COP27 Finance Day and its impact on the path to net zero

There have been some promising announcements on climate finance during Finance Day at COP27. It suggests that momentum may be building to unlock the inertia which exists in the effort to fund the climate resilience of vulnerable countries and enable the global transition to clean energy. The UK export finance agency, UK Export Finance (“UKEF”), will become the first export credit agency to offer “climate resilient debt clauses” in its loan agreements. In part, these clauses will allow some low-income countries to defer debt payments in the event they are hit by a climate disaster. The promises and declarations made at COP27 Finance Day are an indication that traditionally complex and protracted policy change mechanisms might be capable of keeping up with the pace required to facilitate the energy transition within required timeframes.

Progress on finance for adaption to climate change, as well as loss and damage for countries severely affected, compliments the continued growth of private finance in energy transition and climate change mitigation. There is an ever-increasing breadth to the profile of investors looking for opportunities to fund or buy into energy and infrastructure projects. One financing tool which may facilitate this further is the “green loan”. Green loans, while becoming less of a rarity, remain relatively few and far between within the high-value energy and infrastructure funding market. We expect this to change over time – funding of renewable energy infrastructure, electric vehicle, battery and gigafactory projects, together with a range of telecommunications infrastructure, can be inherently green and present obvious lending cases in an environment where the “green” framework for green loans becomes materially more robust.

The question remains, though, how much impact does the ability to label a loan “green” have in helping to achieve a green and just transition on the path to net zero? With recent focus on greenwashing and the tension between various leading financial institutions and networks such as GFANZ many remain hesitant to take documentary provisions further, for now. The path to increasing use of green and sustainable funding in the energy and infrastructure sphere will require a combination of policy, regulatory and private finance alignment and action.

Other developments from COP27 Finance Day include the US government announcing a new voluntary carbon trading market scheme, dubbed the Energy Transition Accelerator, with a view to boosting investment in renewables projects in development markets. It has received a mixed reaction. Criticism from experts in carbon markets centres around a lack of safeguards needed to prevent the scheme being used to back projects which lead to minimal carbon emissions reductions.

In addition, a group of 85 African insurers has pledged to create a financing facility to provide US$14 billion to help the continent’s most vulnerable communities address climate disaster risks.

The small but growing number of governments (predominantly European) which have announced “loss and damage” funds is another significant step. China has also confirmed that it would be willing to contribute to a mechanism for compensating poorer countries for losses and damage caused by climate change.

The evident pace of change on the ground and in the real economy (for example, the high number of electric vehicles now on European roads), demonstrates that the goals of the Paris Agreement, in particular limiting the global rise in temperature to “well below” 2°C and achieving net zero by 2050, are still achievable, just.