Outlook 2022: 10 climate promises the financial system must keep
“I am here right now to ask business and finance leaders: show us your loyalty, show us your reliability, show us your honesty,” the Ugandan climate activist said. vanessa nakate during the COP26 meeting in Glasgow. Nakate’s words underscore the central issue of trust in the climate promises made by governments, development and commercial banks, investors and insurers and central banks and regulators – as well as the promises they should have made. .
The world left Glasgow a few steps closer to a sustainable financial system. Net zero commitments by governments now cover 90% of global emissions, with notable commitments from India and Nigeria. Yet global emissions at the end of this decade are waiting be twice as high as needed to keep global warming to 1.5°C.
Pledges of decarbonisation are increasingly common in the private finance sector, with over 450 institutions with combined portfolios of over $130 billion having joined the Glasgow Financial Alliance for Net Zero.
Yet there are fundamental financial shortcomings that urgently need to be corrected. In the words of the United Nations Secretary General Antonio Guterres, “we are on the edge of the abyss”. Here, political economy will be crucial. With Egypt hosting COP27 later this year, the annual meetings of the International Monetary Fund and World Bank taking place in Morocco, and Indonesia chairing the G20 group, key milestones will be shaped by the Global South.
To earn and maintain trust, actors across the system must use 2022 as an opportunity to deliver on their promises. There are 10 key commitments that must be kept.
1. Meet and exceed the $100 billion climate finance commitment
The oldest and most iconic pledge from industrialized countries is the provision of $100 billion in climate finance to developing countries. Failure to achieve this target by 2020 was recognized as a breach of trust at COP26. Meeting the commitment in 2022 would help restore confidence in the climate negotiations, and industrialized countries have drawn up a delivery plan to find out how.
But public finances should not stop there. Estimates by the Grantham Research Institute suggest that developing countries (excluding China) will need an additional $8 billion in climate finance by 2025 and almost $2 billion a year by 2030. Some of these funds will come from national public and private sources, but it is clear that an increase beyond the 100 billion dollars of public finances is necessary.
2. Produce net zero transition plans
GFANZ members have committed to defining measures to achieve short-, medium- and long-term net zero goals within 12 months of joining the alliance. In some jurisdictions, including UK and European Union, the publication of these financial sector transition plans becomes mandatory. Transparency on the planned allocation of capital will be essential to ensure their credibility.
3. Financing adaptation and resilience
With global average temperatures already rising by 1.1°C, the priority for developing countries is to increase financing to adapt to future physical shocks as well as to obtain compensation for the losses and damages that occur. they have already suffered.
Funding for resilience, adaptation and loss and damage remains stuck in a rut of underinvestment, focusing on millions and billions rather than the trillions needed across the financial system. For this to change significantly, not only the industrialized countries will have to commit new public financial resources, but the rules governing the financial system will have to consider the physical impacts of the climate in every decision.
4. Phase out fossil fuel financing
The International Energy Agency concluding that there is no need to invest in new fossil fuel supplies To achieve net zero, a key task for 2022 will be to accelerate public and private sector action to reduce fossil fuel financing. In Glasgow, 34 countries have promised to end public financial support for fossil fuels in 2022.
COP26 also witnessed progress towards the end of oil and gas, with the launch of the Beyond the Oil and Gas Alliance. The need to power beyond gas has been accentuated by the current crisis in the energy market. Thus, in 2022, the financial sector must match the ambition of governments with a clear commitment to cease all new investment in fossil fuels and support the responsible disposal of existing assets.
5. Make the link between climate change and nature
Financial institutions will need to go beyond the energy system to reach net zero. Only around 30 financial institutions, representing $8.7 billion in global assets (less than 5%), have engaged to address the causes of deforestation. This compares to a commitment by 141 governments representing over 90% of the world’s forest cover at COP26 “to halt and reverse forest loss and land degradation by 2030”.
With the COP15 biodiversity summit scheduled for April, banks and investors have considerable scope this year to make credible commitments to stop funding deforestation and land use that harm both the climate and to biodiversity.
6. Improve the financial rules of the game
During COP26, the 100 members of the Network for Greening the Financial System published the Glasgow Declaration. In 2022, central banks and supervisors will need to step up their efforts to support the transition to net zero, respond to the rise of physical climate-related risks and integrate the loss of biodiversity in plans to green the financial system. The focus should be on increasing capacity in jurisdictions where progress has been more moderate and on facilitating consistency of data, taxonomies and standards.
7. Offer inclusive carbon pricing
Complementary to regulatory efforts, fiscal policy for climate action should be guided by the principles of effectiveness, efficiency and equity. 2022 should be the year that subsidies for inefficient fuels are eliminated and resources redirected towards investments in innovation and infrastructure. Carbon taxes can help increase tax revenue that can be earmarked for a just transition to net zero. Adjusting price signals to shift economic activity towards low-carbon sources will be crucial in correcting market failures. The German government has set the price of carbon one of the main priorities for its G7 Presidency program this year.
8. Set standards for voluntary carbon markets
After years of negotiations, COP26 released rules for international cooperation through carbon markets under Article 6 of the Paris Agreement. This breakthrough paves the way for increased use of voluntary carbon markets.
Efforts this year should focus on scaling the market credibly. Setting high integrity standards should be a priority to address market skepticism. Emphasis should be placed on avoiding discouraging technological transformation in energy and industry through an oversupply of low-cost offsets. As countries in the Global South set their own net-zero targets, emissions production in carbon markets will be limited and can be concentrated where the greatest development and environmental benefits can be achieved.
9. Put people at the heart of climate finance
COP26 made it clear that climate finance must support a just transition to net zero. In 2022, this means that investors, commercial banks and development banks will ensure that their climate plans incorporate provisions for decent work, social dialogue and community empowerment. A key priority will be putting the $8.5 billion Partnership for Just Energy in South Africa in practice. This initiative can serve as a model for other emerging economies.
10. “Whatever it takes”: transformational financing for the climate emergency
The last promise remains to be made: a transformational financial package adapted to the scale of the climate emergency. At COP26, the Prime Minister of Barbados Mia Motley compared the $25 billion in quantitative easing in the wake of the 2008 financial crisis and the pandemic with the level of climate ambition. “If we had used the $25 billion to buy bonds that funded the energy transition, we would have stayed below 1.5 degrees,” she said, suggesting an annual increase in special drawing rights of 500 billion dollars for 20 years to finance the transition instead of the modest 50 billion dollars are proposed for adaptation. Now is the time for real strategic leadership from the G7 and G20.
2022 will be a moment of truth for climate finance pledges that have already been made – and a time to make new commitments that respond to the gravity of the climate outlook. This means not only more climate finance but, above all, better and fairer financing to avoid greenwashing and meet the imperatives of climate justice.
Nick Robins is Professor in Practice for Sustainable Finance and Danae Kyriakopoulou is Senior Policy Fellow at the Grantham Research Institute for Climate Change and the Environment, London School of Economics. Danae Kyriakopoulou is also a member of the advisory board of the OMFIF’s Sustainable Policy Institute.