Next week’s climate summit could shed light on credit risk, investment opportunities and the need for increased adaptation. But how much does it really matter to private finance?
Two thirds of the world’s governments look set to arrive at COP30 next week without renewed climate commitments.
While the Paris Agreement states that signatories should by now have spelt out their decarbonisation plans for 2035, just 69 have done so – leaving 128 without updated Nationally Determined Contributions.
It comes as António Guterres said last week that overshooting 1.5°C was “now inevitable”.
“Which means that we’re going to have a period – bigger or smaller, with higher or lower intensity – above 1.5°C in the years to come,” warned the UN secretary general.
Financial implications
This reality has implications for credit ratings, says Rahul Ghosh, the global head of sustainable finance at Moody’s.
“There are credit exposures to both climate risk and the funding needed to mitigate those risks,” he tells IPE.
“That’s why the finance community looks at COP – because there may be developments that help scale up public- and private-sector financing, or initiatives to decarbonise key sectors.”
But, while previous COPs have been crammed full of new initiatives, Ghosh doesn’t expect to see many this time around.
“This year will be about practical elements rather than pledges,” he predicts. “The focus is on delivery, and on providing things like case studies and repeatable models, rather than launching new private-sector commitments.”
Moving beyond decarbonisation
The focus is also broadening from traditional discussions about decarbonising energy grids and high-carbon sectors, notes Ghosh.
“This is the first Amazon COP,” he says, referring to the summit’s host, Brazil, being home to 60% of the world’s largest rainforest.
“So the nexus between the climate transition and things like land use, regenerative agriculture, nature and the blue economy is more central to the conversation.”
Climate adaptation and resilience will also be a major focus of talks this year.
At COP26, developed countries pledged to double their funding to developing countries for adaptation action by 2025.
Four years later, that promise is far from being realised, and governments will be under pressure to step up before the end of the year.
“The challenge we’re seeing as a rating agency is mostly about how governments communicate their investment plans for adaptation, and how that might translate into credit risk and sovereign ratings,” says Beth Burks, director of sustainable finance markets at S&P Global Ratings.
At the moment, there is limited engagement on the topic from private investors, and few financial products dedicated to climate adaptation compared with mitigation.
The London Stock Exchange Group estimated in August that just a quarter of green bonds are being channelled towards adaptation and resilience investments, for example.
“The call from COP to investors is likely to be around how private finance can help solve some of the adaptation challenges that governments are struggling with,” says Burks.
Mobilising finance
More broadly, she adds, “the finance piece of the agenda has been quite challenging to track this year”.
“The big thing on finance coming out of Baku [where COP29 was hosted] was the Baku to Belém Roadmap, but that’s ended up being less of a discussion point than originally expected.”
Led by the COP presidencies, the roadmap is intended to address the gap between the $300bn governments have so far committed to help lower-income countries tackle climate change each year, and the $1.3trn needed.
A report published today – Who invests and how: Unlocking and mainstreaming institutional investment flows to EMDEs – explores ways of developing such a commitment so that diverse institutional investors can row in behind it.
Written by the Principles for Responsible Investment (PRI), the paper identifies the current challenges investors face when trying to allocate capital to sustainability efforts in emerging markets and developing economies, and looks at the experience so far of working with Multilateral Development Banks and blended finance providers.
On this front, COP30 is likely to throw up two potentially major new opportunities.
The Tropical Forest Forever Facility (TFFF) is a new ‘pay-for-performance’ instrument that uses geospatial data to pay countries that preserve their forests.
The plan is to mobilise $125bn through the project, but so far it’s just $1bn from the COP30 presidency, Brazil, and a smaller amount from Indonesia.
Negotiations are already underway with private investors about how they can contribute to the TFFF, and those discussions are expected to ramp up during the summit.
The Inter American Development Bank (IDB), meanwhile, is hoping to get its ReInvest+ project further off the ground.
The initiative will see IDB securitise performing green loans from banks in the region, enhanced with foreign exchange and political risk insurance, and sold on the capital markets in a bid to free up local loan books for more green lending.
‘We can overstate the importance of COPs’
While these projects may offer up some new investment opportunities, Ghosh isn’t holding his breath for anything truly transformative at COP30 when it comes to sustainable finance.
“COPs are important to set tone,” he says. “But in and of themselves we can overstate their importance – particularly from a private-sector perspective.”
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