With less than two weeks to go until the UK hosts the 26th annual Conference of the Parties (COP26) in Glasgow, the role of green finance in helping to deliver the global vision of a net zero economy is critical.
Finance has always played a big part in the international negotiations, so it is welcome to see the COP26 Presidency select green finance as one of its five priority areas. But with many countries’ economies still recovering from the COVID-19 pandemic, while having also set increasingly ambitious climate and nature-restoration targets, the focus on green and climate finance has never been greater.
At the domestic level, the UK government has made a number of welcome finance-related announcements, including in its recently published Net Zero Strategy, which sets out how it will deliver its revised Nationally Determined Contribution (NDC) and the Sixth Carbon Budget by 2035. The recent publication of the Greening Finance Roadmap sets out further details about the UK’s plans for ensuring “every financial decision factors-in climate change and the environment”. The Roadmap includes new requirements for the financial sector, such as the intention for businesses to publish plans for how they will transition to net zero, which the Aldersgate Group recently called for. Other domestic commitments include ceasing funding for fossil fuel projects from UK Export Finance, and the introduction of mandatory climate-related financial disclosures, which requires businesses to report their exposure to identified risks resulting from climate change.
Internationally, the UNFCCC Race to Zero campaign has seen over 3000 businesses adopt science-based targets to meet net zero globally. Meanwhile, the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of financial institutions working on the decarbonisation of the economy, has called on G20 leaders to use COP26 as an opportunity to embed climate change into decision-making in the financial sector with new regulation.
But further progress on key areas is still needed. UK businesses are aware that COP26 offers a major opportunity for the UK government to drive public and private investment, both domestically and internationally, into the technologies and infrastructure needed to deliver the Paris Agreement. Aldersgate Group members from across the economy want to see the following five priority areas progressed at the Summit, to ensure the opportunity for green finance is seized:
- Encourage other countries to publish their own Net Zero Strategies
The UK has now published a Net Zero Strategy for decarbonising the UK and delivering the UK’s NDC and 6th Carbon Budget, setting out plans for how each sector will decarbonise and providing a baseline from which to ramp up ambition and policy detail. The Net Zero Strategy marks the first time a country has set out a blueprint for delivering the targets of the Paris Agreement, and can be used by other countries as a template to build upon.
The UK should now encourage other developed nations to publish their own strategies. Doing so will ensure that the private sector knows how to decarbonise, increase investment into greening different areas of the economy, and deliver significant emissions reductions.
- Maintain alignment between UK and international finance reporting requirements
The UK government must make sure the UK Green Taxonomy, green bond standards and climate- and nature-related financial disclosure requirements are all aligned at the international level, and should encourage international harmony between approaches at COP26. This should include ensuring the UK’s new integrated disclosures framework, the Sustainability Disclosure Requirements (SDR), is aligned with the EU Sustainable Finance Disclosure Regulation (SFDR).
Doing so will make it easier for businesses which operate in multiple countries to report their climate and nature risks. It will also make it easier for investors to compare disclosures by different companies across different regions, to assess the level of risk the business is exposed to. There have already been hints that the EU Taxonomy will be adopted by the US, which would align US and European sustainability standards. The UK should ensure all financial reporting requirements match those of the EU and beyond.
- Secure a post-2025 agreement which provides adequate climate finance to support vulnerable nations
In the 2015 Paris Agreement, developed nations pledged to support developing nations by providing US$100 billion of funding, annually, by 2020, to help them mitigate the causes of climate change and adapt to locked-in climate-related impacts, such as extreme weather events. This was a critical part of securing signatories to the Agreement from climate-vulnerable countries. With COP26 seeing the fifth anniversary of the Paris Agreement, this funding gap will be a major focus for developing countries.
Data published by the OECD shows that developed nations committed just $80bn of funding in 2019, falling $20bn short of the US$100bn target. To date, only three nations – Luxembourg, Norway and Sweden – have met their commitments. The COP26 Presidency must make closing this gap a priority by encouraging all nations – including the US – to meet their climate finance targets.
- Address the international adaptation funding gap
Historically, adaptation funding has been a major negotiation point for developing countries at COP. The Paris Agreement progressed this point by encouraging all developed nations to commit to supporting developing nations with significant adaptation funding.
However, the OECD reported that 25% of climate finance was spent on adaptation in 2019, with the majority of funding going towards mitigation projects. Though this is an increase from 21% in 2018, it still falls short of the required funding. The COP26 Presidency must make it a priority to balance adaptation and mitigation funding more evenly, particularly in the most climate-vulnerable countries.
- Finalise the rulebook for Article 6 of the Paris Agreement and deliver a well-regulated and voluntary international carbon market. The rulebook must include frameworks for using and regulating carbon offsetting
Delivering the Article 6 rulebook for an international carbon market has the potential to significantly raise climate ambition, reduce decarbonisation and transition costs, and protect and restore nature around the world.
The international carbon market has been unregulated to date, and significant investment into offsetting without regulation could lead to problems such as double-counting – where the same tree could appear as a carbon store for two different private investments, or a country’s NDC and a business could both claim to sequester carbon in the same asset. These risks could lead to market squeezes, where profits may decline or investors may pull their investments, creating a domino effect across the world and potentially a market crash.
Finalising the Article 6 rulebook will ensure the international carbon and offsetting market is reputable, and reduce the risk of undermining recent investment into offsets.