem needs to take place.
Investors need new asset classes to entice renewable investment dollars, euros and pounds, while at the same time providing compelling risk/return ratios.
Alongside this, there is growing necessity for financial market participants to be able to rely on ESG data and ratings, which is no small feat.
Regulators in the UK, and Europe are making particular strides to stamp out so-called greenwashing, which is the difference between what a financial product’s sustainability aims are, and the actual outcomes.
The UK’s Sustainable Disclosure Regime and the European Securities and Markets Authority’s (ESMA’s) November 2022 consultation indicates a shared interest in ESG labelling issues.
Essentially, every layer of the investment chain has to be clear about green credentials, while ensuring appropriate labelling and marketing.
For truly significant progress, it will also be vital for financial participants to easily identify controversial ESG activities and behaviours of both funds and underlying holdings.
This means that ESG regulation cannot simply become a tick-box exercise; meeting financial metrics will be important, but upholding ethical and sustainability standards will be key.
And investment in unsustainable firms, or those not transitioning their business models quickly enough or slowing down their climate-related operational investment, should carry some form of disincentive or cost for investors, and reputational detriment to the funds or businesses concerned.
Actions such as this could help bolster the amount of global capital required to hasten the point at which the world reaches Net Zero.
And the reason such actions are important – and may even be non-negotiable – are that major spending on infrastructure beyond wind turbines and solar panels is required to prevent the worst effects of climate change.
As we heard stressed at COP28, there’s no transition without transmission; meaning that the world can create all the renewable energy it wants, but if there’s insufficient grid capacity to transport it to the world’s homes and businesses, then it’s a futile endeavour.
Releasing the purse strings
The scale of this challenge is significant.
Taking the UK as an example, the Government now has a target of generating 50 gigawatts of offshore wind energy by 2030, but will need roughly five times its existing grid capacity to transport such levels of energy.
That won’t be easy, and the UK isn’t an outlier.
With scientists now saying that the world needs to phase out fossil fuels just to limit the impact of climate change rather than prevent it due to the accelerated changes to the globe’s climate, it has arguably never been more urgent to amplify the quantum of capital being directed at achieving Net Zero.
An immediate boost could come from greater use of green finance products, such as bonds and sustainability-linked loans, while opportunities to invest in the decarbonisation of carbon-intensive sectors, including in sustainable urbanisation planning and grid infrastructure development, could also be grasped.
COP28 should be marked as a significant event when it comes to the shift the world needs to make towards sustainable finance.
Some new and exciting ideas have emerged, now it’s the job of the world’s nations, businesses, and investors to make them work.
And if they do, the most dominant headlines coming out of this year’s COP29 in Azerbaijan could be sustainable finance related.
Allegra Ianiri
Research Analyst at MainStreet Partners
