The road to COP26: exploring the role of private finance

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Summary

Environmental scan: As part of our series of environmental scans leading up to the 26th United Nations Climate Change Conference (COP26), this news scan focuses on the role of private finance in achieving climate reduction targets. Paris Agreement issues. Kiran Arora and Dominic Gregory, partners, and William Rowell, trainee lawyer, of Bryan Cave Leighton Paisner LLP, discuss the four main objectives of private finance work identified in the pre-COP26 strategic report, Building A Private Finance System for Net Zero, and how they are ready for delivery.

introduction

COP26 is due to take place in Glasgow from October 31 to November 12, 2021 after being delayed for a year due to the coronavirus (COVID-19). The landmark 2015 Paris Agreement provided a framework to tackle climate change, but many questions remain, including:

  • the balance between mitigation and adaptation
  • the extent to which the climate change approach should address global inequalities
  • the role of the private sector and
  • the role of private finance

Among these issues, private finance work promises to be particularly important following the establishment of the COP26 Finance Hub, led by Mark Carney, and the publication of a strategic report entitled “Building a private financing system for Net Zero” (the Report) in November 2020.

At COP26, countries will have to reaffirm their commitments to achieve global net zero by 2050 and to “keep 1.5 degrees within reach”. Countries will be encouraged to protect and restore ecosystems and build resilient defenses, warning systems and infrastructure and agriculture to protect the environment and the Paris Regulation could be finalized, encouraging collaboration between governments, businesses and civil society. Developed countries will also be called on to keep their pledge to mobilize at least US $ 100 billion in climate finance per year by 2020.

For more information, see News Analysis: On the road to COP26: what is it and why is it important?

Goals

The report defines four key objectives and the actions necessary to achieve them. These are:

  • report
  • risk management
  • comes back, and
  • mobilization

Reports

The Taskforce for Climate-related Financial Disclosures (TCFD) was created in December 2015. It made a series of recommendations in its 2017 report designed to provide a framework for organizations to “develop more effective financial climate information through their existing reporting process”. It recommended that climate-related financial information be included in companies’ annual financial statements, to improve transparency and quality of information and encourage more sustainable practices. For more information on the 2017 report, see: TCFD Recommendations for Climate-Related Financial Disclosures—LNB News 06/29/2017 110.

The TCFD has already had a significant impact. In March 2021, the TCFD reported that it had over 2,000 supporters, with a market capitalization of over US $ 19.8 billion, including more than 859 financial companies, responsible for assets of US $ 175 billion.

The report argues that the quality and quantity of climate-related financial disclosures should be improved, however, and that the private financial sector should disclose voluntarily in accordance with all of the TCFD recommendations. It recommends that reporting be made mandatory through the introduction of new national and international legislation and that coalitions of countries be established to enforce these reporting requirements.

The report also recommends other measures, such as financial regulators and central banks issuing guidelines to financial companies on climate-related reporting and stock exchanges developing TCFD-compliant listing guidelines.

Risk management

The second objective identified is that the physical and transitional risks of climate change are effectively managed. While the physical risks that arise from the increased frequency and severity of climate and weather events are well documented, there are also significant transition risks arising from changes in climate policy, technology and market sentiment in the shift. to a net zero economy.

The COP26 Private Finance Hub recommended that central banks and / or supervisors commit to taking action, including stress testing of banks and insurers against climate scenarios, incorporating climate risk considerations into the portfolio management and obtaining information in accordance with TCFD recommendations. The report also sets out specific recommendations for the International Monetary Fund (IMF) and the Financial Stability Board (FSB), as well as for other international prudential standard-setting bodies and finance ministries to better assess the resilience of businesses and the economy. financial sector to climate risks.

It is hoped that COP26 will build on the actions already taken by bodies such as the Network of central banks and supervisors for greening the financial system (NGFS) in recent years. The NGFS is a group of central banks and supervisors who wish, on a voluntary basis, to share best practices and contribute to the development of climate risk management in the financial sector. NGFS represent approximately 75% of global greenhouse gas emissions and are responsible for overseeing all systemically important global banks and two-thirds of global systemically important insurers.

The third goal identified in the report is that, as countries transform Paris Agreement goals into national legislative goals, businesses and financial firms will need to adapt their business models and reallocate their capital accordingly.

While this may present significant business opportunities for some, the report recommends that frameworks be put in place to allow investors to make informed decisions about whether companies and portfolios are ready for the transition. The COP26 private finance center believes this can be done in coordination with academic communities and NGOs and recommends that the private sector be encouraged to review approaches to measure portfolio alignment; outline the additional work required; and discuss the next steps to develop a reliable metric.

Once the net zero commitments of countries and companies have been secured, credible transition plans will need to be put in place. The development of transition plans is already supported by the Race to zero campaign, the Science-Based Targets Initiative (SBTi), the Mission possible platform and the Exponential Roadmap Trading Playbook 1.5C. The report recommends that financial institutions continue to work with these initiatives, as well as others such as the Net Zero Owner Alliance and the Climate Action 100+, to publish credible transition plans.

Mobilization

The final objective concerns increasing private financial flows to emerging and developing economies, linking available capital to investment projects and encouraging new market structures. The report suggests helping the Climate Finance Leadership Initiative (CFLI) take the next steps set out in its report ‘Financing the low carbon future‘. Such measures would include building on existing initiatives that seek to remove barriers to financing sustainable infrastructure, such as the work of the G20 and the Global Infrastructure Hub, the work of the OECD and Fast Infra.

Risk management tools can be developed to “reduce investment risks” and the activity of multilateral development banks, new development banks and development finance institutions can be aligned with the Paris Goals, because “These institutions have a unique capacity to enable countries to create private markets for low carbon and resilient investments”. COP26 also appears poised to encourage the development of infrastructure to expand voluntary high-quality carbon markets. According to Carney, “a scalable, high-quality, transparent and credible market structure could turn the $ 300 million currently spent on these projects through the voluntary market into tens of billions of dollars each year.”

Conclusion

There is a wide range of issues that could be addressed at COP26 and parties will not be able to address them all. The role of private finance work will be a key focus and advancements in this area have the potential to rapidly accelerate the global response to climate change. In the words of the COP26 Finance Hub, “every company, bank, insurer and investor will have to adjust its business models, develop credible plans for the transition and implement them”.

* This article was originally published on LexisPSL


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