COP27: Finance is the litmus test
Emerging markets need protection and low cost capital. Who will step up?
One of the biggest headlines from the 2015 Paris Agreement was the Nationally Defined Contributions.
Every five years, each country is expected to submit an updated national climate action plan - known as Nationally Determined Contribution, or NDC.
In their NDCs, countries communicate actions they will take to reduce their greenhouse gas emissions in order to reach the goals of the Paris Agreement. Countries also communicate in the NDCs actions they will take to build resilience to adapt to the impacts of rising temperatures.
At COP26 last year, 197 countries signed the Glasgow Climate Pact, calling countries to report their progress towards more climate ambition at COP27 this week. We seem stuck on disclosures without the real market, trade, and human responses required to solve climate change.
Disclosures are important, but action is better to Bremmer’s point. Still, decarbonization is just one tool and not one for emerging markets where disclosures can hide real issues. Remember that we need to save ourselves, which means change.
At the opening of COP27, Abdel Fattah el-Sisi, President of the Arab Republic of Egypt, articulated it pointedly.
Humanity surely can be just to those who are not responsible for the consequences that are producing so much suffering.
Surely, humanity can find the elements of new solutions.
Surely, there is no more time to hesitate.
We must ensure a just transition by changing systems and keeping an eye on the planet while focusing on all its people.
There are worries out there that this is too uncomfortable and can bring shame, but like any nuanced issue, there are more facets.
Now is the time for those in the Global North to be brave.
What you need to know: Finance and Emerging Markets
I’ll try to keep this high level because even I get lost in the financials.
Money makes things happen. This should be of surprise to no one.
There are a few ways for financial services firms and governments to allocate capital to the emerging markets that are in play. But first, let’s talk about loans and grants.
At COP15 in 2009, developed nations committed to bringing $100B to developing nations by 2020. That timeline has been pushed back to 2023, unfortunately. Further, the funding progress remains woefully short for some countries, including the US and UK (per The Guardian).
Not only has the commitment been delayed, but the vehicles by which this happens can be loans or grants. Loans carry interest, while grants are typically not paid back. In The Value of a Whale by Adrienne Buller, she writes this about the current state of sustainability loans (page 186):
40% of this public finance took the form on ‘non-concessional lending,’ meaning loans offered at or above the often-exorbitant rates, or with short grace periods in instances of default or delayed payments.
It’s worth repeating: concessional lending is funding BELOW market rate to accelerate an objective, but that mechanism isn’t being leveraged. While the US and UK are lagging in the total contributions, their contributions are grants, which avoids this challenge. Still, it isn’t great.
Here’s where loans could exacerbate the issue. This week, The Washington Post reported that the White House is looking to private companies for financing. John Podesta, Senior Advisor to President Joe Biden and one of the first US delegates to COP27, said this:
Private-sector capital flows … that’s where the real money is. We’re talking billions when the need is trillions. We’ve got to unlock that [private-sector] capacity for people to make investments in building a clean-energy future or else we’ll miss both the development goals and the climate goals.
He’s not wrong because companies are participating in a global market, but policy also needs to play a role. If it doesn’t, companies may turn on more funding but look to make a profit on the loans instead of making them concessionary.
Developing countries could use this money to sidestep an economy growing on the back of low-cost fossil fuels, which could bypass the path they are already on with a greener one. Appropriate low-cost capital would allow developing countries to pursue sustainable economic growth while the Global North focuses on decarbonization and changing energy systems.
One way to bring complete solutions is to hire for the challenge. According to an interview with Gillian Marcelle, CEO and Founder of Resilience Capital Ventures LLC, companies and financial services firms entering this fray should staff expertise in emerging markets.
Unless you are actually shifting perception, unless you are improving the ability of the sources of capital to actually allocate financial capital, which means that you need knowledge capital, political capital, social capital, you need more contextual understanding.
You need subject area specialists in those transactions. You need to not only hire emerging markets specialists...you need to be building up and strengthening financial systems throughout the world.
Concessionary loans, grants, and hiring efforts are desperately needed proactive measures, but reactive financial vehicles are an unfortunate need, too. After all, these countries are the hardest hit by climate change and the least responsible.
The other thing to look out for at COP27 is Loss and Damage, which is on the agenda. This covers what happens when climate damage ravages a country beyond what it can deal with. This type of disaster would create climate refugees, a group that needs new definitions and protections.
Despite strong and accurate speech (like the tweet above), this topic has been a strong point of contention for developed countries, as discussed here by Jenny Davis-Peccoud, a partner at Bain & Co (around 17:30).
At COP26, the Glasgow Climate Pact’s last-minute change from phase-out (of coal) to phase-down was the litmus test and, ironically, showed the world that emerging markets have a right to grow. This time around, Joel Makower, CEO of GreenBiz wrote this about COP27:
Some see the negotiations on loss and damage as the litmus test of success for this year’s COP.
It will be interesting to see how Loss and Damage get discussed at COP27 because it is fraught with blame and potential liability. Still, with international courts taking on lawsuits against companies for sustainability issues (even within the US), it cannot be ignored, especially in the private sector. Perhaps companies will step up where governments haven’t.