Here’s what you need to know from COP27

Scaling private capital to address climate change remains a challenge.

As with COP26 in Glasgow in 2021, the role of private finance grew in prominence during the 27th U.N. Climate Change Conference in Sharm el-Sheikh, Egypt, known as COP27.

Overall, trillions of dollars are needed to put the world on a path to limit global temperature rise to 1.5 degrees C relative to preindustrial levels, the target that scientists say the world must hit to avoid the worst-case climate change scenario.

The final agreement between participating countries at the conference, called the Sharm el-Sheikh Implementation Plan, highlighted that a global transition to a low-carbon economy will require investment of at least $4 trillion to $6 trillion annually. That will require transformation of the financial system involving governments, central banks, commercial banks, institutional investors and other financial players, the text said.  

And that can only be achieved by ensuring private and public finance work together to create the right conditions for investment through blended finance initiatives.

Nations will need to turn a “loss and damage” fund into reality.

One breakthrough at COP27 was an agreement over funding for vulnerable nations suffering from the effects of extreme weather events. “Loss and damage” financing was part of the official COP agenda for the first time, after discussions over the last decades on whether and how industrialized nations should compensate developing nations for the costs of climate change.

While countries reached an agreement, details remain scant. Governments acknowledged the need for new funding and agreed to create a new fund. A transitional committee will meet before the end of March 2023 and will make recommendations at next year’s COP28 gathering on how to get the fund up and running. The committee will look at current gaps in financing and potential sources of funding.

While some commitments have been made, they are not yet enough to address the funding gap. The charity Oxfam has estimated the damage and losses caused by irreversible climate change at between $290 billion and $580 billion annually by 2030. Another challenge will be determining which countries receive the money. The U.N. still considers China and India, two of the world's largest greenhouse gas emitters, developing economies. Political realities will also need to be addressed. The U.S. and EU had for years resisted efforts to establish such a fund over concerns they could be held liable for climate disasters.

Learn more about loss and damage and other key themes covered at COP27 in this episode of the ESG Insider podcast from S&P Global Sustainable1:

Finance for developing nations is far short of what was pledged — and what is needed.

Developed nations promised developing countries $100 billion annually by 2020 to address climate change risks in 2009, but the full amount has yet to materialize. Much of what has been delivered is in the form of loans, adding to the debt burden of already financially strained economies. A report from the Organisation for Economic Co-operation and Development in September 2022 showed that climate finance for developing nations was below budget at $83.3 billion in 2020.

Even that $100 billion target would not be enough to address the needs of developing countries, however. A report published during COP27 estimated that developing countries, excluding China, would need annual investments of more than $2 trillion by 2030 to cut emissions and protect themselves from the impacts of climate change. And that amount does not include the $100 billion already promised.

Private sector-led initiatives, in partnership with countries and multilateral development banks, need to develop projects in which they would reduce, share and manage risks with the aim of reducing the cost of capital, the report said.

Boosting flows of capital to adaptation and emerging markets is critical.

Some climate finance announcements at COP27 seek to make it easier to raise capital, particularly in developing countries.

The COP27 presidency announced an initiative designed to raise between $140 billion and $300 billion by 2030 from both public and private sources to invest in adaptation and resilience to protect vulnerable communities from the effects of climate change. The initiative is part of the Sharm-El-Sheikh Adaptation Agenda and includes adaptation measures such as  $4 billion of investments in restoring and protecting mangroves; promoting sustainable agriculture to increase yields and reduce farm level greenhouse gas emissions; and expanding access to clean cooking for 2.4 billion people through at least $10 billion annually by finding innovative means of financing. Adaptation financing for flood defenses or growing resilient crops is critical amid rising climate hazards such as extreme heat, drought and flooding.

Using debt such as green bonds will also be key in getting capital to African and developing nations. The continent accounts for less than 1% of global green bond issuance, while it receives almost a quarter of climate finance, according to the U.N. The COP27 presidency announced a plan to  lower the costs of issuing green, social and sustainability bonds for African and developing countries and to boost demand for the instruments in Africa.

Carbon pricing and voluntary carbon markets have an important role to play.

The growth of carbon markets is one mechanism that could help drive investment into reducing carbon emissions and supporting the energy transition in developing economies.

During COP27, African leaders, CEOs and carbon credit experts launched the Africa Carbon Markets Initiative, a voluntary carbon market aiming to produce 300 million carbon credits annually and create $6 billion in revenues by 2030. The initiative is working with carbon credit buyers and financiers to commit hundreds of millions of dollars for African carbon credits.

The value of voluntary carbon markets quadrupled to just under $2 billion in 2021 and is widely expected to grow by a factor of at least 15 by 2030 as governments and companies seek to use offsets to help achieve net zero emissions targets, according to S&P Global Commodity Insights.

Also during the conference, the U.S. government along with the Rockefeller Foundation and the Bezos Earth Fund launched a carbon offset plan called the Energy Transition Accelerator aimed at unleashing the trillions of dollars needed to speed the energy transition. Government, business and nongovernmental organizations will work together to design the accelerator to deliver finance at scale, according to U.S. climate envoy John Kerry. Some of the financing will be used to support adaptation in developing nations and it will play a key role in ensuring emission reduction targets.

“We believe this can be catalytic,” Kerry said. “By ensuring a predictable finance stream for energy transition, this approach will increase the bankability of clean energy projects, and unlock more concessionary, upfront finance.”

Further Reading

This piece was published by S&P Global Sustainable1 and not by S&P Global Ratings, which is a separately managed division of S&P Global.