Five themes to watch for at COP28

Humanity has just over six years to cut global emissions by 45 percent. Unless we can achieve this reduction by 2030, it will be impossible to keep the earth’s temperature to only 1.5°C above pre-industrial levels. Government pledges are, on their own, not enough. We need private finance and the steadfast commitment of global corporations to tackle emissions and biodiversity loss. 

Global leaders have a valuable opportunity. Concluding at COP28 in Dubai, the UN’s Global Stocktake tells us we are not on track to meet the goals of the Paris Agreement. To correct course, it calls for trillions of dollars to be directed to climate resilient development. It’s now up to global leaders to pursue deep climate action at COP28.  

Private finance for climate action 

COP28 will be crucial for determining how large-scale climate solutions will be funded and operationalised to best support those living on the frontlines of the climate crisis. With limited resources, the world’s most vulnerable need serious support to adapt. Government funding is not enough; private capital must step up and finance solutions. At COP28, the role of private finance in supporting climate action is expected to feature prominently in discussions. The loss and damage fund is just one example of an initiative unable to be sufficiently financed by the public sector.  

The UK is well-placed to accelerate the delivery of private finance to those most in need. Equipped with some of the world’s leading financial infrastructure and expertise, the UK has established itself as a ‘one-stop shop’ for sustainable finance. Indeed, London ranks first in the Global Green Finance Index and the country already boasts a £1.4bn voluntary carbon market (VCM) startup sector. 

1. Voluntary Carbon Markets 

Through VCMs, the world can put a price on carbon emissions not covered by regulatory schemes. Carbon credits are used by corporates to either augment a decarbonisation strategy, or to counter-balance emissions they cannot yet cut. This mechanism has huge potential to drive private capital to climate and nature positive outcomes, including supporting the channeling of funds from the Global North to climate mitigation projects located in the Global South. The VCM therefore has a powerful role to play in helping to direct funding to those most vulnerable to the climate crisis and financing the emission reductions we must achieve by 2030.  

The need for high-quality credits and corporate commitments has never been greater. At COP28, we hope to see progress towards agreement over the technical aspects of Article 6 of the Paris Agreement, which will enable countries to trade a specific type of carbon credit known as an ITMO (Internationally Transferred Mitigation Outcomes). This could unlock further private finance for carbon projects supporting ITMOs. Article 6 provides two market-based approaches for countries to meet their Nationally Determined Contributions (NDCs). The first is Article 6.2, which facilitates the trading of carbon emissions units amongst countries. The second is Article 6.4, which enables carbon emissions units to be exchanged via a trading mechanism established by Article 6.4 Supervisory Body.  

While incremental progress was made at COP27, these mechanisms are not yet operational. However, if the details of Articles 6.2 and 6.4 are agreed at COP28, it would offer additional assurance to the market and release further finance to help countries meet their NDCs. We will be closely watching these negotiations. 

2. Transition finance 

As well as funding climate mitigation and green technology, there is also an urgent need to financially support companies, especially in hard-to-abate sectors, with their emission reductions.  

Transition finance is needed to help these high-emitting companies to decarbonise. To support corporate efforts, the UK Government recently commissioned a transition finance market review to recommend ways in which the UK can become a centre for transition finance in complement to our country’s focus on transition planning and sustainable investment. One aspect of this review is expected to be an exploration of the instruments, such as bonds, project finance and equity, that can support the transition.  

At COP28, we are expecting market experts to consider how such instruments can be developed and structured. Following the launch of the Transition Plan Taskforce’s latest guidance, we anticipate transition planning to be an area of focus. This could include policies to phase-down fossil fuel consumption and to drive green tech innovation as well as developments from Just Energy Transition Partnerships (JETPs). We will also be listening for announcements from private sector stakeholders about new transition finance instruments and strategies.  

3. Nature finance 

The life-threatening challenges of climate change and nature loss are inextricably linked. Not only is 55 percent of global GDP either moderately or heavily reliant upon ecosystem services, but nature is also our greatest asset for combatting carbon emissions. Given their interconnectedness, it is pleasing to see climate and nature increasingly being considered in tandem ahead of COP28. 

In spite of its invaluable importance, funding for conservation and restoration falls at least £200bn short every year. In a recent report, the City of London Corporation recommended clear signalling and policy certainty for nature finance as well as the acceleration of nature-related regulation and advancements in central bank oversight. As such, we expect to see progress from the private sector in mobilising to fill the funding gap in Dubai. Moreover, since the promising emergence of new financing mechanisms for nature, such as biodiversity credits, we will be watching for developments in this arena. 

4. ESG disclosures and transparency 

An increased demand for sustainable investments has raised the importance of ESG ratings and data products in financial decision making. As part of the wider move to raise transparency, the City of London Corporation supported International Regulatory Strategy Group (IRSG), together with the International Capital markets Association (ICMA) is expecting to publish its ESG Ratings and Data Product Providers Code of Conduct following COP28. The Code will be a valuable aid to the development of consistent global standards for ESG Data and Ratings providers, while also supporting market practitioners to assess the risks more accurately. 

More broadly, we expect climate and nature disclosures to once again be a key topic of discussion at this year’s COP. Given the ISSB launch at COP26 in Glasgow and the continued progress of the Transition Plan Taskforce this year, ESG regulation remains an area where the UK continues to show particular leadership. To support this agenda on the global stage, efforts are gathering momentum on reducing gaps in biodiversity reporting in order to help private companies manage their nature-related impacts more sustainably.  

5. Adaptation finance 

The UNEP’s 2016 Climate Change Adaptation Finance Gap Report estimated that climate adaptation will cost between $140 and 300bn by 2030. With public budgets unable to sufficiently fill this financing challenge, private financing is key to building climate change resilience. 

However, there are currently several barriers to harnessing private finance for adaptation. First, there is a perception from the private sector that it is difficult to make money in this space and that financing adaptation is the responsibility of public funds. Moreover, there is a lack of data available to inform decisions and long project timelines can dissuade investors.  

We will be watching to see how global leaders at COP28 look to boost adaptation finance from the private sector. Furthermore, we expect to see governments focusing on building long-term strategies in line with the Global Goal on Adaptation (GGA) that identify the scale of investments required to meet countries’ adaptation needs. With little progress made on the GGA since the Paris Agreement in 2015, we anticipate progress on its finalisation to be a priority in Dubai. 

Whilst the need to act is urgent, the commitment to do so is strong. COP28 presents an unparalleled opportunity for the global financial sector to unite. By the close of this conference, there is an opportunity to have developed firm plans for delivering private capital to support funding gaps and those who need it most. We must not waste this chance.