COP29: A global commitment to addressing the shortfall in sustainable finance flows to achieve Paris Agreement targets

Published on by Indooshan Shanthakumaran

COP29 brought world leaders and negotiators from the member states (or parties) of the UN Framework Convention on Climate Change (UNFCCC) together to advance global progress in combating climate change. Business leaders, young people, climate scientists, indigenous peoples and civil society exchanged insights and best practices to fortify global, collective and inclusive climate action in Azerbaijan last November. Securing a new goal on climate finance, ensuring that every country has the resources to take much stronger climate action, reducing greenhouse gas emissions and constructing resilient communities are the primary objectives of COP29. This summit took place against the backdrop of the US presidential election and escalating geopolitical tensions. Demand for climate finance is on the rise, and the necessity to address climate change is looming larger than ever, despite the current situation.

Background of the global political landscape

There are two prolonged conflicts: the Russia-Ukraine war and the Israel-Palestine conflict. The international community remains fragmented, while inflation and a global economic downturn are reaching unprecedented levels. The US elections significantly influenced COP29. Donald Trump's campaign pledges to reverse climate initiatives and potentially retract the US from the Paris Agreement have rekindled concern about the future of international climate obligations. Notwithstanding these hurdles, other governments, notably those of the EU, UK and China, have articulated their readiness to assume a more prominent leadership role in global climate action. The robustness of the COP process was challenged; however, nations reiterated their dedication to multilateralism and the objectives of the Paris Agreement. Some regions relaxed regulatory requirements to enable their businesses to catch up with developments in the US; for example, the EU has extended deadlines and relaxed CSRD reporting requirements.

Key decisions reached at COP29

The New Collective Quantified Goal on climate finance

• Triple funding: Developed nations agreed to increase climate finance by three times the previous goal of USD100bn annually to USD300bn annually by 2035 (UNFCCC, 2024)

• Voluntary contributions: Developing nations are encouraged to contribute voluntarily to this goal (UNFCCC, 2024)

• Shortfall: Despite the increase, many developing countries argued that the amount falls short of their needs, with some demanding up to 3tn annually (UNFCCC, 2024)

Countries pledged enhanced commitment to climate finance to re-emphasise their duty to scale down coal use, move away from fossil fuels, increase investment in renewable energy and improve adaptation to climate change.

How they plan to achieve the goal

The strategy to incrementally optimise funding to achieve the USD1.3tn-per-year objective by 2035 encompasses a number of essential elements.

• The strategy starts with developed nations’ current commitment of USD300bn a year by 2035

This represents a substantial escalation over the previous objective of USD100bn a year by 2020. Developed nations will continue to allocate public financing via national budgets, international assistance and contributions to climate initiatives such as the Green Climate Fund (GCF) and the Global Environment Facility (GEF). The strategy promotes augmented private-sector investments in climate initiatives. This includes green bonds, climate-oriented venture capital and corporate social responsibility (CSR) efforts.

• Intermediate milestones will be established to guarantee consistent advancement towards the USD1.3tn objective by 2035, as demanded by developing nations

The targets will be evaluated frequently and modified to align with evolving requirements and economic circumstances. COP29 builds on previous COP achievements, including the historic Loss and Damage Fund from COP27 and the global agreement to transition away from fossil fuels, triple renewable energy and boost climate resilience from COP28. Additionally, COP29 successfully reached an agreement on carbon markets, a milestone that previous COPs had struggled to achieve.

The role of banks

The roadmap highlights the significance of international partnerships and cooperation among public and commercial sectors, as well as that between industrialised and developing nations. Innovative financing strategies, including blended finance and climate risk insurance, will be examined to mobilise supplementary funds.

The aforementioned objectives cannot be realised without the participation of financial institutions, particularly banks, which will be important in the disbursement of climate finance. Expediting private-sector involvement is essential to uphold the pledge to limit the annual increase in global temperature to 1.5° and 2° Celsius and to enhance annual funding to developing nations up to USD1.3tn annually.

Banks should get ready for two important developments:

1. Strong reporting systems will be put in place to monitor the movement of climate funding and to ensure the money is being spent on significant impact generation

2. Countries and organisations will be held accountable for fulfilling their financial obligations through the implementation of accountability mechanisms

Furthermore, the establishment of international carbon markets has the potential to decrease the cost of decarbonisation and increase the level of ambition to achieve climate objectives. Nevertheless, it is imperative to guarantee transparency, accountability and equitable access to funds to address the distinctive requirements of developing countries and prevent debt distress.

COP29 underscored the critical significance of aligning financial flows with low-emission development pathways and climate resilience. Limited access to international capital markets and high perceived hazards for investors are among the substantial obstacles that developing countries encounter. Innovative financing solutions, including climate funds, integrated finance and green bonds, were proposed as a solution to these obstacles. These mechanisms can assist in the mitigation of investment risks and the use of private-sector capital to achieve climate objectives. Additionally, capacity building and technical assistance are indispensable for improving the capacity of developing countries to effectively plan, access and manage climate finance. There is significant opportunity to expedite the transition to sustainable development, mitigate climate impacts and promote global cooperation for a resilient future by addressing these challenges.

A main drawback developing nations face is the stringent ESG compliance requirements in accessing sustainable finance. Infrastructure and governance mechanisms in developing countries require significant improvement if they are to comply with lender requirements. Such red tape hinders them from accessing a large portion of sustainable finance.

As debated at COP29, the expansion of climate finance for developing countries presents both substantial challenges and opportunities. Mobilising the substantial financial resources required to achieve the new objective of USD300bn annually by 2035 is one of the primary obstacles. This necessitates the involvement of the private sector, as well as innovative financing mechanisms and increased contributions from developed countries. Enhanced sustainable finance would improve sustainable development, create more employment opportunities and equip vulnerable communities with additional power to combat climate change.

Climate finance should have subgoals to ensure that the impact planned is being translated; the main reasons for formulating subgoals are as follows:

Focused distribution of resources

The allocation of resources should be prioritised for areas that need immediate attention, such as mitigating climate change-induced damage and safeguarding communities susceptible to damage.

Measuring progress

The lender needs to ensure the intended impact is being achieved; progress towards establishing clear subgoals to monitor the impact of the disbursed money within the predetermined time frame should be assessed.

Improving accountability

Accountability would be enhanced through using subgoals, ensuring the desired output is achieved within the designated time frame. This would ensure that the stakeholder is motivated to achieve the objective established by the lender and borrower on the climate-change spectrum.

Customising solutions

Due to the diverse nature of the effects of climate change, specific locations could attract additional attention. In this context, there is no universal solution; rather, a certain degree of customisation would be necessary to achieve objectives.

Taking a balanced approach

Adaptation and mitigation should always be aligned, as they are mutually reinforcing. A collaborative effort is essential for expanding climate finance and achieving sustainable development-related objectives. To effectively address the dual challenges of adapting to climate change and mitigating its effects, climate finance initiatives could be more strategic, effective and impactful through having well-defined subgoals.

How Acuity Knowledge Partners can help

We keep our banking clients updated on the latest climate-change trends and industry standards across sectors and assess alignment of borrowers’ climate-change targets with these. We also assess how these targets can be linked to facilitating sustainable finance products to potential borrowers. Through our sustainable finance analysis and assessments, we suggest how borrowers can position climate-change KPIs in line with current trends and standards by proposing suitable potential KPIs and monitoring these periodically. We also offer data-remediation and database-management services to financial clients in a number of ESG-related areas, including client transition planning, impact monitoring and regulatory reporting.

References:

1. UNFCCC News: "COP29 UN Climate Conference Agrees to Triple Finance to Developing Countries, Protecting Lives and Livelihoods" – [UNFCCC] (https://unfccc.int/news/cop29-un-climate-conference-agrees-to-triple-finance-to-developing-countries-protecting-lives-and)

2. World Economic Forum: "4 key takeaways from COP29, from climate finance to carbon markets" – [WEF] (https://www.weforum.org/stories/2024/11/cop29-4-key-takeaways/)

3. Financial Times: "Connecting global and national level: Climate finance in the wake of COP29" – [FT] (https://www.ft.lk/columns/Connecting-global-and-national-level-Climate-finance-in-the-wake-of-COP29/4-772192)

4. UNFCCC Summary: "Summary of Global Climate Action at COP29" – [UNFCCC] (https://unfccc.int/sites/default/files/resource/Summary_Global_Climate_Action_at_COP_29.pdf)

5. UNFCCC News: "COP29: New Global Climate Finance Target Agreed" – [UNFCCC] (https://unfccc.int/news/cop29-un-climate-conference-agrees-to-triple-finance-to-developing-countries-protecting-lives-and)

6. World Economic Forum: "COP29: Why it Matters and 4 Key Areas for Action" – [WEF] (https://www.weforum.org/stories/2024/11/cop29-4-key-takeaways/)

7. UNFCCC News: "COP29: Key Outcomes and Next Steps" – [UNFCCC] (https://unfccc.int/news/cop29-un-climate-conference-agrees-to-triple-finance-to-developing-countries-protecting-lives-and)

8. UNFCCC News: "COP29: New Collective Quantified Goal on Climate Finance" – [UNFCCC] (https://unfccc.int/news/cop29-un-climate-conference-agrees-to-triple-finance-to-developing-countries-protecting-lives-and)

9. UNFCCC News: "COP29: Advancements in Carbon Markets and Climate Finance" – [UNFCCC] (https://unfccc.int/news/cop29-un-climate-conference-agrees-to-triple-finance-to-developing-countries-protecting-lives-and)

10. UNFCCC News: "COP29: High-Level Champions and Marrakech Partnership Showcase Climate Action" – [UNFCCC] (https://unfccc.int/sites/default/files/resource/Summary_Global_Climate_Action_at_COP_29.pdf)

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