The third day of this year’s international climate negotiations – COP26 – was dedicated to finance, with the 4th High-Level Ministerial Dialogue on Long-Term Climate Finance headlining.
Developed countries are moving closer to the goal agreed in 2009 of mobilizing $ 100 billion per year in climate finance to support developing countries, albeit beyond the 2020 deadline. Most developed country parties have pledged to provide additional funding, and the UK COP Presidency issued the Climate finance implementation plan: meet the US $ 100 billion target. Negotiations are also underway to establish a new collective climate finance goal.
At the same time, multilateral development banks and the private sector have increased their commitments on climate finance, established financing mechanisms and increased alignment of existing commitments with science-based net zero goals. Key initiatives include the Glasgow Financial Alliance for Net Zero, Climate Investment Funds Capital Market Mechanism, the MCPP One Planet platform (led by the International Finance Corporation, the Hong Kong Monetary Authority and Allianz Global Investors) and the Energy Transition Mechanism of the Asian Development Bank.
Key points to remember
Increased public funding commitments are essential to build trust between developed and developing countries, and enable developing countries to meet the “conditional” elements of their Nationally Determined Contributions (NDCs). It is important that good progress is made in the negotiations of the new collective financing target to quickly accelerate the decarbonisation pathways of developing countries.
Ensuring that developing countries have access to climate finance and increasing funding for adaptation actions remain key issues in formal negotiations.
New private financing commitments and mechanisms are promising and present real opportunities for the private sector. However, they remain well below the trillions of dollars in private financing needed to move to net zero emissions and adapt to climate change. A major challenge remains directing a higher percentage of private climate finance towards adaptation actions, with innovative financing mechanisms needed to generate a return on investment.
More in detail
Public finance for climate
In Glasgow, finance ministers met on November 3, 2021 for the 4th high-level ministerial dialogue on long-term climate finance. Ministers discussed three key issues:
- What specific actions can ministers take to further improve the scale and effectiveness of climate finance, especially with respect to developed countries achieving the agreed target of mobilizing $ 100 billion per year in climate finance? by 2020 to support developing countries?
- What progress has been made, and will be made in the future, in developing a financial system to support a net zero and climate resilient future that also ensures sustainable growth for developing countries?
- How can governments, multilateral development banks and the private sector significantly increase the mobilization of private finance to developing countries for adaptation and mitigation?
This follows the publication by the UK Presidency of COP 26 of the publication of the Climate finance implementation plan last week, which provides a clear roadmap for developed countries to reach the goal of $ 100 billion per year. Although it is estimated that developed countries will reach this target 2-3 years later than promised, achieving the target represents an important step in building trust between developed and developing countries.
In the months leading up to Glasgow, developed countries pledged to provide significant additional climate finance (captured here). For example:
- The United States will double its annual public climate finance by 2024 to reach $ 11.4 billion, including $ 3 billion to support adaptation actions.
- Germany will increase its climate finance from € 4 billion to € 6 billion per year by 2025.
- Japan will contribute an additional USD 10 billion in climate finance over the next five years.
- Denmark will mobilize at least 1% of the 100 billion dollars collectively pledged by 2023, 60% of which will support adaptation actions in the most vulnerable countries.
- Norway would double its climate finance to $ 1.6 billion by 2026.
- South Africa, the United Kingdom, the United States, France, Germany and the European Union have formed a partnership to accelerate a just energy transition in South Africa. Over the next 3-5 years, $ 8.5 billion will be available to ensure South Africa achieves its updated NDC.
- The Working Group on Access to Climate Finance was launched by the UK and Fiji, with the aim of improving access to climate finance.
These commitments will be essential for developing countries to meet the “conditional” elements of their Nationally Determined Contributions (NDCs) as well as adaptation priorities.
During formal negotiations, parties discussed a new collective quantified goal on climate finance, including key issues such as quantity, quality, efficiency, timeliness and access to finance. The new target may provide more details on the agreed percentages of public and private funding, and the percentages that should be allocated for different purposes (eg mitigation, adaptation). It is important that good progress is made in the negotiations of the new collective financing target to quickly accelerate the decarbonisation pathways of developing countries.
Parties also discuss the compilation and synthesis of biennial communications under Article 9.5 of the Paris Agreement, which concerns ex ante financial transparency. These include predictability of funding and ways to improve biennial communications (eg to better reflect developing country priorities).
Another key item on the finance agenda was the review of the Green Climate Fund report, with key issues relating to access to climate finance, transparency and modalities of project finance with co-benefits (eg benefits).
Private sector climate finance
Along with the formal negotiations, there has been a proliferation of climate finance announcements from the private sector and multilateral development banks. We summarize a number of key initiatives below:
- Anchored in the Race to Zero campaign of the UNFCCC, the Glasgow Financial Alliance for Net Zero (GFANZ) is a private sector-led initiative that aims to align private capital with science-based net zero commitments and short-term decarbonization goals. This initiative currently represents more than 450 companies in 45 countries, which control $ 130 trillion in private capital. Members have committed to publishing plans to support their long-term commitments and annual progress reports.
- The Climate Investment Fund Capital Market Mechanism initiative plans to issue bonds in 2022 for clean energy and sustainable infrastructure projects in developing countries and emerging economies. It is expected that these bonds could raise up to $ 700 million per year.
- The MCPP One Planet global platform was launched by the International Finance Corporation (IFC), the Hong Kong Monetary Authority and Allianz Global Investors. The platform will provide up to USD 3 billion to private companies implementing Paris Agreement-aligned climate smart investments in developing economies.
- The Asian Development Bank (AfDB) has launched the Energy Transition Mechanism, which aims to accelerate the transition from coal to clean energy. The pilot phase will invest between $ 2.5 billion and $ 3.5 billion in Indonesia, the Philippines and Vietnam with the aim of removing two to three coal-fired power plants in each country before the end of their project’s expected life.
- IFC and Amundi announced the development of a $ 2 billion fund that aims to catalyze private investment in sustainable bonds in emerging markets. The sustainable bonds will aim to support a “green, resilient and inclusive recovery” from the COVID-19 pandemic, and “will channel capital from institutional investors to anchor investments in corporate and sustainable bond issues. of financial companies in developing countries ”, with the objective of mobilizing additional financing and strengthening the asset class.
These new commitments and private financing mechanisms are promising and present real opportunities for the private sector, in particular those engaged in mitigation actions in developing countries and emerging economies.
However, they remain well below the trillions of dollars in private financing needed to move to net zero emissions and adapt to climate change. A major challenge remains directing a higher percentage of private climate finance towards adaptation actions, with innovative financing mechanisms needed to generate a return on investment.
COP26 hub: STEPS towards net zero
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