COP26 | What opportunities emerged for private finance at the Glasgow summit?
Published on 24th Nov 2021
The private sector has more clarity on the actions and amounts needed to achieve net zero but now awaits details of the incentives and regulations needed to propel decarbonisation investment
In response to the Intergovernmental Panel on Climate Change's report which declared that global temperatures were likely to pass 1.5C sooner than expected, the UK prime minister, Boris Johnson, sought to focus international discussions the COP26 conference in Glasgow around four themes: "coal, cars, cash and trees". COP26 may have concluded with a diluted agreement on coal, but a broadly optimistic outlook can be adopted elsewhere in considering the commitments made by the international community in pursuit of achieving the goals of the Paris Agreement.
On "cash" specifically and throughout the climate summit, leaders and delegates acknowledged the role that private finance must play in translating ambition into achievement. After a fortnight of diplomatic wrangling, what do the outcomes of COP26 look like through the lens of private finance: what happened, what are the threats and opportunities for the private sector, and what should businesses be looking out for in terms of next steps?
The finance priorities at COP26 dealt not only with the public finance required to develop the necessary infrastructure for a climate-resilient economy, but equally with the private finance required to fund innovation and transform "billions of public money into trillions of total climate investment."
Wednesday 3 November was COP26's Finance Day, the session specifically earmarked for discussing the accelerated mobilisation of public and private finance for climate action, and notably, how the $100bn a year climate aid target to support developing countries to cut their emissions will be met. Important developments on Finance Day included:
- More than 20 countries and financial institutions, including the US, UK, Denmark and the European Investment Bank, pledged to halt financing for fossil fuel development overseas and divert an estimated $8bn annually to green energy from next year.
- Banks and pensions funds with assets worth an estimated $130tn committed to meeting the goals made by the Glasgow Financial Alliance for Net Zero (GFANZ). Signatories to GFANZ commit to using science-based guidelines to align their assets to net zero emissions by 2050.
- The chancellor of the exchequer, Rishi Sunak, announced the UK will become the world's "first ever net zero aligned financial centre" with all portfolios aligned with a transition to net zero by 2050 at the latest. As part of this, larger firms in the UK will be required to publish their detailed net zero transition plans in 2023.
- The UK and the US announced that they would support a new “Climate Investment Funds’ Capital Markets Mechanism” to issue green bonds to fund renewable energy in developing countries.
Impact on the finance community
However laudable the achievements at COP26, a sceptic might query how enforceable such pledges are. While it is true that the legally binding nature of nationally determined contributions are for individual countries to decide, UK observers can look to their own government's decision to fix emission-cutting targets into law, together with the negative public perceptions of even slightly backtracking on these targets, as evidence of the pressure to deliver on COP26 goals.
Moreover, the imperative for action is not lost on the finance community, who constituted a significant presence at COP26. The involvement of financiers throwing their weight behind GFANZ might well reinforce the assertion that political will alone is not enough: of the $130trn in capital stated to be committed by GFANZ to net zero, only $5trn had been committed when the UK assumed the COP26 presidency.
Well before the conference itself, in November 2020, the COP26 Private Finance Hub (a UK Treasury team led by Mark Carney in his capacity as the UN's special envoy and advisor to the prime minister) had reported on four principles to put climate change at the forefront of every commercial decision:
- Reporting: improving the quantity, quality and comparability of climate-related disclosures by implementing a common framework built on the Taskforce for Climate Financial Disclosures (TCFD) recommendations;
- Risk management: ensuring the financial sector can measure and manage climate-related financial risks;
- Returns: helping investors identify the opportunities in the transition to net zero and report how their own portfolios are aligned for the transition; and
- Mobilisation: increasing private financial flows to emerging and developing economies by connecting available capital with investable projects and encouraging new market structures.
The global commercial opportunity in shifting to a low-carbon pathway is estimated at $26trn by 2030, with rewards to be reaped from backing not only the technologies that will pave the way to net zero but also the regions that need investment the most. What businesses require is a clear pathway to unlocking these opportunities.
Transparency and accountability is a good place to start, and larger firms should ready themselves for increased climate-related disclosures. Requiring information of a standardised quality worldwide, under frameworks like the TFCD, will allow proper identification of climate-related risks and opportunities. Developing global standards as to what constitutes "green" finance seems challenging – but it is a challenge that must be met if private finance is to fulfil its role in supporting the energy transition.
Legislation and regulation will pose risks of their own. Will governments retain the political will to effect the changes required in their jurisdictions? Will regulations impede progress if punitive sanctions for non-compliance are implemented, unless financial resources are diverted to a determined location for a purpose directly linked to decarbonisation?
Caroline Saul, Decarbonisation Stream Lead at Osborne Clarke for funding the transition to a low-carbon future, commented: "COP26 generated much-needed discussion around the actions and amounts required from the private sector 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 now eagerly await details from the UK government as to the incentives and regulations that will propel investment into decarbonisation projects, including the Glasgow Breakthroughs, to ensure we stay on track to hit the targets set."
COP26 may have highlighted the absence of global consensus on climate action, and the scale of the challenge is vast, but so too are the opportunities. Technologies already exist with the potential to deliver on decarbonisation, which Osborne Clarke has reported on in its "Sustainable disruption: 12 decarbonising technologies for cities" publication with Economist Impact, part of The Economist Group.
Agile, entrepreneurial and transparent market participants have much to gain from the energy transition, and the development of a transition-resilient economy will require the involvement of stakeholders from across the public and private sectors. With momentum high and the window for action closing, private finance is primed to deliver on public ambition.