The COP26 climate conference has come and gone. Both the public and private sectors, as well as the media, around the world are now ardently assessing the summit’s achievements or lack of thereof. The talks in Glasgow witnessed firsthand the passion of youth demanding governments to act with greater urgency, while their country representatives worked extra hours to find common ground on the details of the agreement.
COP26 did not unveil a treaty on par with the 2015 Paris Agreement but exhorted countries to take steps to keep global temperature increases to 1.5 C until the end of the century. Leaders of developing nations demanded a trillion dollars annually over the next three decades from developed countries to help the developing world adapt to and mitigate the climate change. Advanced countries, whose carbon pollution over generations caused the problem, agreed to this funding commitment with the goal of eventually achieving net-zero emissions by 2050.
The Glasgow Climate Pact put in place measures for countries to enhance their climate targets next year and phase down coal power; and it resolved key rules of the Paris Agreement. It fell short in other areas, such as insufficient provisions on carbon markets, social protection, and aligning public investments. Outside the negotiations, COP26 made encouraging commitments to cut methane emissions, halt and reverse deforestation, and align private investments to the net-zero goal.
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Delivering on climate finance is the stickiest point of contention between developed and developing countries. Because most of the nationally determined contributions in regard to emissions cuts are conditional to the availability of adequate financial support. Mobilizing $1 trillion every year seems a daunting task. But COP26 witnessed extraordinary support from the global finance industry. The world’s largest investors called for a robust, transparent and fair climate deal, promising that they will make money flow. And banks promised to find ways to promote and channel tens of billions into low-carbon investments.
But private finance will not flow in a vacuum. There is a close relationship between the way in which incentives are handled and increased climate investments. The public sector needs to focus on efficiency of the finance industry to help channel private savings into investments which will not just give investors a return in the short run, but will ensure that those returns are economically sustainable in the long term.
The good news is that the financial industry is not short of savings. At the global level, some $300 trillion is represented in capital markets, a little more than half from commercial banks, and the rest from insurance and institutional investors. Against this, the clean $1 trillion looks quite modest. But financial markets still have not got enough money flowing in support of a net-zero economy.
One of the reasons is that motivation for private financing of low-carbon infrastructure is not strong. If a carbon intensive investment gives a greater return than that of a clean and green alternative, investors cannot ignore the business case of making profits. That is why over 300 financial institutions have urged the world leaders to reach an agreement on climate financing. They are ready to pay a price for carbon if it makes their investment relatively more attractive. These institutions have not suddenly become climate activists. They gradually understood that unless the climate is stable, the economy in which they invest will be at risk.
Moreover, most private investments on climate change mitigation in developing countries in Asia are not made by financial institutions but by big corporations. Huge economic reward could be gained if they are directed towards low-carbon investments by pricing the carbon in the markets.
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Though a lot of activities are taking place in finance systems, there is a long way to go to mobilize the $1 trillion. A major cause is that financial institutions themselves are not well structured to accelerate financial flows in the right direction. They inadvertently give preference to carbon intensive investments over low-carbon ones.
The same is true for accounting standards. Even though they claim to be prudent, they do not question the value of stranded assets. The risk measures used to manage banks are backward looking and are ill-adapted to foresee climate risks which lie ahead. Investment institutions, which owe a fiduciary duty of care towards their stakeholders, often ignore the effects of climate change on the population for which investment decisions are made. Shareholders, citizens and policymakers need to ensure that financial systems are fit for the purpose to achieve net-zero targets. In short, significant, coordinated effort is necessary to compel future investments towards climate change mitigation and adaptation.
The following are some possible initiatives that have been successful in several countries: ensure that crediting agencies offer ratings which incorporate long-term climate risks into their evaluations; encourage companies to report openly on their carbon intensity, and agree to declare their improvement plans; create standards of reporting for all companies that can raise money through public stock exchanges; get banks and financial institutions to manage and minimize value at risk through proper screening and make them safer, and steer them away from carbon intensive activities.
Also, trustees of investments funds could be encouraged to accept fiduciary responsibility; equity investors urged to integrate climate considerations into their engagement with companies and voting for boards; and insurance companies assisted in identifying and creating climate resilience. And donor, public and multilateral banks must significantly increase their climate portfolios and intensify their efforts to help countries advance the net-zero goals.
Each of these is but one of many small steps. But taken together they would put the world on a very different course in mobilizing the clean $1 trillion.
The author is director of research strategy and innovation at the Economic Research Institute for ASEAN and East Asia. The views do not necessarily reflect those of China Daily.