27/11/23

GREEN FINANCE: Funding Climate Change Initiatives Will Be Major Focus Of COP28

As published on: forbes.com, Monday 27 November, 2023.

COP28, the 2023 United Nations Climate Change Conference, takes place in Dubai November 28 – December 10. While the public schedule focuses an array of climate related topics and initiatives, the private meetings of global leaders will drive the transnational changes. Those leaders, and their delegates, have made it clear that there will a heavy focus on funding of climate initiatives to meet the Paris Agreement’s goals.

Drafted in 2015, the Paris Climate Change Agreement, also known as the Paris Agreement or Paris Accords, is a multinational treaty focused on mitigating climate change. The overriding goal of the Paris Agreement is to reduce global greenhouse gas emissions to net-zero by 2050, either directly or through offsets.

The demand created by the Paris Agreement for climate initiatives to reduce GHG emissions and offset the impacts of climate change comes with a high investment cost. These costs are funded through green finance, money allocated for green initiatives, or climate finance, money allocated specifically to address climate change. COP28 will have a strong focus on funding of priorities aligned with the Net-Zero 2050 goal by seeking to “mobilize finance at scale.” However, the reallocation of funding at a global level will leave fewer resources for other projects, even within the private sector.

Much of the policy development has focused on multilateral development banks, institutions established by intergovernmental organizations to lend much needed resources to developing countries, the most notable being The World Bank. The use of MDBs to drive climate finance allows global leaders to coerce developing countries to reduce their GHG emissions by earmarking funds specifically for climate action. While some of the policy focus is on increasing lending capacity of the MDBs so more money is available specifically for climate change initiatives, there are continued calls for them to reallocate existing funds, limiting what is available for other projects. Advocates argue that this reallocation is needed to not only encourage meeting net-zero, but to also not leave developing countries behind in the new technology.

Beyond MDBs, pressure is rising on private lending institutions to focus on green and climate finance. In 2021, the United Nations formed the Net-Zero Banking Alliance, a coalition formed under the UN Environment Programme’s Principles for Responsible Banking. Since 2021, 138 banks have joined the alliance, with ten in the U.S., including Bank of AmericaBAC -0.2%, Citi, Morgan StanleyMS -0.9%, and Wells FargoWFC -0.2%.

The UNPRB commitment statments goes beyond sustainable reporting or environmental, social, and governance, and reaches into how the lending institutions allocate available funds. The targets include aligning lending and investing portfolios with the net- zero 2050 target. That means phasing out investments and loans to business sectors and organizations that contribute to continued GHG emissions, like the fossil fuel industry.

“Banks’ first 2030 targets will focus on priority sectors where the bank can have the most significant impact, ie. the most GHG-intensive sectors within their portfolios, with further sector targets to be set within 36 months.” For founding signors will be required to set those targets by April 2024, only five months after COP28

However, official coordination is problematic and possibly in violation of jurisdictional laws. The same year NZBA was founded, global insurers joined the UN Net-Zero Insurance Alliance, a sister program formed under the UNEP’s Principles for Sustainable Insurance Initiative as a way to encourage the insurance industry to take action on climate change. That coalition suffered significant issues, with the majority of the original signers leaving in 2023 when valid concerns were raised that NZIA violated anti-trust laws of various jurisdictions, particularly the U.S.

Additionally, some Republican controlled states in the U.S. have enacted restrictions on lending institutions’ ability to discriminate in lending based on political stances, in what has been labeled by opponents as a political credit score. This will cause issues for banks that want to prioritize sustainable funding, as it may be considered by state regulators as pushing a political ideology on businesses and individuals. Some states, like Texas, took the restrictions further by regulating that banks cannot discriminate against the fossil fuel industry. This is in direct conflict with the NZBA and the Paris Agreement’s net-zero goal.

Despite the potential conflict of law, climate finance and green finance will continue to be a major focus at COP28 and beyond. Finance is mentioned in nearly every program, and was a major component of the Paris Agreement 2023 stocktake released in September. Concerns continue to rise that the annual cost of climate change action is in the trillions of dollars, placing a significant strain on existing resources. Expect increased pledges from the participants of COP 28, but little clarity as to what funding resources will be cut as a result.

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Green Finance Climate Change COP28