The role of finance was integral to the historic COP28 summit. Whether around methane, loss and damage or the energy transition, funding mechanisms underpinned each commitment made at the conference. The conference closed with an agreement that pronounced the “beginning of the end” of the fossil fuel era and highlighted the need to establish new and innovative sources of capital to finance the transition.
The following observations from COP28, gathered from our conversations and sessions at the event, can help inform how financial-services companies approach key issues raised at the conference.
- Real conversations, real deals
It was only last year when attendees we spoke with across the public and private sectors at COP27 in Egypt bemoaned the lack of investor presence on the ground as a missed opportunity. Indeed, the topic of finance was allotted just a single day at previous COP summits.
This year, the launch of the $30 billion Alterra fund on day one provided a sign of things to come, with the role of climate finance running through the majority of announcements, panels, and conversations.
“How do we fund it?” remains one of the first questions asked, whether about how to diversify revenue streams away from oil and gas, or how to accelerate the flow of capital into emerging markets.
While the debate continues around whether the increased presence of corporates at COP is a positive trend, investors we spoke with cited the high levels of capital committed and the tangible benefits of convening public and private sector decision makers in one place.
As one energy infrastructure investor put it: “I’ve met real people doing real deals, which make a real difference.”
- Spotlight on food security
While ways to reduce emissions in the oil and gas sector were front and center at the conference, other sectors also found themselves under the spotlight; debates about how to drive change in food production and agriculture were particularly prominent.
In a significant announcement, more than 130 countries signed the COP28 UAE Declaration on Sustainable Agriculture, Resilient Food Systems, and Climate Action, which affirms that “agriculture and food systems must urgently adapt and transform in order to respond to the imperatives of climate change.” The consensus among investors was that this move would directly impact portfolios and investment decisions.
As Kamal Bhatia, global head of investments at Principal Asset Management, noted: “Global investors are able to influence not only the pace of global warming, but also to help mitigate its effects on food production and economic resilience through investment in local solutions and technologies which help agricultural production to be more resilient in the face of a rising temperatures globally. We see opportunities in globalized companies whose business interests – either through near-shoring or global operations – are clearly aligned to helping emerging markets develop climate mitigation solutions is an important consideration.”
But participants noted that obstacles arise when companies are not moving as fast as their investors. Sofia Condés, head of investor outreach at FAIRR, said that while engagement with the food sector is a good proxy for how seriously investors take their commitments to decarbonising portfolios, many companies simply don’t have the resources to understand their own biodiversity and carbon footprints. She said this challenge is particularly acute within emerging and developing markets, and investors need to encourage management teams at food companies to bolster their teams and reporting resources so they can enhance disclosure, drive change, and sufficiently respond to shareholder questions and demands.
- Was this the “Collaboration COP?”
Collaboration was another theme that permeated conversations. As Cara Williams, Global ESG and Sustainability Leader at Mercer reflected: “This year is the ‘Collaboration COP.’ I’ve been struck by the diversity of industries and asset pools around the table. Investors have a role to play in accelerating this transition, but one group of actors cannot make a difference alone. Blended finance provides part of the solution. Private investment and philanthropy, alongside the work of committed governments and development banks, must work together to create consortia to pool capital into direct investment.”
Despite this optimism, how to de-risk investments, especially in the Global South, remains a challenge. Companies looking to raise transition capital in emerging and developing markets may apply stringent corporate governance and disclosure frameworks but, as one asset owner regretfully noted, sometimes this hard work is outweighed by “perceived risk” and low risk tolerance from investors. It is often only after governments implement first loss mechanisms that institutional investors can even consider allocating capital to these regions.
- Can the power of the Gen Z dollar move the needle on green capital flows?
Attendees expressed some frustration about the challenges of scalability and returns that still prevent institutional capital being channelled en masse into green and sustainable projects.
One large global investor suggested that, in time, it will be younger, retail investors who catalyse this change. This generation is more likely to want to invest in themes such as water and food security and will even – possibly - accept a lower rate of return to invest in line with their values. As Matt Lawton, Portfolio Manager at T. Rowe Price, commented: “Something like a blue bond (that supports the health, productivity, and sustainability of oceans and water resources) is tangible. Investors can physically see how their money translates into impacting the real world.”
To increase capital to smaller, unlisted sustainable vehicles, another investor floated the idea of tokenisation of funds to allow retail investors liquid access to hard-to-reach projects.
- Data, research, and AI can help achieve and implement COP28 climate targets.
While the scale of commitments at COP28 is surely a positive step, companies and governments need the tools and resources to start delivering on these pledges successfully.
Across the Blue and Green Zones, the importance of AI, data, and research was touted as critical to translating commitment into action and measurement. Data transparency and credibility have, for example, been central to negotiations around a revival of voluntary carbon markets. Google, Microsoft and IBM all discussed AI as part of the solution to solving climate problems.
The Presidency’s launch of the Global Climate Finance Centre (GCFC) – backed by the likes of BlackRock, HSBC and the Glasgow Financial Allowance for Net Zero (GFANZ) – is expected to provide a platform to accelerate progress in these areas.
As Rebeca Minguela, CEO and founder of Clarity AI, the sustainability technology platform, commented: “The launch of the GCFC is a positive step towards meeting Net Zero Goals. Spearheaded by some of the world’s most influential financial institutions, it is the type of action which people expect to see at COP. Research and data, augmented by advanced technology and AI, represent some of our most powerful tools to combat climate change. They facilitate evidence-based assessments, track progress and ensure data equity for a more just transition.”
Alfie Sealy, Account Manager (Alfie.sealy@edelmansmithfield.com) and Imogen Gardam, Director (imogen.gardam@edelmansmithfiled.com)