Policy Gaps Curbing Private Climate Finance Flows
Multi-stakeholder dialogue seen as essential in unlocking capital for net zero solutions, as GSIA calls for development of national transition plans.
Reports released on COP29’s Finance Day by the Global Sustainable Investment Alliance (GSIA) and Taskforce on Net Zero Policy have highlighted the significant obstacles that continued policy gaps pose for investors and companies.
The GSIA’s report contains recommendations for three groups – policymakers, investors, and COP29 negotiators – to overcome barriers preventing action on climate change and mobilising net zero-aligned public and private finance.
Meanwhile, the Taskforce on Net Zero Policy’s report assessed more than 1,000 policy instruments across Group of 20 countries, finding that policy reform progress remains insufficient to align the activities of large corporates with a 1.5°C temperature pathway.
“Governments cannot solely rely on investors and companies to fill the climate investment gap,” James Alexander, CEO of the UK Sustainable Investment and Finance Association (UKSIF), which currently acts as secretariat for the GSIA, told ESG Investor. “We need governments to act as strongly as everyone else, and policy is a significant part of the solution to this climate challenge.”
Will Martindale, Managing Director at UK-based consultancy Canbury Insights, which contributed to the report, said policymakers’ expectations of investors “often go beyond the remit that investors are able to work within”.
The gap between current climate investment and the funds needed until 2030 to achieve the net zero targets of the Paris Agreement currently stands at US$6 trillion annually, according to research from the Climate Policy Initiative (CPI) and law firm A&O Shearman, equating to approximately 6% of global annual GDP. The CPI had previously estimated that global investment must increase at least seven times by the end of this decade to align with Paris Agreement objectives.
“There are a range of areas where we need policymakers, companies and investors to work in partnership to deliver finance for climate and to make things happen,” said Alexander. “Governments need to understand where there are barriers, as well as where there are levers that they can pull – using those to get private capital to flow into the right places.”
Examples include reducing inefficient fossil fuel subsidies and driving investment to new low-carbon technologies, such as green hydrogen.
“Investors need to be proactive in engaging with governments and show where policy is stopping them from being as effective in providing capital for sustainable investments,” said Alexander. “What we are doing right now isn’t working at the pace and scale we need and must be addressed as a matter of urgency, because if we don’t get the private finance to move we are not going to achieve climate targets.”
The taskforce, launched by UN Secretary General Antonio Guterres at COP28, also called for increased coordination between policymakers and companies to provide “clear market signals” to drive decarbonisation and address wider sustainability goals.
According to the taskforce, significant gaps remain in the ambition, specificity, and compatibility across jurisdictions which must be addressed to support the delivery of nationally determined contributions (NDCs) and align financial flows with the Paris Agreement.
“The current global policy landscape is uneven and fragmented, creating challenges for companies and financial institutions with an international reach as they navigate a complex regulatory patchwork [and] enhanced policy action and coordination is essential,” said Helena Viñes Fiestas, Co-chair of the taskforce, which is has a remit to advance net zero aligned policies via engagement with policymakers and regulators.
All signatories to the Paris Agreement are required to submit new NDCs by February 2025, outlining their plans to decarbonise over the next five years.
National-scale action plans
The GSIA report provided evidence of a “policy vacuum” preventing private sector investment, which the alliance characterised as a lack of positive policies and transition planning guidance to encourage climate-positive investments.
The GSIA recommended the development and implementation of “comprehensive” national transition plans (NTPs) to fill this vacuum, integrating climate goals into countries’ economic strategies.
An NTP would integrate a country’s existing NDC and other existing plans to form a coherent strategic response to climate change. According to the report, it should outline short- and long-term pathways and actions for emissions reduction, backed by legislation, to offer investors greater confidence on governments’ commitment to net zero, as well as setting “appropriate incentives” to steer investor action.
NTP progress should be communicated “actively and frequently”, with both national and sector-specific pathways developed and tailored to local circumstances to then inform sectoral policies, the GSIA said.
“It’s not just about setting a target, it’s about creating and delivering a plan for how to get from today to that target, and with year-on-year strategies and long-term plans which can underpin that,” said Alexander.
“We have a global problem where we must fix climate change by working collaboratively, but each nation state is prioritising their own interests, policies and political challenges over solving these international challenges.”
The GSIA report pointed to France’s Low Carbon Strategy as being an example of a “coherent, well-informed” countrywide plan which offers clear signals to investors through mechanisms, such as strengthened carbon pricing and incentives for reducing emissions that other nations could follow.
“We need to build investor confidence and make sure that when governments are committing to things they’ve got a clear roadmap of how they’re going to achieve it and a commitment to make sure they’re delivering against those targets,” added Alexander.
The GSIA also recommended policymakers explore “innovative” financing mechanisms such as blended finance and green bonds to support climate adaptation and mitigation projects, particularly in emerging markets.
The alliance, founded in 2010, is a group of the world’s largest regional and national sustainable investment representative organisations, including in Australasia, Canada, the EU, UK and US, collectively representing tens of trillions of dollars in AUM.
“We shouldn’t shy away from honest and open dialogues relating to subsidies or carbon markets, and how those regulatory changes might influence investor decision-making, or how the development of blended finance solutions can help facilitate upfront derisking of private investments in to transition related projects,” said Maria Lettini, CEO at the US Sustainable Investment Forum.
Separately, half of investors surveyed by the Asia Investor Group on Climate Change called on governments to introduce more “clearly defined” public-private financing mechanisms for climate adaptation and resilience projects.
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