We are six months on from COP 26, the international climate meeting in Glasgow, which was widely hailed as “the finance COP”. Bankers and investors were more visible than at any previous COP, and their pronouncements reflected a much greater level of ambition, writes Alexandra Tracy, Director at CMIA.
Mark Carney, the UN’s Special Envoy on Climate Action and Finance, summed up the mood of many at the meeting in a bold statement: “Up until today there was not enough money in the world to fund the transition. Right here, right now is where we draw the line”. He urged financial institutions to do much more to align lending and investment activities with the net zero goals of the Paris agreement of 2015.
Private Sector Leading the Way
One of the big headline grabbers at the COP was the launch of the Glasgow Financial Alliance for Net Zero (GFANZ), a grouping of some 450 global banks, asset managers and insurers that have committed to net zero targets by 2050. Together, they control over US$130 trillion in assets under management, which is approximately 40% of the world’s financial assets, and acclaimed by Carney (also co-chairman of GFANZ) as “more than is needed for the net zero transition globally.” GFANZ signatories must set robust transition targets over the next year, which will be reviewed every five years in future.
Half a year later, GFANZ is facing a considerable amount of scepticism from detractors who point out that it puts forward no concrete definition or measure of “net zero” and that, in fact, absolute emission targets are not required from its members. Moreover, a recent report by think tank New Financial shows that capital flowing into investments that seek to address climate change is far less than that going to the fossil fuel industry. Even Bloomberg (Michael Bloomberg is the other co-chairman of GFANZ) confirms that banks have organised “almost US$4 trillion of loans and bonds for the oil, gas and coal sectors since the Paris Agreement.”
Public Sector Still Catching Up
While the private sector is addressing these tricky issues, let’s not forget that the commitment to provide US$100 billion per year in climate finance, made back in 2009 by a large group of wealthy nations, has not yet been met – leaving many poorer countries struggling to fund essential climate mitigation and adaptation.
Several governments did make additional pledges around the time of COP26. Germany and Canada came together to encourage more commitments from their peers, and announced that the amount should be fulfilled by 2023, an aspiration echoed by John Kerry, the United States Special Presidential Envoy for Climate. They expressed the hope that a greater amount will be mobilised annually from then on.
At the meeting, donor governments also agreed to support new initiatives to help fossil fuel reliant emerging economies develop greener alternatives. Japan, Britain, Germany and Canada, for example, will help to fund a programme under the World Bank’s Climate Investment Funds to accelerate the transition away from coal in South Africa, India, Indonesia and the Philippines.
Funding for Adaptation Seriously Lagging
According to the Climate Policy Initiative, another think tank, funding for adaptation from all sources increased 53% between 2017/2018 and 2019/2020, reaching US$46 billion. However, this is far short of the amounts that will be needed to create real resilience against potential future climate change. The UN Environment Programme estimates that annual spending on adaptation in emerging markets should be at least US$155 billion, and possibly as much as US$330 billion, by 2030.
Almost all of the current finance for adaptation is provided by governments, either directly or flowing through the multilateral and national development banks. The Climate Policy Initiative estimates that only about 12 percent of the total can be identified as coming from institutional or corporate investors (although it acknowledges that tracking data in the private sector can be challenging).
Barriers to investment include concerns about the benefits and revenue generating potential of adaptation projects, as well as local and cross border risk profiles and often lengthy pay back periods. Relatively few private sector investors in emerging markets are experienced at identifying bankable projects and building investment pipelines.
In order to close this spending gap, however, it will be essential to involve the private sector. To achieve this, however, governments must also play a key role in providing clarity on national planning and development goals and in strengthening the financing ecosystem to enable private sector participation. Together with a range of policy instruments, financial incentives, risk mitigation tools, better metrics and standards, these measures should provide the catalyst for much stronger investment flows.