The three F’s of COP28 - Part 2: Finance

As global stakeholders head to Dubai next week for COP28, Chief Sustainability Officers will pay particular attention to three main themes: fossil fuels, climate finance and food systems.

With the first Global Stocktake due to be released at this year’s conference, the focus will be on taking an honest look at what has been done so far and what is lagging – and it’s clear that finance falls in the second category. 

Allen & Overy estimates that  US$6.2 trillion of climate finance will be required every year until 2030 to meet the goals of the Paris Agreement, yet global climate funding only amounted to about US$1.3 trillion 2022 – a ‘net zero financing gap’ of nearly US$5 trillion.

One of the stated goals for this year’s conference is to ramp up public support for climate action and adaptation and create “breakthrough innovations, partnerships, policy incentives, and transformative instruments to unlock the potential of the private sector”. 

Creating the right incentives to mobilise private capital will be crucial: companies are keen to invest more in sustainability and there is growing appetite for sustainability-linked bonds, but finding a balance between short-term earning and long-term sustainability goals remains a challenge.

Read also: Growth pains ahead for sustainable finance

Climate leaders are also keen to make the next generation of finance mechanisms inclusive and equitable, and they will likely incentivise private capital to follow – particularly through their supply chain sustainability programmes.

Energy transition finance: supporting corporate investment in green electricity

Since transitioning away from fossil fuels is an increasingly pressing priority, COP28 participants will look to accelerate financing for alternative sources of energy. Meeting the 2030 goal of tripling renewable energy capacity would require US$10 trillion of investment – including almost US$3 trillion in solar PV and more than US$4 trillion in wind power development. 

The International Renewable Energy Agency (IRENA) has announced that it will launch an Energy Transition Accelerator Financing platform (ETAF) at the conference. The platform aims to become a sort of unified directory of quality renewable energy projects around the world, which public and private financiers could use for funding allocation. It has already received US$900 million of pledges from four institutions to scale about 1.5 GW of renewable energy projects by 2030.

Additionally, any energy transition pledge made during COP28 is likely to incentivise corporate renewable power purchase agreements, already one of the preferred methods for reducing Scope 2 emissions. 

Article 6 and carbon finance: increasing confidence in carbon offsetting

Another positive outcome from the conference could be the adoption of recently finalised rules for project eligibility under the Paris Agreement’s carbon market mechanism.

If approved at COP28, the framework would go a long way in creating a trusted voluntary carbon market and unlocking carbon finance to support climate action. 

McKinsey estimates that the voluntary carbon offset market could channel as much as US$250 billion of private capital a year towards climate mitigation efforts by 2050. But concerns around the quality of carbon credits and the potential misuse of funds have so far limited growth, with many companies choosing to stop offsetting emissions through this mechanism.

Combined with recent private market integrity efforts such as the Core Carbon Principles and VCMI’s Claims Code of Practice, the implementation of the much-awaited UN carbon market could finally propel carbon finance to its full potential – and give Chief Sustainability Officers the confidence to invest in carbon offsets again.

COP28: Equitable finance for climate mitigation and adaptation

Climate change is accelerating, and while mitigation remains crucial, governments and companies are realising they now need to invest in adaptation as well. Already, a majority of companies are planning to modify sustainability planning and investments based on recent extreme weather events.

UNEP’s 2023 Adaptation Gap report estimates that the cost of adaptation in developing countries will amount to US$215 billion per year until 2030, so it’s essential that any adaptation funding package agreed at COP28 ensures most of the financing is distributed to vulnerable nations.

Moreover, negotiations around the workings of a loss and damage fund agreed at COP27 to compensate poorer countries for the damages they suffer from extreme weather events are set to continue this year. A draft framework was agreed upon in early November, but questions over who should pay and how much remain unanswered.

“Countries across the world, especially vulnerable and poor countries are looking to this COP for some definitive progress to finance from richer countries. One of them will be loss and damage, but that's not the only place funding is required: there’s also adaptation and other things. So finance would be another big trust building exercise,” said World Resources Institute President and CEO Ani Dasgupta.

The good news is finance negotiations are off to a good start, since it emerged last week that wealthy countries may have finally met their pledge to provide US$100 billion a year to help poorer nations cope with climate change in 2022 – two years later than what they originally promised. 

Failure to reach that goal was seen as “holding up” progress, so this achievement is likely to increase trust as governments prepare to tackle other financial packages at COP28. 

In this series: The three F’s of COP28 - Part 1: Fossil fuels