The period 26 October to 12 November 2021 will see various parties gathering around the proverbial COP26 table in Glasgow, Scotland. The COP26 summit seeks to bring together parties with the aim of accelerating the deliverables of the Paris Agreement and the UN Framework Convention on Climate Change – but what seat will sustainable finance have at this year’s COP26 summit?
Securing global net zero by 2050, keeping 1.5 degrees within reach and adapting to protect communities and natural habitats are the primary goals of the COP26 summit. Countries have been tasked with delivering ambitious 2030 emissions reductions targets as well as working together to restore ecosystems, build defences and make infrastructure more resilient to climate change.
COP26 seeks to overcome this obstacle by mobilising finance as a key goal of the summit. It is recognised that in order to achieve the primary goals, developed countries need to deliver on the promises of raising $100 billion in climate finance per year whilst working hand-in-hand with international finance institutions to unleash the private and public sector finance onto the path of achieving global net zero.
With the prospect of sustainable finance having a meaningful seat around the table at COP26, it is important to avoid conflating the definition of sustainable finance. In short, sustainable finance is the development of a financial system that is sustainable across economic, social and environmental platforms.
Sustainable finance is focused on the longer term investment decisions in the financial sector which encompasses material ESG (environmental, social and governance) criteria into the decision processes, policies, frameworks and practice. It requires buy-in from the financial sector to inter alia evaluate portfolio and transaction-level environmental and social risk exposures as well as to maximise opportunities and mitigate risk, in the pursuit of contributing to the delivery of the sustainable development goals.
A financial market specifically catering for the shift to the realisation of social and environmental impacts whilst facilitating financial return has emerged out of the growth of the social economy globally. Notwithstanding the challenging landscape on which it finds itself, sustainable finance provides emerging markets with the necessary space for innovative financing to develop.
Whilst the necessary space for the development of innovative finance is a key point of departure, a fruitful engagement on the mobilisation of finance at COP26 will be vital in providing emerging markets with the necessary assistance and funding. Emerging markets are currently facing the burden of having to tackle climate change and reaching global net zero. However, they lack the necessary financial capacity. There is an over dependence on the use of cheap fossil fuels for internal and export use – a dependence that is simply not sustainable.
The emergence of sustainable finance has been greatly assisted by the rapid growth of the green bond market. Green bonds are bond issues where the proceeds arising therefrom are ring-fenced and exclusively applied to either finance or refinance existing projects with a focus on progressing environmentally sustainable activities. The growth of the green bond market assists investors in aligning their financial objectives to achieve ESG targets. The growth of green bonds has certainly encouraged private companies, as well as the public sector, to internally assess the manner in which they access and raise their capital. What is encouraging is that green financing is expected to be a key topic at this year’s COP26. The hopeful result being an acceleration of green and sustainable financing.
Another key aspect linked to achieving sustainable finance is climate-related disclosures. With ESG initiatives being a key component of sustainable finance, climate-related disclosure seek to promote informed decisions at the hands of stakeholders in the financial sector to better understand the exposures to climate-related risks. Climate-related disclosures are tipped to be a key discussion point at this year’s COP26.
COP26 is the 26th edition of the United Nations climate change conference and whilst the negotiations at this year’s conference has the primary focus of the race to net zero emissions by 2050, it has been recognised that sustainable finance will hold a key seat at the COP26 summit table this year. Sustainable finance will play a major role as we work together towards unleashing the trillions in private and public sector finance required to secure global net zero.