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COP26: Securing financing for a global net-zero transition by 2050

03 November 2021 Amena Saiyid

Bankers, investors, and world leaders agree that a global financial system focused on a transition to net zero will require trillions of dollars in investment through collaboration between the public and private sector.

At 3 November gatherings on what was dubbed "finance day" of the COP26 climate change meeting in Glasgow, Scotland, COP26 President Alok Sharma said countries have made their pledges, and finance needs to follow.

A number of new pledges were made prior to and on the first two days of COP26, including from the Global Energy Alliance for People and Planet, the Breakthrough Energy Catalyst, and the High Impact Partnership on Climate Change.

And on the basis of analysis by the Organisation of Economic Co-operation and Development, Sharma confirmed that developed countries would make progress toward meeting the $100 billion a year goal in 2022 and meet it in 2023. The $100 billion a year pledge was made 12 years ago at the UN climate summit in Copenhagen to help developing countries mitigate and adapt their infrastructure to the vagaries of climate-driven impacts, such as wildfires, hurricanes, and heat waves.

Moreover, Sharma said "we will likely be above $500 billion in aggregate" over the five-year period from 2021 to 2025.

He also mentioned that the UK has doubled its climate finance commitment to £11.6 billion ($15.88 billion) through 2025.

Effective use of funds

During her turn at the podium, US Secretary of the Treasury Janet Yellen noted that the size of the funding is just one piece of achieving the global net-zero future. "We also have to make sure it is being channeled as quickly and effectively as possible," she said.

Yellen also announced that US is joining the UK to fund the Climate Investment Fund's Capital Markets Mechanism, which will leverage private capital by providing $500 million per year for clean technology funds.

Bonds from this mechanism are set to be issued in 2022 in the City of London and could mobilize up to $700 million annually, with the potential to leverage a further $70 billion from both the private and public sector.

The price tag for the net-zero transition is estimated at upwards of $100 trillion in the next three decades, Yellen noted. "The gap between what governments have and the world needs is large, and the private sector needs to play a role," she said.

A recent analysis by UN High Level Champions found $32 trillion of investment in decarbonization is needed this decade to put the world on a path to net zero in alignment with an International Energy Agency transition scenario. This analysis also said the private sector could provide 70% of total investments needed to meet net-zero goals.

"Make no mistake, the money is there if the world wants it," said former Bank of England Governor Mark Carney.

Private capital

As the co-chair of the Glasgow Financial Alliance for Net Zero (GFANZ), Carney announced that its members, which includes bankers, insurers, stock exchanges, pension funds, and asset managers, have committed more than $130 trillion in private capital to transforming the global economy to a path to net zero.

These commitments, coming from more than 450 firms spanning 45 countries that make up GFANZ, "can deliver the estimated $100 trillion of finance needed for net zero over the next three decades," Carney said.

Private capital also will be harnessed to accelerate the transition to renewable energy and hasten coal-fired power plant retirements.

The Asian Development Bank launched the Energy Transition Mechanism (ETM) to accelerate the retiring of coal-fired power and the move to clean energy, one of the key goals for COP26. As part of the pilot phase in Indonesia, the Philippines, and Vietnam, the ETM is expected to raise $2.5 billion to $3.5 billion to retire two or three coal-fired plants per country.

And the International Finance Corporation, together with asset manager Amundi, announced a new $2 billion fund to help channel capital from institutional investors into sustainable and green bonds in emerging markets.

To play their role effectively though, "financial markets need good quality, comparable information about the effects of sustainability-related risks and opportunities for making investment decisions," said Erkki Liikanen, chair of the International Financial Reporting Standards Foundation Trustees.

Common standards

Liikanen announced the creation of a new international body, the International Sustainability Standards Board (ISSB), that would be charged with developing a comprehensive global baseline for sustainability disclosure in the financial markets.

Also, UK Chancellor Rishi Sunak announced steps that would go beyond just requiring companies to disclose climate risk. Noting that "investors need to have as much clarity and confidence in the climate impact of their investments as they do in the traditional financial metrics of profit and loss," Sunak said the UK is creating a Net Zero Financial Center that will require financial institutions and listed companies operating in the country to publish "clear-deliverable" net-zero transition plans that detail how they will adapt and decarbonize as the UK moves towards to a net-zero economy by 2050.

Meanwhile, through the work of the Network for Greening the Financial System (NGFS), which represents 100 central banks and supervisors, 38 central banks in countries comprising 67% of the world's emissions have committed to climate-related stress tests that would review the resilience of the world's largest financial firms in the face of severe climate-related risks.

And 33 central banks and supervisors, representing 70% of the world's emissions, have committed to issuing guidance to firms on managing climate-related financial risks.

The NGFS issued a statement of declaration reiterating its commitment to greening the financial sector, an action that was endorsed by the US Federal Reserve Board.

Posted 03 November 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst

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