Follow the Money at COP26
What to look for on Finance Day — Margaret Kuhlow, Global Finance Practice Leader, WWF
“If money go before, all ways do lie open”
Together with accelerating nature loss, the climate crisis is a ‘code red’ for the global economy — so what do we hope to see on Finance Day here in Glasgow at COP26?
Certainly, financial institutions have a vital role to play in averting climate catastrophe — including accounting for climate-related financial risks, aligning portfolios with the Paris Agreement, and investing in decarbonization and nature-based solutions.
Yet as the recent call on G20 leaders from the Glasgow Financial Alliance for Net Zero (GFANZ) — a net zero alliance chaired by UN Special Envoy Mark Carney and responsible for a massive $130+ trillion in assets in 40 countries — makes plain, it is governments that must restructure the global financial system and accelerate an equitable transition to net zero.
While finance ministers and central bankers understand the need, last weekend’s G20 was disappointing, making COP26 the place where world leaders must now make a start.
Will it be a tragicomedy on a grand scale, or a case of all’s well that ends well? Or too little, too late? Here are three things to look out for on Finance Day.
Act I — Willingness to pay
Will developed countries meet the $100 billion annual public climate finance commitment, unlock private investment, and agree a new post-2025 finance goal?
Included in the GFANZ call on governments is unlocking the trillions of climate finance required to support developing economies meet the transition to net zero. Climate finance still falls far short of what’s needed to keep global warming within 1.5°C.
Developed countries must find a way to meet the annual $100 billion public climate finance commitment made in Copenhagen in 2010, which so far, they’ve missed by a country mile.
Compared with the costs of avoiding climate breakdown, the $100-billion pledge is minuscule and long overdue, as the impacts of climate change are already here and hitting the poorest and most vulnerable. People living in low-income countries are four times more likely to be displaced by extreme weather than those in rich countries.
Delivering on the commitment would not only be a sign of ‘good faith’ but also help trigger the scale of private investment required to secure a 1.5°C future, with critical grant capital and development finance to crowd in private investors who are increasingly looking to finance the transition.
Crucially, at least half of this public funding needs to support climate adaptation, helping vulnerable countries adapt to climate impacts and deal with loss and damage. Currently, only 10% of climate finance reaches local actors in developing countries that already need $70 billion a year to cover adaptation costs, rising to $140 billion–$300 billion in 2030.
Meeting the $100 billion target is within reach and in the countdown to COP26, new pledges have been pouring in — but it is not guaranteed, and governments must also open negotiations on a new post-2025 goal for public climate finance, with some calling for $750 billion a year by 2030. How far they get will be one touchstone determining whether COP26 is a success for people and planet.
Act II — ‘Race to Zero’ credibility
Will governments, companies and financial institutions accelerate the Race to Zero by making and acting on ambitious, credible, science-based commitments?
Supporting the transition to net zero also requires a host of public policy measures, including economy-wide net zero targets, regulatory reform, fossil fuel subsidy phase out, carbon pricing, and mandatory climate reporting.
Right now, public and private net zero intentions appear promising. Net-zero pledges currently cover around 70% of global carbon emissions — and over 70% of global GDP. Yet while GFANZ includes the UN-convened Asset Owner Alliance, which the UN Secretary General has called the ‘gold standard’ for investors, and whose members have set and reported on interim targets for 2025, commitments outside GFANZ vary hugely in their quality. Ambition must be backed by credible science-based commitments, and action.
GFANZ’s members are all participating in the UN’s Race to Zero, and its $130+ trillion in net zero-committed assets is not only a potential tipping point for transition but also a powerful signal to governments that they can act to transform economic and financial systems.
Given climate-smart growth could deliver at least $26 trillion in economic benefits cumulatively through to 2030 compared with business as usual, there’s really no excuse not to join the Race to Zero. The question to ask those not doing so, whether governments, companies, or financial institutions, is why they’re sitting on the bench. It’s time to be part of the solution rather than the problem.
Act III — Back to Mother Nature
Will leaders in Glasgow prioritize and unlock investment and action for nature?
The third and final dance in which leaders and negotiators at COP26 must participate with sincerity, if not abandon, is one of reconciliation with nature.
As we destroy nature and degrade ecosystems, we radically restrict opportunities to tackle climate change. And in turn, climate breakdown further drives nature loss and lessens the resilience of natural systems and the communities who depend on them — ultimately each and every one of us.
For the financial sector, climate and nature are two sides of the same coin, and to meet net-zero commitments, finance must also become nature-positive. The nature and climate crises, as well as the pursuit of food security and social equality, must be addressed together.
Reversing nature loss will cost around $1 trillion a year — less than 1% of annual global GDP and just a fraction of the $5.2 trillion spent annually on subsidizing fossil fuels. And, transitioning to a nature-positive economy could generate annual business opportunities worth over $10 trillion and create 395 million jobs by 2030.
Many financial institutions and companies are already responding but securing an equitable, net-zero, nature-positive future requires coherent government support.
With funding for nature from all sources totalling less than $150 billion, and only around 8% of public climate finance supporting nature, will leaders in Glasgow prioritize investment in nature-based solutions within Nationally Determined Contributions and unlock additional private investment to close the nature financing gap?
Epilogue
“… gold that’s put to use more gold begets.”
Climate breakdown is already upon us. The costs of turning things around pale in comparison to those of inaction. As Mark Carney has pointed out, the core of the financial sector is stepping up. It’s time for major economies to do the same — before it’s too late.
