COP28 gives green light to fund energy transition

IFR 2513 - 09 Dec 2023 - 15 Dec 2023
5 min read
Americas, EMEA, Asia
Tessa Walsh

Finance is finally starting to flow towards energy transition as evidenced by the increasing number of bankers and businesses at the UN's COP28 meeting in Dubai, with billions of US dollars of capital pledged at the meeting sending a strong message to capital markets.

Despite the customary torrent of announcements, COP28 has a very different feel to previous summits as the recognition of the role of capital and the mechanisms for deploying it take an increasingly central role in proceedings and energy transition starts to move at speed and scale.

"I think it's a very significant change from the last few years – it's exactly what we want. We want that capital to start flowing across all parts of the spectrum from big infrastructure for renewables right through to the cutting-edge technologies," said Keith Tuffley, chairman of clean energy transition and sustainability for investment banking at Citigroup.

"The momentum behind new technologies and enormous commercial opportunities is a signal to the capital markets – debt capital markets and equity capital markets – that this is really starting to accelerate."

The UAE has pushed to increase financing under its presidency of COP28 via a global climate finance framework. Governments, multilateral development banks and companies announced billions in climate cash commitments in the run-up to Finance Day on December 4 in Dubai's Expo City.

COP28 president Sultan Al Jaber said on Friday that more than US$83bn of pledges, commitments and investments had been mobilised to catalyse action across energy, nature and finance in the first five days of the event.

The creation of a new US$726m Loss and Damage fund to assist countries that are vulnerable to the effects of climate change was hailed as an early win and MDBs and climate funds pledged to scale up financing across a variety of initiatives, while the UAE announced a US$30bn "Alterra" climate-focused investment fund.


Other important developments for vulnerable and low-income countries included climate-resilient debt-servicing pauses for countries hit by catastrophes, and the creation of a technical taskforce to support the development and growth of sustainability-linked financing to help sovereigns achieve climate and nature goals.

US special climate envoy John Kerry said on Thursday that COP28 in its first week had "already made substantial progress on all aspects of the clean energy transition". The US, European Union and UAE co-led a pledge to triple renewables by 2030 that was signed by 118 countries, which Kerry described as a "huge economic reason for people to be looking to this transition".

While this ambition is reassuring for capital allocation, the target is not without problems. A report by KPMG has identified 10 critical obstacles to scaling up renewables at such a rapid rate that include permits, supply chain delays, access to critical minerals and higher interest rates.

"Notwithstanding the dramatic growth in renewable energy, the renewable energy industry is not yet ready to act as a substitute for fossil fuel-based energy generation," said Mike Hayes, head of renewable energy at KPMG and one of the report's authors. He favours collective action but said there is "no easy fix".

Pledges by some 50 oil and natural gas companies to cut carbon emissions to net zero by 2050 and methane emissions to near zero by 2030 were also greeted with scepticism, with critics calling them too little, too late because the proportion of total capex that the sector allocates to climate solutions remains low.

More ... bankers

While many bankers were busy with client meetings, their noticeably increased presence at COP28 is also due to the implementation of targets by Net Zero Banking Alliance members, part of the broader Glasgow Financial Alliance for Net Zero, which was the centrepiece of COP26 in 2021 in the UK.

Banks have been developing systems, analyses and measurement techniques to understand the baseline of financed emissions across their lending portfolios and setting 2030 targets that are aligned with 1.5 degrees of global warming. They are starting to make decisions about allocating capital to clients that will be driven by technological advances.

"This increased presence is really a signal that the private sector is now in motion, and is beginning to grasp the scale of the opportunities ahead," said Thomas Hohne-Sparborth, head of sustainability research at Lombard Odier Investment Managers.

"At COP, the tone of the conversation in the financial industry is rapidly changing. A substantial evolution in financing mechanisms or mindset will be required. Opportunities and financing requirements of the transition cut across all asset classes," he said.

Progress on climate finance at COP28 is crucial to laying the groundwork for an even more ambitious “New Collective Quantified Goal” being pushed by the United Nations. The goal – linked to countries' nationally determined contributions – is to raise the floor on climate finance above the current US$100bn annual target. Parties are expected to agree a new goal at COP29 at the end of 2024.