Capital and COP29: What the finance sector needs to fund the climate transition 

The Baku summit – the 29^th Conference of the Parties (COP) to the UN climate convention – has been dubbed another ‘finance COP’, building on the ambitious finance agenda that has been gathering pace since the last ‘finance COP’, COP26 in Glasgow. One of the key issues to be addressed is a decision on the level of climate finance that advanced economies should direct to lower-income countries. A target of $100bn/year by 2020 was met in 2022, but now negotiators are seeking consensus on a new target.  

Reports suggest that the figure is likely to be in the “hundreds of billions”, but this is far short of the trillions of dollars demanded to mitigate climate change and adapt to its effects. Unlike the COP climate finance target, which is mostly delivered by governments and multilateral financial institutions, much of this funding will need to come from the private sector. 

Make no mistake: the private sector is taking proactive steps to address climate change. The green economy, which we have been tracking since 2007, has grown at an average of 13.8% over the last 10 years.  Only the Technology sector has grown faster. Twice as much is expected to be invested in clean energy technologies than in coal, gas and oil in 2024, according to the International Energy Agency. 

But meeting the goals of the Paris Agreement demands even faster green growth. So, what does the finance sector need to deploy more capital, faster, towards the net zero transition? Some levers are in the hands of policymakers, including those at COP29. Others involve greater uptake of private sector-led initiatives. Many will require the public and private sectors to come together.  

To decarbonise the global economy, investing in climate solutions such as renewables and electric vehicles is, relatively speaking, the easy part. The greater challenge lies in helping carbon emitters transition their business models away from a dependence on fossil fuels and inputs towards zero-emitting business models. 

To help investors understand this process, the Glasgow Financial Alliance for Net Zero (GFANZ), which launched at COP26 in Glasgow, has produced guidance that sets out four key transition financing strategies and case studies from across the finance sector. These address: climate solutions that deliver emissions reductions; financing companies that are either aligned or in the process of aligning with a net-zero pathway; and the managed phase-out of high-emitting assets before the end of their natural life.  

These strategies, and the associated advice and methodologies that GFANZ provides, offer important tools and techniques to help investors and financial institutions to contribute to the net zero transition. Crucially, this helps them reduce the climate transition risks they face from companies without clear transition plans that will struggle to shift business models and face business risks.  

Investors can only support the transition of companies towards net zero if those companies’ plans are clear, credible and transparent. Numerous initiatives are underway to support companies in drawing up transition plans – such as the UK’s Transition Plan Taskforce (TPT), which was set up by the UK government to set a “gold standard for private sector climate transition plans”.  

These plans should be publicly disclosed, to give investors the confidence to allocate capital to transitioning companies. That is why LSEG has supported calls for the global adoption of the International Sustainability Standards Board (ISSB) standards. If implemented globally, and on an economy-wide basis, these standards would establish a global baseline of sustainability information. Crucially, the ISSB standards say companies should publish any transition plans and corporate decarbonisation strategies that they have. Moreover, the ISSB has now taken responsibility for the TPT’s transition plan disclosure framework, paving the way for global convergence in this area.  

Investors are also acting to understand and invest in the transition. The asset owner-backed Transition Pathway Initiative (TPI), with which LSEG has partnered since inception, aims to track the progress being made by corporate and sovereign entities in making the transition to a low-carbon economy and provides academically rigorous analysis to underpin investor-corporate engagement. Its research also underpins the FTSE TPI climate indexes, which are weighted towards companies depending on the risks and opportunities they face from the climate transition.  

This transparency is helping to shift capital. Billions are now invested against its indexes. The TPI’s data is also used to create bespoke benchmarks to underpin passive portfolios, such as CalPERS’ new Climate Transition Index, against which the US pensions giant has allocated $5 billion. 

For many climate solutions, a clear business case exists independent of government intervention. Cheap solar panels and energy efficiency improvements often quickly pay for themselves. But government action to create economic incentives for early and rapid climate transition is also key, especially in higher carbon industries such as aluminium, steel, cement, aviation and chemicals.  

Carbon markets can play a key role here, alongside a range of other policy interventions. The voluntary carbon markets are still awaiting the operationalise of Article 6 of the Paris Agreement. This will enable carbon finance to flow between countries, providing vital funding to the developing world, helping to reduce the cost of emissions reductions for rich countries and corporations alike, and potentially enabling the managed early phase-out of some of the highest emitting facilities, such as coal-fired power plants.  

Over the long term, the costs of inaction could ultimately dwarf the costs of the net zero transition. But in the near term, investors and companies would be able to move more quickly with policies that reward efforts to reduce emissions, and that recognise the costs of polluting activities. 

The financial sector is increasingly demonstrating that it recognises the urgency of the climate crisis. It is telling that the insurance sector – which is beginning to bear the costs of physical climate impacts – has moved swiftly to set transition objectives in its investment portfolios. According to a new survey by asset management giant Blackrock, 99% of insurers now set some sort of transition objective, such as a net-zero target date, in their portfolios, up from just 2% two years ago.  

This is just one data point among many that show how the finance sector stands ready to fund the net-zero transition. But investors, and the companies they invest in, can’t push capital uphill. They will require clear signals from COP29, and from governments around the world, that the policies will be in place to support rapid decarbonisation.