Three main lessons from Finance Day at COP28


INSIGHT
Published
Dec 5th '23
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After only five days of operation, COP28—the yearly summit where nearly all nations come together to debate and decide on climate policy—has already produced a number of headlines: nations have decided to establish a loss and damage fund to compensate developing nations for the effects of climate change; half of the world’s most significant oil and gas companies have committed to achieving net zero methane emissions by 2030; and the president of COP28, who also serves as CEO of Adnoc, the state oil company of the United Arab Emirates, has declared that there is “no science” supporting calls to phase out fossil fuels, despite the overwhelming body of scientific evidence to the contrary. But the day for finances was Day 5, or December 4. Below is a summary of the three key takeaways:

 

Pledges, pledges & pledges

Climate target pledges continue to flow, with numerous banks at the forefront. Prior to COP28, BNP Paribas made a commitment to gradually stop funding metallurgical coal, thus bringing its portfolio and the steel sector closer to a net zero trajectory. Regarding green products, banks in the United Arab Emirates have committed to pooling $200 billion for green finance. This money may be used for green/social loans or loans with sustainability clauses. Nonetheless, there is general agreement that many institutions run the risk of engaging in greenwashing if there is no established process for determining what is actually green. When the Financial Conduct Authority’s (FCA) new anti-greenwashing regulations take effect in late May 2024, banks will need to evaluate their product lineup to make sure that goods are advertised and run in a fair, clear, and not misleading. We are getting ready to take a close look at the greenwashing rule to help you meet the FCA’s requirements.

 

Emerging markets have a fresh opportunity thanks to blended finance

Structures such as blended finance combine public and private money to mobilize capital in areas that the private sector alone cannot access because of high capital risk. To put it another way, it shifts the risk profile of projects to guarantee that the transition funding gap is filled in emerging economies by leveraging safety from the public sector through guarantees or insurance. Alterra, a $30 billion climate fund with Blackrock, TPG, and Brookfield as launch partners, has set aside $5 billion to fund risk mitigation in order to encourage investment flows to the Global South. Anticipate other vehicle announcements with comparable features, which could indicate a promising future for sustainable investing in emerging economies.

 

IFRS S1 and S2 from the ISSB will be the worldwide standard disclosure framework

The fact that 400 organizations from 64 jurisdictions—including up to 25 stock exchanges—have declared their support for ISSB has further demonstrated that IFRS S1 & S2 will serve as the benchmark sustainability reporting methodology going forward. This latest round of support during Finance Day at COP28 has made it even clearer that companies need to start adapting their systems to this framework. Numerous national legislators, including those from Brazil, Australia, the UK, and Japan, have cited the disclosures as a baseline or source of inspiration for their regulations pertaining to sustainability reporting requirements.

 

Only once the summit concludes in mid-December will we be able to fully assess COP28’s success. The conference did, however, underline that the finance sector is headed in the right direction: prospects in emerging markets are expanding, disclosures are uniting around the standards established by ISSB, and the focus is on the quality—not the quantity—of green goods. If you want to be the first to know about any of these developments, send us a message.

 

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Firms who are not meeting critical ESG regulations criteria reduce their ability to attract investment and talent. This, paired with increased regulatory pressure, is creating a rapidly developing ESG landscape, meaning companies must respond in order to maintain competitiveness and control of risk.

 

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