In this article, we reflect on current financing needs and how COP29’s key results1 are of relevance to our clients investing in the energy, infrastructure and natural resources sectors.
What is driving current financing needs?
Each country’s ambition to reduce emissions is reflected in its Nationally Determined Contribution (NDC) which includes both unconditional contributions based on domestic capabilities, and conditional contributions that are achievable with international support (including financial support). The latest report tabled at COP29 shows that current overall NDCs would reduce emissions on average by 2.6% in 2030 compared to 2019. Without conditional contributions, emissions would actually be 0.8% higher than in 2019 – strong indication that such contributions are vital to help certain countries reduce emissions.
The level of financial engagement required to achieve NDCs is clearly beyond the domestic means of many nations and the need for international support for climate finance to support the mitigation and adaptation efforts of developing countries is a central feature of the UN Framework Convention on Climate Change and the Paris Agreement.
What is the scale of current climate financing needs?
It's worth a reminder of the sheer scale of climate finance needs debated at COP29. Developing countries proposed a financial goal of over USD1 trillion annually to combat climate change but negotiations among the parties reportedly ranged from USD900 billion down to USD200bn per year. Even the higher end of this range would not be sufficient to meet the goals of the Paris Agreement. Our recent research How big is the Net Zero financing gap?, conducted in partnership with U.S. thinktank Climate Policy Initiative, shows that an average of USD6trn per year is needed up to 2030 to achieve net zero.
COP29 recognised the need to dramatically scale up adaptation finance, particularly in developing countries. Costed needs reported in NDCs of developing countries are c.USD5.1 – 6.8trn to 2030 (USD455 – 584bn per year), with adaptation finance needs being c.USD215 – 387bn per year up until 2030 (projected to rise over future decades). COP29 affirmed that the provision of scaled-up financial resources should aim to achieve a balance between adaptation and mitigation, taking into account country-driven strategies and the needs and priorities in particular of developing countries with capacity constraints and vulnerable to the effects of climate change.
What are the implications of COP29 outcomes for financiers?
One of COP29’s most eagerly awaited financing outcomes is the establishment of the New Collective Quantified Goal on Climate Finance (NCQG). This new goal aims to encourage global partnerships and enhance cooperation on the funding which is essential to successfully implement the Paris Agreement.
Under the NCQG, developed countries will take the lead in contributing and mobilizing “at least” USD300bn annually to assist developing nations in mitigating and adapting to the climate crisis. Developing country parties are encouraged to make contributions on a voluntary basis. The new goal is promising, but it is dependent on developed countries fulfilling their commitments. The previous annual goal of USD100bn set in 2009 was met for the first time in 2022.
For private and multilateral financiers, it is important to note that the NCQG will come from both direct provision of public financial resources (bilateral and multilateral) by developed countries, and from the mobilization of capital from wider sources, including via private sector involvement. The NCQG calls on all actors to work together to enable scaling up of climate financing from public and private sources to at least USD1.3trn per year by 2035. In addition, parties to the NCQG have agreed to work on a "Baku to Belem Roadmap to 1.3T" to be presented at the 2025 COP, aimed at scaling up financing including by way of grants, concessional finance and non-debt creating instruments, and measures to create fiscal space.
Other sources of potential funding have also been considered and one indirect impact on financiers (through their borrowers or investee companies) could be charges imposed on certain private sector activities. In its progress report submitted at Baku, the Global Solidarity Levies Task Force constituted under COP28 considered several innovative funding sources, including “solidarity levies” on high polluting sectors such as shipping, aviation, fossil fuels, financial transactions (including crypto) and carbon pricing.
The COP29 discussions touched upon a number of other topics on which there was no agreement, including issues such as whether NCQG funds should be spent on mitigation, adaptation or loss and damage, and who gets access to the funds and how.
Another noteworthy outcome was progress on carbon markets. This included the operationalizing of a global trading mechanism under Article 6.4 of the Paris Agreement and the establishment of guidelines on transparency, integrity and inconsistencies in the bilateral trading system under Article 6.2 of the Paris Agreement. While a step in the right direction, much more needs to be done to ensure a significant growth in the carbon market that is capable of meaningfully impacting climate finance.
A more detailed reflection on the outcomes of COP29, including on the Global Energy Storage and Grids Pledge and the Hydrogen and Green Digital Action Declarations, can be found in our recent article and podcast.
How can private and multilateral finance contribute to the climate finance goal?
The gap in funding creates an opportunity for private capital, particularly through blended finance where public financing measures and initiatives are used to leverage private finance. In this vein, the Singapore government announced up to USD500 million in concessional funding to support the Financing Asia’s Transition Partnership (FAST-P) launched by the Monetary Authority of Singapore last year. This funding matches concessional capital from other international public, multilateral and philanthropic partners to create a pool of capital to crowd in commercial and other finance to support Asia’s green and transition financing needs.
This chimes with the conclusions of the U.K.’s recent Transition Finance Market Review (TFMR) (on which we were legal adviser to the TFMR secretariat) which highlights the need for public finance measures to attract in private finance and for financing institutions of all kinds to play an increased part. Our summary of the TFMR can be found here.
Other key themes for private and multilateral finance that emerged from COP29 (many of which are reflected in the TFMR) include:
1. Role of multilateral banks and multilateral climate funds
Multilateral development banks are called on to align their operating models and instruments to be fit-for-purpose for climate finance.
We have recently advised on various examples of such alignment, in particular advising ADB (from concept to launch at COP29) on its Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP). IF-CAP is a groundbreaking instrument which uses an innovative structure leveraging support from partners to unlock billions in climate finance for mitigation and adaptation projects across Asia and the Pacific.
We also advised EBRD on structuring its participation as an implementing entity with respect to funds derived from the Climate Investment Funds’ (CIF) Capital Markets Mechanism (CCMM) which recently launched its bond issuance program on the London Stock Exchange. CCMM is an innovative program which seeks to raise private sector capital in the international financial markets to mobilize climate finance to support climate-related projects in developing countries; EBRD, as an implementing entity, is key to deploying concessional finance from the CTF derived from the CCMM at scale to its recipient countries.
2. Types of finance instruments
COP29 emphasized the importance of deploying non-debt inducing instruments to avoid worsening the debt-crisis in developing countries. While recognizing the imperative to scale up concessional finance and increase grant funding, there is a need to balance these sources with private financial flows seeking an economic return.
3. Shift in risk appetites
International financial institutions, including multilateral development banks, are invited to shift their risk appetites for climate finance and develop innovative instruments. This is a step that all financial institutions wanting to invest in this space should be considering. We have already seen in practice how more flexible approaches can be catalytic in bringing in private finance, particularly alongside national and supra-national governmental initiatives. On a European battery production project, for example, the European Investment Bank expressly acknowledged2 that it was taking on a loan risk profile beyond what it traditionally regards as acceptable and this was due to InvestEU3 protection.
Governments could also support first-of-a-kind projects in greater ways to attract private investment by addressing specific key risk areas on a project. The final COP29 text refers to innovative instruments such as first-loss guarantees, local currency financing and foreign exchange risk instruments, but this could also be, for example, by backstopping domestic offtake arrangements which would support financeability as well as help domestic economies.
4. Improved accessibility
Multilateral climate funds are called on to simplify and harmonize application processes and reporting requirements. There was a recognition of the need to prioritize and scale up direct access to funds instead of having developing countries go through an intermediary body.
What next?
The outcomes of “The Finance COP” highlight the vital roles the multilateral and private sectors are urged to play in climate finance if the world is to achieve net zero ambitions. This will require finance parties to seize new opportunities, reassess risk appetites and collaborate with other public and private sector stakeholders to develop innovative structures and instruments to support climate finance.
We are excited to support our clients in exploring these new avenues towards net zero and will continue to monitor developments in these areas. In the meantime, please contact your usual A&O Shearman contact for further discussion, or the named contacts on this article.
Footnotes
1. Outcomes of the Baku Climate Change Conference - Advance Unedited Versions (AUVs): https://unfccc.int/cop29/auvs
2. https://www.eib.org/en/projects/pipelines/all/20220168
3. https://investeu.europa.eu/investeu-programme_en