Finance Day at COP27 in Egypt, November 2022, once again brought together global investors to find ways to address climate change. While there has long been an acceptance that action on climate change is impossible without the financial services sector, this COP moved into a new phase. “If Paris was the ‘what’, and Glasgow was the ‘how’, Egypt was about implementation,” says Gill Lofts, EY global sustainable finance leader. Central to this is finance.

The 14-day meeting of 200 countries highlighted the crucial role investors must play in addressing the climate crisis. The COP agreement text calls for the need for the financial system to reform, support and enable climate goals. The finance section of the Sharm el-Sheikh Implementation Plan highlights the vast sums required to facilitate the energy transition and calls for “a transformation of the financial system and its structures and processes, engaging governments, central banks, commercial banks, institutional investors and other financial actors.”

The United Nations Framework Convention on Climate Change summarises: “Finance is at the heart of all that the world is doing to combat climate change. Mitigation, adaptation, loss and damage, climate technology – all of it requires sufficient funds to function properly and to yield the desired results.”
Key takeaways

Key takeaways

A dedicated fund for loss and damage
Funding for vulnerable countries hit by droughts, floods, and other climate disasters

Maintaining a clear intention to keep 1.5°C within reach
Global greenhouse gases must peak before 2025 at the latest and reduce by 45% by 2030.

Holding businesses and institutions to account
This includes no tolerance for greenwashing. 

Mobilising more financial support for developing countries
A pathway to align finance flows towards low emissions and climate resilient development.

Making the pivot toward implementation
"Paris gave us the agreement and Katowice and Glasgow gave us the plan, Sharm el-Sheikh shifts us to implementation.” 

The headline outputs of COP27 centred around adaptation and mitigation, no longer focused mainly on the root causes of climate change, and all requiring significant financing. “The Sharm el-Sheikh Implementation Plan [the Cover Plan] constituted a package focusing on mitigating the impacts of climate change, rather than on reducing the causes,” says Marian D’Auria, global head of risk & sustainability at GFG Alliance, the global steel business. This important step change acknowledges that although this annual meeting of governments is important, it is difficult to galvanise people between the meetings. Marian points to an all-country agreement at COP26 in Glasgow in 2021 to revisit and strengthen their 2030 climate commitments, or NDCs (nationally determined contributions), by the end of 2022. “By the end of September [2022], only 24 of the 166 NDCs, representing 193 parties to the Paris Agreement [2015] had been updated following COP26,” she explains. “So COP27 was looked on as an opportunity for world leaders to regain momentum on climate change and also, crucially, for the finance sector to articulate how it could contribute to keeping the world on course for no more than 2°C warming.”
Commitment to 1.5°C

Multiple sources of analysis show the world is not on course to deliver its climate goals, which are to limit global temperature increases to well below 2°C – ideally 1.5°C – above pre-industrial levels. A key outcome of COP27 was to maintain an intention to keep the world on course for no more than 1.5°C warming above pre-industrial levels. To limit global warming to 1.5°C, annual clean energy investment needs to triple by 2030, exceeding US$4tn (the UN puts it at US$4–6tn), while adaptation in developing countries is estimated to cost up to US$340bn a year.

For Gill at EY, achieving that warming level should be the starting point for the financial services sector and comes before thinking about funding and finance. “We have to go back to think about 1.5°C,” she says. At COP27 she spoke to a lot of people from financial service firms and says: “There is a genuine willingness to lean into adaptation and climate finance. There is a decent volume of finance that can be deployed. But the supply chain to deploy it is not very efficient.” This is because the COP process is intergovernmental and there is no formal role for the private sector.

Private–public pathways

To make radical progress to deliver on 1.5°C requires agreements not just between governments and NGOs, but also between public bodies and the private sector. Simplifying the supply chain would ensure climate finance can fund mitigation and adaptation for the Global South, as well as move it swiftly to greener technology.

There are steps to bridge this gap through blended finance and positive developments were made at COP27 through calls for proactive measures from multilateral banks and a reform of the World Bank. “These measures would allow for greater risk exposure and support further extensions to lending, which would then be expected to encourage private investors to follow suit,” explains Marian. Notable was the agreement between the United States, Japan, and private investors to help Indonesia shift away from coal-fired power generation.

Loss, damage, adaptation, and mitigation

Pledge funds from COP27

Adaptation Fund – US$211.58m

Least Developed Countries Fund – US$70.6m

Special Climate Change Fund – £35m

The Loss and Damage fund, heralded as a breakthrough agreement between 198 governments – rather than simply a direction of travel – will provide a dedicated fund to compensate vulnerable nations for loss and damage from climate-induced disasters. It is also a public acknowledgment that the world’s richer countries, and bigger carbon emitters, are responsible to the developing world for the harm caused by global warming.

There is little detail regarding how much finance will be available and how payment will be allocated, which means 2023 will be crucial to determining how to operationalise this commitment. A transitional committee will decide which countries are vulnerable and make recommendations on the funding arrangements and adoption at COP28 in Dubai, running from 30 November to 12 December 2023. Most of this finance won’t be commercially available and will have to come from blended finance after the framework is developed.

The second key area of progress includes new pledges of more than US$210m to the Adaptation Fund, which aims to improve resilience among the most vulnerable communities by helping them adapt to climate change. Negotiators also agreed to produce a report for COP28 in Dubai on progress towards doubling adaptation finance by 2025.

"There is absolutely no point in putting ourselves through all that we’ve just gone through if we’re going to participate in an exercise of collective amnesia the moment the cameras move on"

” Adaptation involves investment in largescale infrastructure such as roads to help people escape from flood areas more quickly, or housing that can cool when the temperatures soar. By their nature and scale, the money to pay for these projects is more likely to be public rather than private finance. But there remains a need to join up all the COP27 takeaways and match them with all forms of financing. As Gill points out, it comes back to the supply chain because nothing can happen in isolation. She says that there is little point putting in place adaptation finance and improving infrastructure resilience if there isn’t also a loss and damage fund to help people cope if there is a climate issue. Underpinning all this is the need to invest in countries to transition to green technology. “You have to have all these things in place, otherwise you are simply adding to the problem,” she says. 

Zero-tolerance for greenwashing

Another theme to emerge from COP27 is around holding businesses and institutions to account. The UN states: “This new phase of implementation also means a new focus on accountability when it comes to the commitments made by sectors, businesses and institutions.”

The High-Level Expert Group on Net Zero Emissions Commitments of Non-State Entities published a new set of recommendations in its Integrity Matters report in November 2022 on setting short-, mid-, and long-term commitments in an aim to crack down on greenwashing. These include prioritising deep emissions reductions, in-line with science, and robust, transparent offsetting processes.

“There is absolutely no point in putting ourselves through all that we’ve just gone through if we’re going to participate in an exercise of collective amnesia the moment the cameras move on,” said Simon Stiell, UN Climate Change Executive Secretary in his opening speech at the conference. Antonio Guterres, UN Secretary-General, added that “We must have zero-tolerance for net zero greenwashing.”

The UN will be prioritising the transparency of commitments from businesses and institutions over the next year. Four key areas are highlighted by the UN Secretary-General in its report: environmental integrity, credibility, accountability, and the role of governments. Plans must be detailed and concrete, and net zero pledges should be accompanied by a plan for how the transition is being made. The report also provides clarity and details on what businesses, financial institutions, and sub-national authorities need to do to phase out coal, oil and gas.

“Undoubtedly this puts the finance sector’s net zero commitments into sharper focus and highlights the importance of being able to demonstrate tangible progress towards these goals,” says Marian.

Gill agrees that financial services firms need to walk the walk with their own commitments to net zero “so they create world impact and not just balance-sheet impact,” as she puts it. “Their financing, insuring, and investing should be reducing greenhouse gases (GHGs) in the real world. They need to set clear goals, metrics, and requirements against net zero commitments, and report success against them.”

Fossil fuels … and financing the future

Despite the progress made at COP27, little was done around reducing dependence on fossil fuels or reducing emissions. “The world’s major emitters didn’t make new commitments on climate mitigation, and the final text ignored growing calls for the phaseout of fossil fuels,” says Marian. “New language was introduced such as ‘low emissions energy’ alongside renewables as the energy sources of the future. The term wasn’t clearly defined and could be used to justify new fossil fuel development.

“As a result of the failure to meaningfully progress fossil fuel phaseout and GHG reduction at COP27, the chances of achieving a 50% reduction in global emissions by 2030 is narrowing. COP28 will see the First Global Stocktake, where countries will take stock of their implementation of the Paris Agreement.”

There are signs that private finance is finding a way to solve some of these bigger issues. John Kerry, the US climate envoy, unveiled a new plan for a carbon credit programme aimed at mobilising private capital to help countries transition away from coal and move to renewable energy. This Energy Transition Accelerator, in partnership with the Bezos Earth Fund and the Rockefeller Foundation, will allow companies to buy carbon credits to fund renewable energy projects in developing countries. The firms would then be able to count the cut in emissions toward their own net zero target. Although carbon credits have been criticised for greenwashing and delaying action on climate change, John Kerry told an audience at COP27: “The fact is we have to accelerate the clean energy transition, and, my friends, it takes money to do that.”

Looking ahead to COP28 Some 45,000 people attended COP27 and there is an expectation that momentum will build, and many more will attend COP28 in Dubai. “COP27 proved the private sector is serious and committed and wants to show up and get involved and make progress on climate change,” says Gill. “There is a sense that the private sector is moving faster than the public sector. Most parties agree that is not ideal.

“The key thing before the next COP is how to engage with all the other relevant parties to make a difference. It is not easy, but the financial services sector has proved it can make change happen rapidly.”

Other outcomes with a financial impactData
Former US vice president Al Gore announced the launch of Climate Trace, a platform to revolutionise the data issue. It aims to use satellite imaging, artificial intelligence and public data sources to help people estimate underlying emissions data at the source. According to EY this could help to reduce financial institutions’ reliance on exclusively corporate disclosure – of varying quality – on climate change to inform lending and investment decision-making. Better and consistent data will give financial services organisations the ability to make informed decisions about how they finance their clients while aligning with net-zero goals.

Reporting
The International Sustainability Standards Board set out its implementation roadmap with a goal to accelerate the global adoption of climate-related disclosure standards, making reporting easier to generate and interpret for stakeholders.

Ahead of the summit the European Financial Reporting Advisory Group approved the final version of the European Sustainability Reporting Standards. The framework sets out reporting rules on sustainability-related impacts, opportunities and risks under the Corporate Sustainable Reporting Directive. It will expand the number of companies required to provide sustainability disclosures from 12,000 to more than 50,000.

Strategy
In the UK the Transition Plan Taskforce launched its gold standard for net zero planning to help companies plan for the transition, execute the transition strategy and disclose it to stakeholders. Elsewhere, GFANZ published guidance for investors on how to develop net zero transition plans. These advances come amid questioning from UN climate experts about the integrity of existing transition plans and fears that industry and government are conducting greenwashing practices.

Big business
A new Asia Clean Energy Coalition was founded by members including Amazon, Apple, Meta and Nike. The Climate Group, the Global Wind Energy Council and the World Resources Institute will run the coalition, with the aim of driving better alignment between energy buyers, project developers, financiers and policymakers, to accelerate the energy transition.