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COP26: Financial pledges surge, carbon phaseout accelerates, but skepticism remains

05 November 2021 Kevin Adler

A carrot-and-stick approach is emerging at COP26 to push the world towards lower-carbon energy production and use—with wealthy governments and multilateral banks offering hundreds of billions of dollars in support of the energy transition, but also making it clear that they are expecting new levels of transparency in how those funds will be used.

To think about COP26, IHS Markit Vice Chairman Daniel Yergin said on 4 November, "You have to go back to the Paris conference, COP21, which was about pledges. COP26 is about implementation, mobilization of capital, how aggressive or ambitious government objectives will be. And what about carbon market offsets? Those are the big issues."

At the most obvious end, it starts with the Nationally Determined Contributions (NDCs) that were part of the Paris Agreement, through which countries commit to GHG emissions reductions goals by 2030. Those have been updated by more than 100 countries this year, including several nations such as India announcing new pledges at or immediately in advance of COP26.

Looking at the new NDCs, the International Energy Agency (IEA) revised its trendline to show a more optimistic picture about climate change. "We ran our models once again," said Fatih Birol, IEA president, at COP26 on 4 November. "The result is extremely encouraging. We would have a temperature trajectory consistent with 1.8 degrees Celsius [compared to an estimate earlier this year of 2.7 degrees C]."

IEA's Net Zero by 2050 report, published in May, said that all unabated coal-fired power plants must be closed in the next few years, and only existing and under development oil and gas projects can be completed (no new projects after 2021), for the climate goal to be met.

The newly aggressive coal phaseout efforts made at COP26 are a step in fulfilling IEA's vision, as is the pledge by 25 nations not to fund new fossil fuel projects (though that is only government funding, not private investment).

Funding pledges

Money is the key to going from a pledge to reality. Hundreds of billions of dollars of new pledges have emerged from nations and foundations at the world meeting, and $130 trillion in private capital is available through the 450 banks, pension funds, insurers, and asset management firms in the Glasgow Financial Alliance for Net-Zero (GFANZ).

"There is [an] enormous amount of capital that can be put to work," said Larry Fink, CEO of BlackRock, the world's largest investment manager, on 3 November, and a GFANZ member.

One of the promises made at the Paris conference in 2015 was for $100 billion in annual energy transition and climate funding from wealthier countries to the developing world: the so-called "North to South" promise. This was finally reached at COP26, years later than expected. But it's a milestone, said UK Finance Minister Rishi Sunak, who hailed the "historic wall of capital for the net zero transition around the world."

Numerous other investment programs were launched or expanded at this week's conference, many with the aim of increasing the speed of coal phaseouts and renewable energy installations to replace them. These include:

  • Climate Investment Funds (CIF) will invest about $2.5 billion on coal phaseout, starting with support to South Africa, India, Indonesia, and the Philippines, which represent 15% of global coal demand. The US, UK, Germany, Canada, and Denmark have pledged to CIF.
  • The Asian Development Bank said it secured $690 million in fresh funding for its Green Recovery Platform to expedite coal phaseout in Southeast Asia.
  • The United Arab Emirates and the International Renewable Energy Agency (IRENA) have announced a new $1-billion climate finance facility, the Energy Transition Accelerator Financing (ETAF) Platform, on 3 November. The plan is to finance 1.5 GW of new renewable energy by 2030. IRENA said the platform has already secured $400 million anchor funding from the UAE through the Abu Dhabi Fund for Development (ADFD), a long-time supporter of renewable energy projects.
  • The Climate Investment Council said that UK and Nordic pension funds pledged on 2 November to make investments of $130 billion in clean energy and climate-related assets by 2030, building on a previous commitment by Danish pension funds.
  • The Global Energy Alliance for People and Planet launched with $10 billion from foundations and development banks, and it's seeking to leverage this for $100 billion of private capital aimed at clean energy installations in Latin America, Africa, and Asia.
  • Participants in the Global Forest Finance Pledge announced $12 billion for 2021-2025 as part of a drive to end deforestation by 2030.

But all of these financing plans should be recognized as coming in the context of unmet promises in the past that led to an upward trajectory in GHG emissions every year except for the 2020 COVID-19 recession.

The Global Carbon Project issued a report on 3 November with the sobering finding that CO2 emissions in 2021 will increase by 4.9%. This would wipe out almost all of the reduction that occurred in 2020.

The global "carbon budget"—the amount of carbon that can be emitted for the world to limit temperature rise to 1.5 degrees C by 2050—stands at about 420 billion metric tons, said the Global Carbon Project. That's only 11 years at the current pace of emissions.

As for the new financial pledges, reaction has been mixed, with some critics saying it's too little too late, or potentially misdirected. "Less developed economies and those most at threat are understandably angry at the lack of breakthrough progress in unequivocally defining the demand shocks needed and living up to past finance promises," wrote Richard Youngman, CEO of the Cleantech Group.

Others pointed out some investment pledges do not prohibit development of fossil fuels. "You can't deliver Paris without this happening as soon as possible, and no amount of new green investment can offset this requirement," wrote Ben Caldecott of the Oxford University Sustainable Finance Group.

Transparency in financing

Ensuring that the investments are not misguided or "greenwashing" is part of the task of COP26 as well.

The European Investment Bank Group (EIB Group) launched one such effort to align multilateral bank financing with the goals of the Paris Agreement.

This new framework complements the EIB Group's Climate Bank Roadmap to support €1 trillion of climate action and environmental sustainability investments in the decade to 2030 and to deliver more than 50% of EIB finance for climate action and environmental sustainability by 2025.

"The Paris Agreement commits countries to make finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development," EIB Group President Werner Hoyer stated on 4 November in a presentation about the new framework. "But this leaves open the question as to whether the EIB Group can support a green project with a client that, in its wider activities, continues to invest in high-carbon activities."

Under the new framework, which comes into effect in January, EIB corporate clients will need to develop and disclose decarbonization and resilience plans. "In general, EIB will no longer finance standard low-carbon projects of high-emitting corporates if the corporate continues to operate or invest in activities that are not aligned with the goals of the Paris Agreement," Hoyer said.

The European Commission's Fit for 55 program of a 55% emissions reduction 2030 will require immense funding and "a new taxonomy" on investments, said Ulla Hudina, head of the EC's Financing and Innovation Unit D3. About €250 billion per year will need to be directed to energy and €130 billion to meet other environmental goals, she said. "In order to enable them, at the Commission we are putting into place a sustainable finance framework," she said on 4 November, and it's hoped this will generate another €1 trillion in next decade from private capital.

At the same time governments are transforming how they invest, companies are doing the same thing, as investors are demanding both cleaner investments and more information.

One key step in opening transparency about climate risk and spending is the formation of the International Sustainability Standards Board, announced at COP26 on 3 November. These standards, to be based on the Task Force on Climate-related Financial Disclosure, will seek to standardize reporting by public companies about their GHG emissions.

"Investors and other providers of capital want global sustainability disclosure standards that meet their information needs. Voluntary reporting frameworks and guidance have prompted innovation and action, although fragmentation has also increased cost and complexity for investors, companies and regulators," the board's representatives said in a press statement about the project.

Standards could be provided in proposed form as early as June 2022, they said. They will cover companies across the world and will be applicable for Scopes 1, 2, and 3 emissions.

Posted 05 November 2021 by Kevin Adler, Chief Editor

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