Despite the cynicism around COP27 last month, there were some potentially major developments for investors. Excitingly, a number of them address what’s often ignored in climate finance discussions: moving money.
While regulators and investors have been prioritising stewardship, climate disclosures and product labels – which may eventually reorient capital flows to greener investments, but not in time to meet climate goals – governments at COP unveiled some innovative ways for the private sector to allocate capital to the net-zero economy.
But many of the most interesting announcements raised more questions than they answered.
Take John Kerry’s announcement of his new carbon-offset mechanism, the Energy Transition Accelerator, which former Generation Investment Management adviser Simon Clark described as having “confused, frankly, everybody in the conference”.
The US climate envoy is proposing a voluntary carbon market through which firms contribute to their climate targets by buying offsets from developing countries that green their power grids. It’s reported that the framework was developed in partnership with US banks, but it’s not clear how it will work and it seems to ignore long-standing challenges around the credibility of carbon offsets.
As one COP attendee told me: “Using carbon credits to close down coal is a good idea, but it’s super complicated to get it right, and people are already thinking about it. [Kerry’s announcement] is one of those things where a politician thinks nobody’s thought about it before and all it takes is them saying that it’s important.”
But if the Energy Transition Accelerator does overcome the issues that no one else has managed to over the decades, it could become a crucial tool for the private sector to funnel money into the decarbonisation of developing economies without opening itself up to financial risk.
Another project with massive potential is the Global Climate Mitigation Trust – part of the Bridgetown Initiative proposed at COP27 by Barbados’ prime minister, Mia Mottley.
The trust would be backed by $500bn of IMF special drawing rights or other guarantees, which it would leverage to borrow a further $500bn to lend to green infrastructure projects. This could be scaled up to raise trillions from the markets for climate mitigation, according to its architects. But again, there are questions around who would host the trust and how to create a pipeline of credible projects.
Likewise, Indonesia’s Just Energy Transition Partnership is a promising model, through which industrialised governments work with the global private sector to help finance the country’s clean energy shift ahead of schedule and with a view to minimising the socio-economic impacts.
A group of institutions, mainly banks, has committed to help “mobilise” and “facilitate” at least $10bn for the project but no one yet knows what that will look like: it could involve their own balance sheets or simply their underwriting services.
All these projects could be genuinely game-changing for investors serious about decarbonising the real economy. But only time, clarity and commitment will tell whether they fulfil that potential.
Sophie Robinson-Tillett, Contributing Editor, ESG
sophie.robinson-tillett@ipe.com
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