The private sector has more clarity on the actions and amounts needed to reach net zero, but now awaits details on the incentives and regulations needed to propel decarbonization investments
In response to the Intergovernmental Panel on Climate Change report who said global temperatures were likely to exceed 1.5 ° C earlier than expected, British Prime Minister Boris Johnson sought to focus international discussions at the COP26 conference in Glasgow around four themes: “coal, cars, money and trees ”. COP26 may have ended with a watered-down coal deal, but a largely optimistic perspective can be taken elsewhere when considering the commitments made by the international community in pursuit of the goals of the Paris Agreement.
Regarding “cash” in particular and throughout the climate summit, leaders and delegates recognized the role that private finance must play in translating ambition into achievement. After a fortnight of diplomatic wrangling, what the results of COP26 look like through the prism of private finance: what happened, what are the threats and opportunities for the private sector, and what companies should they expect in terms of next steps?
The financial priorities at COP26 addressed not only the public funding needed to develop the infrastructure needed for a climate resilient economy, but also the private funding needed to finance innovation and transformation “billions of public money in trillions of total climate investments.“
Wednesday November 3 was the Finance Day of COP26, the session specifically dedicated to discussing the accelerated mobilization of public and private finance for climate action, and in particular, how climate aid of $ 100 billion per year target to help developing countries reduce their emissions will be achieved. Some of the important developments of Finance Day include:
- More than 20 countries and financial institutions, including the US, UK, Denmark and the European Investment Bank, have pledged to halt funding for fossil fuel development overseas and divert around 8 billion dollars a year towards green energy starting next year.
- Banks and pension funds with assets estimated at $ 130 billion engaged to achieve the goals set by the Glasgow Financial Alliance for Net Zero (GFANZ). GFANZ signatories pledge to use science-based guidelines to align their assets with net zero emissions by 2050.
- The Chancellor of the Exchequer, Rishi Sunak, announcement the UK will become the world’s ‘first financial center aligned with net zero’, with all portfolios aligned with a transition to net zero by 2050 at the latest. As part of this, large UK companies will be required to publish their detailed net zero transition plans in 2023.
- The UK and US have announced that they will support a new “climate investment fund capital markets mechanism” to issue green bonds to finance renewable energy in developing countries.
Impact on the financial community
As laudable as the achievements of COP26 are, a skeptic might wonder to what extent such commitments are enforceable. While it is true that the legally binding nature of nationally determined contributions is up to each country, UK observers can look to their own government’s decision to set emission reduction targets in law, as well as perceptions. public to go back even slightly on these targets, as proof of the pressure to achieve the objectives of COP26.
In addition, the imperative of action is not lost on the financial community, which was a significant presence at COP26. The involvement of financiers supporting GFANZ may well reinforce the claim that political will alone is not enough: of the $ 130 billion in reported capital committed by GFANZ to net zero, only $ 5 billion had been committed when the UK assumed the COP26 presidency.
Long before the conference itself, in November 2020, the COP26 Private Finance Hub (a UK Treasury team led by Mark Carney in his capacity as UN special envoy and advisor to the Prime Minister) had reported on four principles to put climate change at the forefront of every business decision:
- Reporting: improve the quantity, quality and comparability of climate-related disclosures by implementing a common framework based on the recommendations of the Working Group on Climate Financial Disclosures (TCFD);
- Risk management: ensuring that the financial sector can measure and manage climate-related financial risks;
- Returns: help investors identify opportunities in the transition to net zero and indicate how their own portfolios are aligned for the transition; and
- Mobilization: increase private financial flows to emerging and developing economies by linking available capital to investment projects and encouraging new market structures.
The global business opportunity to shift to a low-carbon path is estimated at $ 26 billion by 2030, with the rewards to be reaped by supporting not only the technologies that will pave the way to net zero, but regions as well. who need investment the most. What businesses need is a clear path to unlock these opportunities.
Transparency and accountability are a good place to start, and large companies should prepare for an increase in climate-related disclosures. Demanding quality, standardized information around the world, under frameworks like the TFCD, will allow appropriate identification of climate-related risks and opportunities. Developing global standards on what constitutes “green” finance seems difficult – but it is a challenge that must be met if private finance is to fulfill its role in supporting the energy transition.
Laws and regulations will pose their own risks. Will governments retain the political will to make the required changes in their jurisdictions? Will regulation hinder progress if punitive sanctions for non-compliance are implemented, unless financial resources are diverted to a specific location for purposes directly related to decarbonization?
After that ?
Caroline Saul, Decarbonization Stream Lead at Osborne Clarke for Financing the Transition to a Low Carbon Future, said: “COP26 generated much needed discussion on what actions and amounts the private sector requires to achieve net zero, with GFANZ providing an umbrella under which like-minded financial institutions can form a coalition to work towards this common goal. We are now eagerly awaiting details from the UK government on the incentives and regulations that will propel investment in decarbonization projects, including the Glasgow breakthroughs, to ensure we stay on track to meet the targets.“
COP26 may have highlighted the lack of global consensus on climate action, and the scale of the challenge is vast, but so are the opportunities. Technologies already exist with the potential to achieve decarbonization, which Osborne Clarke reported in his “Sustainable disruption: 12 decarbonisation technologies for cities“publication with Economist Impact, part of The Economist Group.
Agile, enterprising and transparent market players have a lot to gain from the energy transition, and the development of a transition-resilient economy will require the involvement of public and private sector stakeholders. With strong momentum and the window for action closing, private finance is ready to respond to public ambition.