Pledge review for COP27: Will private finance follow through on green pledges?

Author Georgia Gratton

OECD governments and the private sector are clear that public money will not be sufficient to fund the transition to renewable energy. Public-sector spending on the energy transition in advanced economies is typically designed to leverage private-sector finance, but commercial banks and institutions are also investing of their own accord, as financing decarbonisation becomes more lucrative.

Policy and regulation to drive so-called green investment remain at an early stage across much of the developed world. The Institutional Investors Group on Climate Change (IIGCC) — the European body for investor collaboration on climate change — has called for “clearer signals” from EU policy makers to drive investment at scale, but points to work under way by investors. The IIGCC has more than 350 members representing more than €51 trillion ($51.01 trillion) in assets under management, and highlights the “innumerable financial and economic opportunities presented by green solutions”.

The private sector has rapidly signed pledges committing to net zero. The Glasgow Financial Alliance for Net Zero (GFANZ) was launched at the UN Cop 26 climate summit last year, and now has more than 500 members, representing around 40pc of global private financial assets, thought to be over $130 trillion. GFANZ members must commit to align their portfolios with net zero by 2050 or sooner, as well as provide 2030 targets and report in line with UN criteria. This is a new field with limited metrics, and GFANZ aims to provide a framework for the financial sector to use to gauge the credibility of its net zero plans.

The plans that are starting to emerge range widely in stringency. Several institutions and funds argue that divesting fossil fuel assets will not lead to global decarbonisation, and they instead plan to encourage a transition to renewables. But there is scant information on how this will be implemented in practice.

And European banks are continuing to provide financing to new upstream oil and gas developments, despite their own net zero commitments, non-governmental organisation (NGO) ShareAction says. The 25 largest European banks provided $406.5bn in funding to 50 upstream oil and gas firms between 2016 and 2021, and financing in 2021 remained consistent with pre-pandemic levels, ShareAction data show. Private finance is still supporting coal. A coalition of NGOs found that globally, commercial banks provided financing of $1.5 trillion to the coal industry between January 2019 and November 2021.

The majority of the banks and institutions that lend to or invest in coal are members of the Net Zero Banking Alliance (NZBA) or the Net Zero Asset Managers Alliance — both part of GFANZ. And NZBA members provided $38bn in financing to the top 50 upstream oil and gas expanders since the launch of the alliance, with half of that amount from four founding signatories, ShareAction says.

Green bonds on the rise

But even as fossil fuels continue to receive funds, green bond issuance — with proceeds earmarked exclusively for positive environmental or climate benefits — has increased steadily. It jumped significantly in 2021, driven largely by financial and non-financial corporate issuances, according to non-profit Climate Bonds Initiative. Annual green bonds issued in 2021 rose by 75pc on the year to $523bn, mostly by developed nations and with the bulk issued in Europe, its data show.

Jurisdictions including the UK, US and EU have or are taking steps to impose mandatory climate reporting on private companies, while measurement frameworks are gathering pace — both should spur solid plans and ratify claims made. Leaders in the financial sector have been clear they view the transition as an opportunity, and much of the focus at Cop 27 will be on whether they have taken it.

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