COP29 Deal Can Unlock Public and Private Climate Finance
Transformation and innovation are needed in the financial system to make good on Baku agreement, says Ben Taylor, Partner, Climate Change and Sustainability Services at EY.
As with all recent climate summits, COP29 made significant progress in some areas, while seeming to stall in others, with no initiatives advanced without significant effort and collaboration. In this Q&A, EY’s Ben Taylor highlights the developments most likely to shape and accelerate the net zero transition, as well as the climate-related investment strategies of asset owners and managers.
ESG Investor: What are the implications of the outcome on climate finance?
Taylor: The establishment of a New Collective Quantified Goal (NCQG) is crucial for mobilising the resources needed to support climate mitigation, resilience and adaptation projects in developing countries. At EY, we forecast that £3.3 trillion (US$4.2 trillion) in annual investment globally – four times the current investment levels – will be required to fund low-carbon transition technologies and energy infrastructure alone by 2050.
Achieving this goal will require massive transformation and innovation in the financial system, leveraging both public sector funding and private sector investment. A higher NCQG should also lead to increased climate finance demand and stimulate greater investment in emerging markets and developing economies (EMDEs), where climate finance is essential for mitigating and adapting to the impacts of climate change.
The UK government’s latest green pledges were certainly bold and ambitious, a move that we fully supported. However, if these are to be realised, not only will businesses of all sizes need to play a critical role by providing innovative thinking and implementing solutions at speed, but citizens and consumers will need to play their part too. We must not shy away from the uncomfortable truth that achieving these targets will require some changes in behaviour.
The UK’s latest nationally determined contribution (NDC), along with the anticipated launch of the UK Industrial Strategy in the spring, should provide the platform for greater business funding to support these goals, and for finance to be structured around specific targets, such as investments in clean technology or energy-efficient buildings. What has been achieved to date is clearly not enough, compared to where we need to get to, but the combined impact of business action has huge potential.
ESG Investor: What were the most significant takeaways for institutional investors from COP29 bearing in mind their pre-summit asks?
Taylor: The standout outcome for institutional investors was probably the tripling of climate finance. This could be especially impactful when combined with the US$1 trillion of private finance expected to be unlocked by country and multilateral development bank (MDB) financing, and the next wave of country-level NDCs in the run up to COP30 in Brazil next year.
While global geopolitical and economic turbulence are creating headwinds for much-needed transition planning, the majority of world leaders are still demonstrating an overarching commitment to the energy transition. Through areas of focus such as transforming our food systems, creating more sustainable built environments and the integration of health into climate action, this commitment has the potential to impact sectors well beyond renewable energy.
Finally, a refocus on the carbon markets and the recognition of the need for a more robust and nature-based market will be key. The agreements to strengthen the overall voluntary carbon markets should help spur greater investment in related asset classes.
ESG Investor: After COP28 committed to transitioning away from fossil fuels, how did COP29 accelerate the clean energy transition?
Taylor: It is notable that it took 28 COPs for fossil fuel to be mentioned in the negotiated text last year in Dubai. And it was perhaps even more notable that it was omitted from the discussions and text for COP29.
Some large fossil fuel-producing countries that have benefited most recently from social development via fossil fuel extraction are not supporting the move away from fossil fuel at the pace required to meet targets.
However, there was some progress in widespread backing for a faster ramp-up of energy storage, hydrogen and hydropower.
ESG Investor: In what way did COP29 improve the likelihood of delivery of comprehensive, investible and Paris-compliant NDCs?
Taylor: Enhanced NDCs, which several countries, including the UK, committed to at COP29, are crucial for accelerating global momentum toward achieving the Paris Agreement goals. By setting bold targets, the UK is encouraging other nations to strengthen their climate commitments, fostering a collaborative approach that can drive significant progress in reducing global emissions. Such leadership sets a critical standard for action, especially as countries prepare for future rounds of NDC revisions.
For financial services and the investor community, stronger NDCs and climate commitments, especially when coupled with sector-level transition plans, are likely to lead to regulatory adjustments that incentivise financial institutions to align their portfolios with net zero goals.
This presents both risks and opportunities. Institutions with climate-aligned investments and lending may benefit from supportive policies, while those lagging in climate strategy could face increased regulatory and reputational risks.
ESG Investor: What are the implications for the development of carbon markets following progress made on Article 6?
Taylor: The approval of the implementation of the Article 6.4 mechanism aligns global efforts under a common framework, creating a unified carbon market and reducing risks of fragmentation. This aims to elevate integrity standards and establish global benchmarks, ensuring effective and accountable climate action. Enhancing market transparency and integrity is crucial for building trust among stakeholders, which is essential for attracting investment.
When it comes to creating investment opportunities, a transparent carbon market could unlock new investment avenues in carbon credits, renewable energy and emission-reduction projects, aligning with net zero investment strategies. However, the market is still not as robust as it needs to be and is in need of strengthening further. Initiatives such as the Voluntary Carbon Markets Initiative are working to create stronger market-based mechanisms to close the gaps.
ESG Investor: What were the most significant announcements made on Finance Day in terms of mobilisation of private investment?
Taylor: Starting with the approval of Article 6.4 for carbon market rules, Finance Day and COP29 in general placed a significant emphasis on mobilising finance to achieve global climate goals. It also reiterated the role of the private sector in scaling up the financing currently being negotiated as a part of the NCQG.
ESG Investor: There has been increasing criticism of the COP process, including from scientists and previous participants – what options for reform are most likely to be adopted?
Taylor: Greater senior political engagement would be a first step, considering that many of the choices we need to make are political, require financing and cooperation at scale, and impact national social, economic and industrial development.
The role of non-state actors could also be enhanced. The private sector has been much more visible in climate space discussions in recent years, with the COP28 Green Zone attracting a significant number of businesses. However, a more targeted focus on key partnerships for system transition would help move the agenda forward.
The negotiation process itself could be streamlined and would be easier if decision-making at COPs could move from a consensus basis to one where a super-majority could take a position forward.
Finally, and perhaps most importantly, COP agreements are not legally enforceable, and it is not clear what consequences there are for non-compliance. If there was enough political will, member states could agree to a change in UN Climate Change Conference structures and move agreements to being legally enforceable.
This could be the key to driving accountability into the process and rebuilding trust in its effectiveness to help ensure the outcomes the planet so desperately needs.
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