COP27: Implications for Financial Institutions
COP27 took place in Sharm El-Sheik, Egypt, in early November 2022. COP27 was the 27th annual “Conference of the Parties,” that is, the meeting of delegates from countries that are signatories to the United Nations Framework Convention on Climate Change (UNFCCC). At COP21, held in Paris, France, in 2015, delegates agreed to a legally binding international agreement on climate change to limit global warming to less than 2 C, ideally less than 1.5 C, as compared to pre-industrial levels. To meet this goal, most member nations have set targets to lower their domestic greenhouse gas emissions by 2030. COP26, held last year in Glasgow, United Kingdom featured a discussion on increased climate financing. This year, COP27 focused on implementing plans and funding to mitigate and adapt to climate change. COP27 has been called the “Implementation COP.”
The world has not met the climate goals that have been set to date. COP27 is the halfway point between the signing of the Paris Agreement and the 2030 goalpost. In October 2022, ahead of COP27, the United Nations Environment Programme (UNEP) released its 2022 Emissions Gap Report, detailing the difference between the current emissions forecast for 2030 and the level of emissions actually required to keep global temperatures aligned with the Paris Agreement. Based on current policies, global temperatures will rise to 2.8 C by the end of the century. This year’s Emissions Gap Report was titled “The Closing Window,” as there is a limited time to reduce emissions before the Paris Agreement goals become unattainable. UNEP called for a system-wide transformation to avoid this scenario. UNEP recommends collective action in the energy, industry, transport, building, food, and financial systems to decrease emissions quickly. All of these transformative actions will require financing. Financial institutions are in a place of both responsibility and opportunity.
IFC’s Green Banking Academy (GBAC) is an online knowledge initiative designed to help financial institutions in Europe and Central Asia (ECA) learn about green banking and build green portfolios. GBAC advisory services are available to help financial institutions align with the goals of the Paris Agreement. IFC offers the tools needed for financial institutions to ensure that they are able to measure, report on, and decrease the levels of GHG emissions in their portfolios. IFC can also assist financial institutions in developing new financial instruments to meet the needs of investors in the green economy.
Climate Finance and COP27
According to the Sharm El-Sheikh Implementation Plan developed at COP27, a global transformation to a low-carbon economy will require investments of $4 to $6 trillion annually. This, the Plan states, “will require a transformation of the financial system and its structures and processes, engaging governments, central banks, commercial banks, institutional investors and other financial actors.”
To directly support developing countries as they adapt to climate change and recover from climate-related disasters such as droughts and floods, delegates agreed to establish a “loss and damage” fund. Analysts saw this fund announcement as a positive step toward global “climate justice,” and ensuring that no country is left behind. Not all participants initially agreed to support the creation of this fund, but delegates ultimately approved the concept.
Details governing the loss and damage fund will be finalized at COP28, next year in the United Arab Emirates. In the meantime, representatives from 24 member countries will work together to develop a framework for financing and distribution. UNEP says innovative financial tools will be needed to disburse these funds. For example, the UN Secretary General has called for windfall taxes on fossil fuel companies to be diverted to countries suffering losses caused by climate change.
As for the size of the fund, UNEP’s 2022 Adaptation Gap Report found that adaptation could cost between $160 and $340 billion annually by 2030. This figure includes costs for a variety of activities ranging from building sea walls to breeding drought-resistant crops. Actual expected contributions to the fund have not yet been determined.
IFC at COP27
As part of the COP27 proceedings, IFC addressed several issues, including mobilizing additional finance and the use of blended finance.
Financial institutions will need to provide or disburse much of the capital for climate mitigation and adaptation. In order to this, IFC estimates banks need to increase the share of climate finance in their portfolios from seven percent in 2016 to 30 percent in 2030. IFC can assist in this area by acting as an anchor investor, providing advisory services, helping banks issue green bonds, and providing lending guarantees.
Blended finance is a key method of attracting private sector funding. IFC has catalyzed $11 of commercial funding from sponsors and other lenders for every $1 of blended climate financing deployed. Blended finance is one of IFC’s most powerful tools. Small amounts of donor funds are used to mitigate specific investment risks, decreasing the risk profile of investments that would not otherwise attract commercial investors.
Food security in many countries was already vulnerable to political and climate turmoil. The war in Ukraine has exacerbated these problems, sparking food security crises in several areas. To increase funding available to help countries and businesses adapt to the reality of climate change, IFC launched a new $6 billion Global Food Security Platform at COP27. These funds will provide emergency funding to farmers, traders, processors and other private sector players.
“Climate and development are intertwined —
Managing Director and Executive Vice President, IFC
The Net Zero Banking Alliance (NZBA)
The Net Zero Banking Alliance (NZBA) is a group of financial institutions committed to aligning their lending and investment portfolios to net-zero emissions by 2050. The NZBA formed in April 2021 and formally launched at COP26. At COP27, the NZBA presented its first annual progress report. Ninety percent of NZBA’s founding members met the deadline of setting and announcing portfolio targets within 18 months of joining NZBA. Of these, over 90 percent plan to lower their portfolio emissions by focusing on coal and/or oil and gas investments. The NZBA reports that, although intermediate targets have been met, action must be accelerated.
To join the NZBA, banks must establish an emissions baseline for their portfolios, establish reduction targets, then report their emissions profile in future years. While no single emissions measurement method is proscribed, banks must use science-based methods. Carbon offsets may be used to reduce portfolio emissions, but guidelines recommend that carbon offsets be limited to carbon removals, and that the offsets be certified. The NZBA has grown from 43 initial founders to 119 banks at the time of COP27.
The NZBA has developed a Transition Finance Guide which provides recommendations on the role of banks in the transition to net-zero emissions. The core purpose of transition financing, the Guide says, is to help the real economy meet climate objectives. The Guide suggests that banks consider two key client-facing questions:
- Does the client have a credible, feasible plan to transition to net zero?
- Will the proposed financing advance the client (or the wider economy) toward net zero?
The Net-Zero Asset Owner Alliance (NZAOE) is similar to the NZBA, but consists of asset owners such as pension funds and insurance agencies. The NZAOE produced its second progress report at COP27. Of the $10.5 trillion assets managed by members of this association, $7.3 trillion are included in carbon reduction targets. This association is asking policymakers to support increases in blended finance, to leverage more public and private capital.
The banking sector has an important and powerful role to play in supporting the transition to net zero but, clearly, we cannot do this alone. Achieving net zero requires whole system change including policy action, changes in societal behaviour and continuing advances on technical solutions to support transition, adaptation and ultimately decarbonization.
Steering Group Chair, NZBA
Multilateral Development Banks
In his COP27 closing statement, UN Secretary-General’s António Guterres stated that multilateral development banks and international financial institutions “must accept more risks and systematically leverage private financing for developing countries at a reasonable cost.” The World Bank Group, the biggest multilateral funding of climate action in developing countries, delivered $31.7 billion of climate finance in its 2022 fiscal year, a 19 percent increase from the previous year.
Measuring and Monitoring Portfolios’ GHG Emissions
Financial institutions planning to reduce emissions associated with their portfolios must first measure the baseline emissions of their existing portfolios. IFC’s Climate Assessment for Financial Institutions (CAFI) tool is available to enable financial institutions to assess the climate impact of their existing investments. Financial institutions can work with IFC staff to input information about existing portfolio investments into the CAFI tool to estimate greenhouse gas emissions. CAFI can also be used to assess emissions from potential new investments.
In addition to the CAFI tool, IFC staff are available to assist financial institutions as they work with existing and potential clients to revamp projects and reduce emissions. Experts are also available to assist financial institutions in setting climate targets and preparing relevant climate impact reporting for stakeholders.
Abdel Fattah El-Sisi
President of Egypt
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