What does COP28 hold for sustainable banking?
The 28th Conference of the Parties starts in Dubai tomorrow. Dubbed the finance COP, conflicting priorities could turn it into a fossil fuel investor roadshow.
There are always two COPs: the political one and the private sector one. They happen in tandem, and progress at one usually impacts the outcome of the other.
This week, the global migration of state delegations, institutions, financiers, scientists, NGOs and community representatives to the event has begun.
Expectations for COP28 are as high as the criticism it has attracted.
As always, the banking sector will be well represented at the conference. Talking to bankers before the launch, Euromoney finds that while they share a desire for greater clarity on what the transition towards a low-carbon future should look like, persistent disagreement on what that means could slow progress.
A bigger audience
The finance industry expects COP28 to be a big one. Dubai is preparing to host about 70,000 delegates, double last year’s 35,000 attendees in Sharm El-Sheikh.
“Expectations are for a significantly larger global presence, including more senior representatives both from governments and from our clients,” says Luke Nelson, head of sustainability EMEA at JPMorgan Chase. "Anecdotally, we’re hearing from clients that this is a more significant COP."
In the world of climate conferences, bigger tends to mean better. The communication around this year’s event focuses heavily on international collaboration and cooperation.
We are not at all in line with the objectives of the Paris Agreement, and the window for action is shrinking very fast
“COP is about ecosystem building,” says Helge Muenkel, chief sustainability officer at DBS. "A finance day discussion would be incomplete with only a few financial institutions; we want representatives of the real economy too."
There are a couple of reasons for this surge in attendance. For one, the logistics of getting to and staying in Dubai are easier than they have been for some prior host cities. But more importantly, the 28th conference is the year of the first global stocktake (GST), a sort of progress report that is supposed to take inventory of how well – or poorly – the world is doing in achieving the goals set out in the Paris Agreement of 2015.
The GST feeds into the next round of government climate action plans and the nationally determined contributions (NDCs) due in 2025. However, nobody is expecting the GST to make heart-warming reading.
It will more likely be a humble reminder that not only are we not progressing on decarbonization, but the data suggests that things are getting worse.
According to the International Energy Agency (IEA), global energy-related CO2 emissions grew by 0.9% or 321 million tonnes in 2022, reaching a new high of over 36.8 giga tonnes.
“Unfortunately, we already know the conclusions, and they are not good ones,” says Alix Chosson, lead ESG analyst at investment manager Candriam. "We are not at all in line with the objectives of the Paris Agreement, and the window for action is shrinking very fast. The real question of this COP is how countries will respond to this assessment."
Switching off coal
Part of that response will have to focus on the energy mix. The banking sector will be closely watching the outcomes of country-level negotiations on the transition pathway for the energy sector, with decarbonization targets for coal, oil and gas.
The banking industry is firmly in the crosshairs of the press thanks its continued financing activities in fossil-fuel production and expansion. Greater support from governments in suppressing demand for fossil fuels will facilitate a reduction in financing.
Negotiations at COP27 were riddled with last-minute disputes around technical details on wording in order to get as many countries as possible to sign a deal on the phase-down (as opposed to phase-out) of fossil fuels. The hope is that COP28 will see genuine target-setting for the industry.
Management of the transition away from coal has sped up massively in the last six months
For Muenkel, regional momentum on the topic of a coal phase-out is a positive sign.
“We have about 5,000 coal power plants in Asia Pacific, and they are instrumental for the provision of electricity and jobs for many communities,” he says. “No matter how much effort and capital we put into clean energy, about two thirds of our 1.5-degree carbon budget will be used up if we keep coal power plants running in the region, which is why a managed phase-out is essential to ensure a just transition.”
Like other lenders in Apac, DBS is in a tricky situation with coal. On the one hand, it has set itself ambitious targets: in 2019, the bank said it would cease financing new coal power assets, and it has vowed to get rid of its coal exposure fully by 2039 when the last of its loans in the sector mature.
On the other hand, it has been asked by the Singapore central bank to help finance the ‘managed phase-out of coal’ in Asia. The bank has been mandated by Indonesia's sovereign wealth fund to phase out coal power plants in the country.
This requires lending to coal-sector companies if they have a credible transition plan, a decision that has been criticised by many for being a gateway to more greenwashing.
But for Muenkel, this shows that since COP27, there has been a strategy change that reflects a greater realization of what funding the transition should look like.
“Management of the transition away from coal has sped up massively in the last six months," he says. "We have taxonomies that include managed coal phase-out. I’m quite hopeful that we will see progress on this at COP and beyond.”
Oil and gas targets
As for the oil and gas sector, the industry is split between those who are happy with the UAE’s decision to keep the negotiations around operational emissions reduction targets – otherwise known as Scope 1 and 2 – and those who want to see more ambition from the public sector.
“We’ve seen some criticism of the UAE as a host from some quarters," says JPMorgan Chase’s Nelson. "In reality, they are in a position to bring the oil and gas sector to the negotiating table, unlike other countries.”
For him, the banking industry remains focused on balancing climate goals with the question of energy affordability and security.
It is hard to ignore the fact that the COP presidency – which is held by the UAE’s national oil company Adnoc – is beneficial to the oil and gas industry.
We are quite optimistic on the opportunities; we see more interest in innovation at COP this year
Not only does the company itself have a $150 billion expansion growth strategy, but it has become clear that the climate conference will be used to secure new deals for oil and gas production in emerging markets. Having the oil and gas sector at the negotiating table serves little purpose if what is being negotiated isn’t decarbonization.
The oil and gas industry has a vested interest in focusing the negotiations on operational emissions reduction because that is a version of decarbonization in which they can be active and portray themselves as having a concrete transition strategy without having to concede expansion of production and the profits that come with that.
“The UAE’ plans on operational emissions and methane are already quite ambitious targets, but Scope 3 emissions account for 40% of energy-related emissions, so we cannot ignore them,” says Elise Beaufils, deputy head of research at Lombard Odier.
Some banks argue that public-sector support is essential to bring clients on the long-term transition journey.
“We need more bankable assets,” says Antoni Ballabriga, global head of responsible business at BBVA. "That depends on our clients, and our clients need clarity on what projects or technologies will be protected and supported via incentives, regulation, etc. And that comes from governments."
This rhetoric is not new. At both COP27 and COPs before that, the private sector has requested more administrative support from governments to reduce bureaucratic barriers and provide more incentives for clean energy and clean tech.
There are some plot holes in that argument, however, since most investment banks still lend or facilitate financing certain fossil-fuel activities such as liquid natural gas production or natural gas exploration that are lengthy and rife with bureaucratic or licensing barriers.
It is hard to see this as anything other than a double standard in how the market choses to engage with energy transition. But for Ballabriga, it comes down to public policy.
“LNG has a business case thanks to government policy,” he says. "They made it profitable via energy policy in those countries. We need to reduce barriers to big renewable-energy projects and for greener retail solutions to improve the business case for clean energy.
The outlook for low-carbon technologies is generally more positive. Not only will there be a bigger focus on the deployment of clean tech globally at COP 28, but recent reports show that there has been an acceleration in output over the last three years too.
According to the IEA’s latest net-zero progress report, the technologies not available on the market represent 35% of the emissions reductions needed in 2050 to reach net zero, compared with 50% in the 2021 report.
“We are quite optimistic on the opportunities; we see more interest in innovation at COP this year compared to COP27,” points out Ballabriga, adding that innovation has the potential to decrease the green premium still seen in some hard-to-abate sectors.
What will happen at government-level on oil and gas is essential
The UAE has said it wants to triple renewable energy capacity by 2030, and recent meetings between the US and China suggest that negotiations will focus on multilateral efforts to create economic incentives to make that happen.
These are some attractive green flags for large investment banks exposed to larger energy assets.
“Our focus will be on providing support for government and companies on their energy transition journeys,” says Nelson.
Lombard Odier’s Beaufils argues that this is precisely why more focus ought to be placed on phasing out brown energy at the same time.
“The private sector is already moving quite fast on clean energy production,” she says, "but there is less momentum on the question of phasing out fossil fuels at the same time. What will happen at government-level on oil and gas is essential."
Clearly, COP28 will host conversations on clean energy, but these will be less about capacity growth and more about operational practicality. In the Asia-Pacific region for example, where the renewables landscape is less homogeneous than in Europe or the Americas, there are new questions of functionality.
“Singapore among other countries will more likely rely on renewable energy imports, with lots of discussion on a regional grid and what collaboration would look like,” says Muenkel.
Here there are certain lessons to learn from the West. The war in Ukraine and its impact on European energy security shows how fragile partnerships can be.
As the financial sector looks to accelerate clean energy deployment, another cornerstone of the COP28 agenda is going to be reform of development finance and banking. The theme of COP27 in Egypt was a just transition. It focused heavily on public funding for adaptation in markets hit hardest by climate change.
This year, banks continue to ask for more support from the public sector to create a financing system that can make it easier for them to funnel private capital into green and transition projects in developing markets.
“We have a lot of expectation on the new multilateral development bank (MDB) architecture,” says BBVA’s Ballabriga, "so that they can deploy instruments with more ambitious risk-mitigation mechanisms with the same balance sheet."
It’s important to consider the financial structures that can help drive private capital to developing markets, but also how to ensure a pipeline of bankable projects
For him, MDBs should have a target on private capital mobilization. Two thirds of BBVA’s income comes from its activities in emerging markets. Given its big exposure to Latin America and Turkey, the bank is following this topic closely and hopes that the new World Bank presidency should start yielding some results.
“A successful COP would be one where we have agreements on MDB lending architecture,” Ballabriga adds.
Emerging-market banks are frustrated by the fact that MDBs and development finance institutions are not moving as fast as the market in identifying the regions and sectors that need de-risking and those that have matured.
“MDBs cover risk that the market could cover anyhow, but we need them for the extra mile,” one senior banker tells Euromoney. "Why are they conducting direct lending for wind farms or solar projects in Egypt or Mexico that would have been financed by the private sector anyways?"
This frustration has fuelled the trend of banks and investors setting up private-sector DFIs to bypass the clunky development banking model.
Last year in Sharm El-Sheikh, JPMorgan’s DFI was promoting its methodology to make ‘development impact’ a bankable asset. More recently, Euromoney reported on Blackrock, McKinsey and JPMorgan’s efforts to set up a DFI for the reconstruction of Ukraine.
“At the Paris climate finance summit, MDB reform was a big topic,” says Nelson. "It’s important to consider the financial structures that can help drive private capital to developing markets, but also how to ensure a pipeline of bankable projects. A lot more can be done upstream to reduce implementation hurdles.
MDBs are not the only ones under fire for their operational weaknesses and the consequence of this on the speed of transition.
COP28 will be a sobering experience for the international community as they realise that some sustainable transition initiatives are hard to implement.
Chief among those initiatives is the Just Energy Transition Partnerships (JETPs), which were the focus of attention in Glasgow and Sharm El-Sheikh.
JETPs were receiving so much attention that Euromoney listed them as one of the top five sustainability trends for 2023 back in January.
South Africa was the first country to sign a JETP and is due to receive $8.5 billion under the programme, but the country’s energy crisis seems to be getting worse. It has dealt with severe load-shedding this year due to power shortages. Unsurprisingly, the plan to shut down one of several coal plants in the country was widely criticised as going against the principles of a just transition.
Vietnam, Indonesia and Senegal have all signed JETPs with the G7 as well. But developing markets are concerned that the model – through which financing mostly comes in the form of loans and guarantees rather than grants – is disadvantageous.
It is quite fitting then, for COP28 to host the first GST and measure progress on meeting the goals of the Paris Agreement.
The eyes of the private sector will be firmly focused on what will come out of this most political COP.
Natural assets and carbon credits
At COP27 in Sharm El-Sheik, negotiations focused on carbon markets and specifically on the carbon-trading rules that fall under Article 6.2 and 6.4 of the Paris Agreement.
Much was said on the issue of double counting – when a corporate purchases a credit for an emissions reduction that can also be counted towards the climate goals of the country where that reduction took place.
This led to the creation of mitigation contribution units as an alternative to the offsetting mechanisms currently used on the voluntary carbon markets.
Negotiations over this framework are due to continue at COP28 in Dubai, but this is less of a focus for the banking sector, perhaps because the carbon markets have had a tough year.
“The market has suffered this year, to say the least,” says Scott Eaton, chief executive of Carbonplace, speaking to Euromoney about the recent investigation into over-issuance and quality concerns of the REDD+ Kariba forest conservation project in Zimbabwe and the carbon-offsetting firm South Pole that has been selling the associated credits.
“What’s more important is how it reacts to these shocks,” he adds. "We support the enhancing of integrity in the market. The more scrutiny the better."
When asked if the progress made on Article 6 and whether a project-based compliance carbon market could come disrupt the growth of the VCM even further, Eaton replies that it will take time for this to come to force.
“It’s already been a few COPs since those first announcements were made. Even if all the technical issues or questions were answered now, the implementation will take a long time.”
Still, the UAE presidency of the COP has a keen interest in carbon offsetting, and the topic is likely to come up at the event.
Nature as an asset class
Beyond carbon markets, the question of driving capital towards nature-based solutions has also become more mainstream in sustainable development.
At COP28, Lombard Odier hopes to see how conversations on building sustainable food systems can bring biodiversity to the forefront.
“We’ve seen this year that biodiversity and nature-as-an-asset class is higher on the agenda,” says Elise Beaufils, deputy head of research at Lombard Odier, "with COP15 and the Taskforce on Nature-related Financial Disclosures (TNFD) report launched during climate week in New York, for example."
Recent geopolitical crises and supply-chain resilience have led the private sector to embrace this topic and look closely at food systems.