COP27: Finance Day November 9, 2022

In the first of COP27’s thematic days, Wednesday saw participants focus on climate finance, which is seen as the key to achieving the goals set out in the Paris Agreement and addressing the climate crisis.

Key Announcements and Pledges:

Egypt’s finance minister suggested that the amounts required to implement the climate commitments made by countries and companies required trillions, rather than billions, of dollars. Mr Maait said that COP27 would be a success if it could achieve “more financing at a reasonable cost and on reasonable terms”.

US Climate Envoy John Kerry announced plans to introduce a new carbon credit scheme (the ‘Energy Transition Accelerator’) enabling polluting companies to purchase carbon credits, compensating for their own emissions. The money raised from such purchases will be directed towards assisting developing countries in their move towards renewable energy.

Key details as to how the Energy Transition Accelerator will operate in practice are yet to be decided, and the US will work in partnership with the Rockefeller Foundation and the Bezos Earth Fund to further develop these plans with a view to having the scheme up and running before COP28.

Critics suggested that rather than compensating for high emissions with the purchase of relatively cheap credits to meet their environmental targets, companies should instead be focused on reducing their actual emissions. Kerry made clear that fossil fuel companies would not be able to purchase these credits.

Xie Zhenhua indicated that China could be willing to contribute to compensation for the losses and damages suffered by poorer nations as a result of climate impacts.

The controversial loss and damage payments (which have been referred to by some as ‘climate reparations’) are seen as a key demand of developing nations at COP27, following last year’s progress in Glasgow. Austria and New Zealand have now made commitments to put forward funding towards loss and damage, which follows Scotland’s First Minister Nicola Sturgeon stating earlier in the week that further financial commitment would be announced during COP27.

The UK’s credit export agency will introduce “climate resilient debt clauses” in its lending to developing countries. These clauses will operate to stop debt payments for two years in the event that a climate disaster occurs, enabling funds to be directed towards dealing with the climate emergency. The UK called for all creditors, domestically and internationally to explore adopting similar clauses in their lending.

In the light of the UK’s Transition Plan Taskforce’s Disclosure Framework and Implementation Guidance being published for consultation, the UK’s Treasury Minister welcomed the next step towards companies demonstrating how they will align their business with net zero. The framework is intended to enable companies to demonstrate what measures they are taking to meet their goals, setting out recommendations for disclosure.

UN experts have published a list of projects with a combined worth of $120 billion in the hope of demonstrating that there is a “meaningful pipeline of investible opportunities … across the economies that need finance most". Dozens of projects were listed, including 19 in Africa alone.

The release of the list will enable banks and other lenders/investors to assess the projects and eventually provide finance. The team behind the release said that "we now need a creative collaboration between project developers and public, private and concessionary finance, to unlock this investment potential and turn assets into flows".

A group of over 85 African insurers have pledged to provide $14 billion of cover to help the continent's most vulnerable communities deal with climate disaster risks. The group stated that they were trying to create a local market-based funding tool for resilience.

Matthew Allen, Global Head of Financial Services at Eversheds Sutherland, comments

“Financial markets have an enormously important role to play in the fight against climate change. Whether providing sustainability linked debt finance to taxonomy compliant businesses and projects, acting as sponsors of private market investment into green assets and businesses or creating liquidity in market instruments designed to fund the energy transition in emerging markets, institutions including banks, asset managers and insurers are key enablers of change.?Trust, transparency and good customer outcomes are however key to the resilience and longevity of institutional and private market funding. Capital allocation in ESG backed investments continues to grow exponentially but sentiment can rapidly change when returns weaken or market integrity is put at risk. We therefore expect to see a continued and robust focus on disclosures, due diligence and asset liquidity by regulators on both sides of the Atlantic in the period ahead.”