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Will COP26 be a breakthrough summit for Green Finance?

Olivia Thomson Renewable Energy & Infrastructure, Energy Supply & Trading, Energy, ESG & Green Tech Finance...

Will COP26 be a breakthrough summit for Green Finance?

 

Are we Underfunding the Green Economy?

COP26 follows on work done in 2015 on the Paris Agreement. Whilst that agreement was undermined by the US withdrawal under the Trump administration, in the arena of green finance it left a powerful legacy. The Paris Agreement aimed from the start to encourage greater flows of finance towards lowering emissions and ensuring developing countries had access to funding from developed economies. Before Paris there was an earlier commitment in 2010 for developed nations to provide $100bn a year by 2020 in funding to developing countries through the Green Climate Fund (GCF). However, a recent OECD report estimated that in 2019 just under $80bn was provided for developing countries. Whilst we don’t have the 2020 figure its clear that past summits may have over promised and underdelivered. Yet every year that goes by underlines the urgent need for a net zero world, given the need for industrial scale transformations to achieve net zero, it is impossible to separate green finance from the green transition. The question is will COP26 help move green finance forward?

 

Why COP26 might be different

It does feel that coming into COP26 there may be a greater financial focus. November 3rd sees finance take centre stage, placing ahead of the other themed days of the conference. There are at least several different funding mechanisms available globally, China’s OBOR (one belt one road), the G7 “Build Back Better” strategy, Europe’s Global Connectivity Strategy and the ongoing GCF. Provided that finance discussions don’t become bogged down in minutiae there is a chance that major green finance issues could be tackled. There is a sense that the finance is there, what we are discussing is the best use of the money.

 

What should the priorities be?

There will be many competing priorities at COP26, but here are some of the main ones to address:

 

  1. Focus on agreeing standards. Green finance suffers from not having one core standard, with that comes credibility sapping accusations of green washing. Getting greater international standards agreement will give greater confidence to the overall system.
  2. Understand how clear green finance policies can impact trade behaviours. Greater international collaboration is needed especially in relation to goods. Everything from illegal logging to palm oil should be up for discussion. There will be flash points in this area, several countries have already been seen to lobby hard on areas such as meat farming.
  3. Ending subsidies for fossil fuels.
  4. Ensuring countries stick to their finance commitments especially in relation to the GCF.

 

Ultimately COP26 also needs to provide a stimulus for greater global adoption of ESG standards. Currently the space is increasingly dominated by European nations as opposed to the traditional finance power houses of the UK, US or Asia. The think tank New Financial estimates that UK investment assets represent 6% of all funds compared to 13% in Europe. New Financial also rates European countries ahead in 90% of their 60 metrics for assessing ESG against their global rivals. Whilst this is great for Europe, a sign of success will be a greater diffusion of ESG investing across the globe.

 

What does COP26 need to deliver to help Green Finance?

So far, we have focused on what green finance needs to do, however it does not exist in a vacuum. Finance works best when it knows what it is investing in. The real pressure will still be on world leaders to provide clarity. We know what the target is – preventing a rise beyond 1.5°C, hopefully this frees the politicians and negotiators to focus on the how. That will be invaluable for getting things done.