The eyes of the world are on Glasgow. That’s what everyone says these days. Every new natural event, every fresh forecast about the perilous and worsening state of the climate, seems to be met with the same conclusion. That it’s time for political leaders to get a grip – time for them to come together and agree meaningful action. Time, in other words, for COP26.
Cynics though will be excused for their doubts. After all, the clue is in the title. This will be the 26th time since the early nineties that nation states have convened with the express aim of reducing the planet’s carbon emissions – and still they continue to increase.
This time though, most people seem to agree that something feels different. Climate change as an issue has moved with rapidity from scientists and environmentalists to the mainstream, the speed largely dictated simply by evidence, our screens filled increasingly with images of people in not so far-flung Greece and Germany watching their homes be consumed by fire or washed down flooded streets. On the other side of the debate, only a niche of denialists remains, limited mostly to the comments sections of conspiracy blogs.
Acceptance is one thing, however, and action another. But it does all mean that for possibly the first time ever, the eyes of the world might actually be on a major international climate change gathering.
Those eyes will fall on the financial sector, too. One of only five key overarching objectives at COP26 is to mobilise finance, to unleash the “trillions in private and public sector finance required to secure global net zero”. Thus far, the sector has only been responsible for adding to the list of glaringly missed climate targets. It was back at COP16, in 2009, that developed countries agreed that by 2020 they should contribute at least $100 billion annually in “climate finance” to developing countries. The number could have constituted any local, national, or transnational financing. It could have come from the private sector or direct state funding. It could have been met jointly by all the developed nations, even though as a total it represented a fraction of what individual governments might spend on health, education or policing.
And still it became another target missed. Oxfam analysis found climate finance totalled just $59.5 billion per year on average in 2017 and 2018. Even more soberingly, the actual value was found to be a third of what was reported, and around 80 per cent of it loans rather than grants, meaning the already high debt burden of low-income countries was added to.
And more sobering still is that most agree the figure is well short of what is needed. Estimates from the Intergovernmental Panel on Climate Change (IPCC) suggest as much as $1.6 trillion to $3.8 trillion will be required annually between 2016 and 2050 to alleviate the climate crisis. It’s no wonder mobilising finance is one of COP’s key objectives.
But how exactly is the industry supposed to do it? What can we expect in terms of new obligations? And what exactly is the role of green finance in enabling and incentivising the transition to net zero?
One of the big issues to look out for in Glasgow is whether world leaders opt for an incentive-based approach, focused on tax breaks and other goodies for green investors, or the likes of carbon pricing, carbon border tariffs and increased regulation. Cynics – it’s again worth noting – will be looking out simply for whether they opt for any sort of meaningful action at all.
For examples of the sort of mechanisms that could be used on the carrot side, look no further than the UK. Rishi Sunak announced in this year’s Budget the creation a green national savings bond. Concerned by inflation and with an estimated £180 billion of excess savings built up during the Covid lockdown, the idea is to channel a meaningful percentage into “productive investment”. The Government will use the money to help finance green infrastructure projects, then pay back an interest rate and a lump sum savings in full, plus the interest, once the bond’s term is over.
Then there is green lending. The UK Government is giving money to pilot projects testing green finance products for things like home energy efficiency measures. One day they could form part of the whole mortgage package, with lenders and sellers having to disclose homes that are inefficient. On a local level, there are also pioneering councils like West Berkshire and Warrington issuing green bonds to residents for individual measures like solar installations and bio-diversity improvements. Some wonder whether these concepts could work on an international scale, too.
On the “stick” side, carbon trading will be another interesting issue for the financial world at COP26. The former has proved thorniest at previous world climate gatherings. Article 6 remains the only significant part of the Paris agreement to be resolved, substantial efforts at both COP24 and COP25 failing to break the deadlock.
In theory, carbon pricing mechanisms incentivise big polluters to reduce their emissions by making them pay for the carbon they emit. In the worst case they would contribute to a huge pot of money that could be used for green technology across the planet. Yet most people think that to make it work, costs of emission-reduction action must be cheaper than the price of the carbon. It’s not exactly what’s happening so far. The EU established the world’s first system in 2005 and since then dozens more have emerged, most notably in China this year. To this day though an estimated four-fifths of global emissions are said to be unpriced, while the global average price is just $3 (£2.16) per ton. Many governments presumably fear that carbon taxes would move investment elsewhere – another reason a global system is seen as necessary. But various competing domestic responsibilities mean that finding common ground at COP26 is still seen as difficult, and increasingly a “now or never” moment for the entire concept.
Financial regulation could be another major topic of discussion. Since the Paris Agreement was signed in 2015, it’s reported that banks have continued to invest some $2.2 trillion into the fossil fuel industry. The objective for the private finance work for COP26 is to “ensure that every professional financial decision takes climate change into account”.
The COP26 Private Finance Hub will work with the private sector and other stakeholders to develop four key areas – reporting, risk management, returns and mobilisation. The first will be one of the most crucial – in other words improving the quantity, quality and comparability of climate-related financial disclosures.
This work has never been more timely. The ecosystem of ESG reporting is growing with such speed and complexity that common frameworks are needed as soon as possible. The focus of industry leaders at COP26 should be on implementing one built on the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations. And they should explore going further, mandating serious, detailed, sector-specific requirements for every sector of the economy, but particularly those involved in finance.
In the same breath, climate-related demands should work in both directions. The financial services needs assurances that it is investing in markets and technologies that will actually drive progress towards net zero, thereby delivering measurable returns. Currently the likes of carbon capture and storage and green hydrogen are cited as potential solutions, but most nations lack regulatory frameworks to incentivise financing them.
In short, COP26 has a lot to live up to. The so-called decade of action is upon us. In fact, thanks to Covid-19 we are well into it by the time of the first major international climate gathering. Yet for those genuinely committed to a sustainable future, the pandemic might also prove to have thrown up a tragic but very real lifeline for the planet. The last 18 months have given every government, organisation and individual the chance to pause and reflect on the way forward. Priorities are shifting everywhere. Debt and inflation are reaching such levels that stimulus, rather than prudence, is widely seen as the way forward.
Which presents an opportunity. By now every world leader must know that if there is any chance of arresting the climate’s decline, economic growth over the next few years must have sustainability front and centre of the financing strategy. And this means all countries committing to delivering together, with proportionate and meaningful targets and actions.
It’s clear that there are many challenges to overcome for the thousands of lanyard-wearing diplomats who descend on the historic Scottish city of Glasgow soon.
Yet there is also a growing determination that these challenges can be overcome, that they must be – not least because most scientists are clear that it’s not just the next but quite possibly the last chance to deliver meaningful action, at least in any sort of timeframe that aligns with reasonable climate forecasts.
Perhaps then it is time to find hope in the power of language, instead. The word Glasgow has Gaelic roots, translating into English as “the Dear Green Place”, thought to be rooted in its one-time abundance of greenery and parks. Given the obstacles, given the stakes, and given the nature of change required, it would certainly be an aptly named place for the occasion.
more than a word.