Key Takeaways from COP28 and Its Climate Finance Deals

Has COP28 delivered the pledge to phase out fossil fuels?

The answer to this is revealed in the last part of this newsletter. In the interim, our focus will be on examining the climate finance deals that went down.

Following the Paris Agreement?on climate change at?COP21?in 2015, subsequent conferences have centred around implementing its objectives: preventing a global average temperature increase beyond 2°C, with dedicated efforts to restrict the rise to 1.5°C above pre-industrial levels. COP28, which ends today in Dubai, was organized around four themes: fast-tracking emissions reduction; deploying climate finance; increasing adaptation by focusing on nature, lives and livelihoods; and making the transition inclusive.

Was the objective on deploying climate finance realized?

The realization of decarbonization, climate mitigation, adaptation, and the attainment of the net-zero target hinges on securing funding. Adequate financial support is imperative to facilitate climate mitigation, enhance resilience, and execute adaptation projects, all of which are crucial for attaining global climate objectives

Globally, only about 16% of climate finance needs are currently being met which means that climate finance must increase by at least 590% – to $4.35 trillion annually by 2030 – to meet climate targets.[1] The world faces a $41 trillion mitigation investment gap to 2030, with emerging markets facing a higher gap as a share of their GDP.?There is also an adaptation financing gap of $600 billion required annually to 2050, which is 10–18 times greater than current flows.[2]

Climate finance is, therefore, based on the premise that developing nations do not have the financial resources to mitigate or adapt to the consequent impact of climate change. Here are the major climate finance deals at the COP 28.

Loss and Damage Funding

Loss and damage refers to the adverse outcomes resulting from the inevitable hazards of climate change, including but not limited to rising sea levels, prolonged heatwaves, desertification, ocean acidification, and extreme events such as wildfires, species depletion, and agricultural losses. A significant feat was achieved during last year's COP27 with the consensus to establish funding for 'loss and damage,' slated for implementation this year.

In a pivotal development on the inaugural day of COP28, delegates reached an agreement to set in motion the operationalization of a fund designed to provide compensation to countries vulnerable to the severe impacts of climate change.

Sultan al-Jaber, the President of the?COP28?climate conference, has said that his country, the United Arab Emirates, would commit $100 million to the fund.?Up to 18 countries have now committed to the fund, with $792 million pledged.

The fund will be deployed where adaptation measures prove insufficient, and developing nations find themselves grappling with the detrimental consequences of climate catastrophes beyond their management capabilities. This initiative serves to assist the world's most vulnerable countries in covering the substantial costs incurred by climate disasters.

Alterra

ALTéRRA is a key financial initiative unveiled during COP28 to expedite the global transition to a low-carbon economy and build climate resilience. It is a private investment vehicle established by Lunate, an ?Abu Dhabi-based independent global alternative investment management company.

At the COP28, The UAE announced a $30 billion climate fund?pledge to Alterra in collaboration with BlackRock, Brookfield and TPG to combat climate change. The overarching objective is to mobilize $250 billion globally within the next six years, fostering a more equitable climate finance framework.

Alterra will become the world's largest private investment vehicle for climate action focusing on ?climate investments in emerging markets and developing economies,?where traditional funding has been lacking because of the higher perceived risks.

Alterra has a two-part structure: The Alterra Acceleration and The Alterra Transformation. The former, a $25 billion fund, will provide institutional capital to climate investments at scale. It will serve as an anchor investor and co-investor in climate strategies, allocating capital both directly and through fund partnerships. On the other hand, the $5 billion Alterra Transformation fund will provide risk mitigation capital to incentivize investment flows into the Global South. It will also aim to create opportunities to "leverage concessional finance to further attract climate investment" to least developed countries and small island developing states.

Green Climate Fund

The GCF is the world's largest international fund with a primary mission to channel financial resources from the private sector towards climate-smart investment opportunities. Vice President Kamala Harris declared the United States' commitment to contribute $3 billion to the GCF. Estonia, Portugal, and Switzerland also joined this commitment, with Estonia pledging $1 million, Portugal committing $4.4 million, and Switzerland contributing a significant $155 million.

Global Green Bond Initiative and African Green Bond Markets.

Africa’s engagement in the green bond market currently represents less than 1 percent of more than $2.2 trillion in community green bond issuance in 2022.[3] At COP28, the African Development Bank Group entered into a partnership agreement with the coalition of development finance institutions under the Global Green Bond Initiative. The collaboration aims to provide technical assistance for the advancement of green bond markets in Africa. This initiative is designed to facilitate the flow of private capital from institutional investors into climate and environmental projects in partner countries of the European Union.

The Global Green Bond Initiative, through this partnership, seeks to enhance access to capital for emerging markets and developing economies (EMDEs) by offering technical support to green bond issuers. Additionally, it aims to attract private investors through a dedicated de-risked fund, functioning as an anchor investor in green bonds issued in EMDEs. The expected outcome of this collaboration is a substantial impact, potentially resulting in €15-20 billion in green investments.

In an effort to bolster technical assistance, the coalition will contribute to the origination of green bonds, assist in the development and identification of pipelines for green projects, and contribute to the establishment of robust and consistent green bond frameworks. This collaboration marks a significant milestone in endeavors to mobilize green bonds within emerging and developing economies.

Africa Disaster Risk Financing Programme (ADRiFi)

ADRiFi helps African countries build capacity to respond to climate change-related weather extremes such as cyclones, flooding and drought. Through the ADRiFi initiative, the African Development Bank (AfDB) has injected over $100 million, aiding 15 African countries in securing sovereign insurance and financial safeguards against climate-related hazards.

The recent financial commitment of ￡7.4 million ($9.63 million) for the programme will specifically fortify sovereign drought insurance protection, with Somalia being a focal point over the next three years. The UK’s Foreign, Commonwealth and Development Office announced nearly $10 million in additional funding to the programme assisting African countries to strengthen resilience and enhance their response to climate shocks.

IsDB’s Green Sukuk

The Islamic Development Bank (IsDB) announced an industry collaboration with International Capital Market Association (ICMA) and the London Stock Exchange Group (LSEG)?that will create a comprehensive guide for practitioners focused on the issuance of Sukuk (Islamic bonds) in accordance with the Green Bond Principles and Sustainability Bond Guidelines outlined by ICMA.

The objective is to facilitate the expansion of green and sustainable finance within the global Sukuk market. The guide will offer issuers and market participants valuable insights, utilizing examples, case studies, and best practices to demonstrate how Sukuk can align with the Principles, thereby enabling them to be classified as Green or Sustainable. Additionally, this initiative seeks to enhance investor awareness of Sukuk as a distinctive asset class within the global fixed income markets.

Other Climate Finance Deals

• The World Bank committed to allocate a minimum of 45 percent of its financing to climate projects, representing a $9 billion increase from its previous commitments.
• The UAE pledged $200 million to the International Monetary Fund (IMF) Resilience and Sustainability Trust. This initiative aims to support low-income and vulnerable middle-income countries in funding resilience, mitigation, and transition projects. Additionally, the Development Bank of Latin America and the Caribbean (CAF) announced its intention to invest over $2 billion annually until 2030 in Latin America to combat climate change.
• The Asian Development Bank (ADB) has outlined plans to dedicate $10 billion for climate investment in the Philippines between 2024 and 2029.
• UAE banks have committed to mobilizing 1 trillion dirhams, equivalent to approximately $270 billion, in green finance.
• Charitable donors, including the Bezos Earth Fund, have collaborated with the World Bank's private investment arm in a climate financing initiative aiming to generate $11 billion in investments in developing countries.
• The UAE, contributing $100 million, is among the supporters of a new World Bank methane trust fund designed to reduce flaring and emissions of this potent greenhouse gas.
• The Bill & Melinda Gates Foundation and the UAE have jointly pledged $200 million to assist smallholder farmers in sub-Saharan Africa and South Asia in building resilience and adapting to climate change.
• Brazil's national development bank has launched a $205 million initiative to restore 60,000 square km (23,160 square miles) of degraded or destroyed woodland in the Amazon by 2030.
• The UAE, along with several charities, has provided $777 million in financing to address neglected tropical diseases expected to worsen with rising temperatures.

UAE Consensus

The debate surrounding the management of fossil fuels in the context of the climate crisis extended the COP28 negotiations into overtime. Numerous nations had expressed dissatisfaction with a draft deal released on Monday, as it did not advocate for a clear "phase-out" of fossil fuels, identified by scientists as the primary contributor to the greenhouse gas emissions fueling global warming. Participants voiced concerns that the wording lacked the necessary strength.

This morning, representatives from almost 200 countries reached a consensus for the reduction of global fossil fuel consumption. This marks the first instance in the history of U.N. climate summits where there is explicit mention of reducing the use of all forms of fossil fuels.

Key points from the agreement include:

• The agreement urges the transition away from fossil fuels in energy systems, conducted in a just, systematic, and equitable manner to achieve net zero by 2050.
• The tentative use of 'could' has been eliminated from the language concerning fossil fuels; the text now 'calls on' countries to transition to renewables and decrease their dependence on fossil fuels.
• Nations are urged to expedite and substantially decrease emissions, particularly methane emissions, by 2030.
• The agreement advocates for a threefold increase in global renewable energy capacity by 2030, hastening efforts to curtail coal usage, and accelerating the deployment of technologies like carbon capture and storage to address hard-to-decarbonize industries.

Similar to the 'Paris Agreement,' the final accord is dubbed the 'UAE Consensus’.

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Peter Okediya

[1] Environmental Finance, “Financing the Missing Middle for Climate Tech’, https://www.environmental-finance.com/content/market-insight/financing-the-missing-middle-for-climate-tech.html

[2] Mckinsey, ‘https://www.mckinsey.com/capabilities/sustainability/our-insights/sustainability-blog/cop28-climate-finance

[3] African Development Bank, https://www.afdb.org/en/news-and-events/press-releases/global-green-bond-initiative-joins-african-development-bank-strengthen-green-bond-markets-africa-66491