Will COP28 trigger a green wave in ESG investing?

COP28

At COP28 in UAE in December 2023, the hosts announced a new private climate finance vehicle called ALTÉRRA. The vehicle will be managed from Abu Dhabi by a firm overseen by the royal family. The aim of this vehicle is to mobilize US$250 billion by 2030 for initiatives that help transition economies to net-zero emissions and more resilience to handle the effects of climate change. The fund includes emerging markets and developing economies “to get investment where it is needed most”. The UAE committed US$30 billion to the fund, and the inaugural North American investment partners, BlackRock, Brookfield and TPG, committed US$6.5 billion.

Major new investment fund announced at COP28
COP28

Of UAE’s US$30 billion, US$25 billion is dedicated to the ALTÉRRA acceleration fund, which will serve as an anchor investor and co-investor in major climate transition initiatives with the aim of attracting more institutional investors. US$5 billion will be dedicated to the ALTÉRRA transformation fund that will provide risk mitigation capital to incentivize foreign direct investment and concessional investments (loans and grants) in the “Global South” (meaning developing countries). ALTÉRRA said it would invest directly and through fund partnerships.

 

As for the inaugural investment partners, BlackRock separately announced that over $1.6 billion was committed to its “Climate Transition-Oriented Private Debt strategy” and its Global Infrastructure Fund IV. Finances have already been earmarked for renewable projects in India. Brookfield said it will run a multi-billion dollar investment strategy to promote energy transition initiatives through their emerging market investment strategies and its Global Transition Fund II. TPG said it will focus investments on the Global South, through multi-billion dollar investments in its “Global South Initiative” and “TPG Rise Climate II efforts.” These are all private finance initiatives with backing from ALTÉRRA.

 

Dr. Sultan Al Jaber, who is controversially the president of COP28 and the CEO of UAE’s oil company, Adnoc, said that the fund would have a “material impact” on the climate transition. Four priority areas have been identified: 1. Εnergy Transition  2. Industrial Decarbonization  3.  Sustainable Living and 4. Climate Technologies. The fund’s impact will be measured against a “Climate Impact Framework”, although this is still under design and to be released in draft form within 12 months.

 

 

Will the COP28 fund catalyze a green wave in investing?

 

Governmental policies and initiatives can wield significant influence over investor behavior. For example, the effect of environmental policies is already evident in the global shift towards a low-carbon or “net zero” economy. The Paris Agreement has driven governments to set ambitious carbon reduction targets, catalyzing investments in clean energy and vigorous debate about how to regulate carbon markets to incentivize real behavior change. This surge in interest fuels investment opportunities in growing economic sectors such as renewable energy. The International Energy Agency (IEA) estimated that since 2020, the annual investment growth rate in clean energy has been about 12%. The IEA said this is, “…well short of what is required to hit international climate goals, but nonetheless an important step in the right direction.”

 

The ALTÉRRA fund certainly has lots of potential to nudge institutional investors further in the direction of backing the climate transition. Investors gravitate towards companies and public-private initiatives demonstrating robust adherence to good governance standards and compliance with transparent and internationally-agreed criteria. They also gravitate towards scenarios in which risks are managed well. On paper, the ALTÉRRA vehicle is designed to seek out and conduct due diligence on these investing opportunities and investment partners, thereby attracting more investors into the mix.

 

In addition, the high standards and expectations of global investors can seriously limit investing in the least developed countries because they present higher risks to returns. They have less capacity in their private sectors to absorb major investments and more challenges to building good governance and robust legal systems for enforcing contracts. When I looked at private financial flows to the poorest and most fragile countries for the OECD, I found that only 6% of foreign direct investment went to the 50 poorest and most fragile countries in the world. The ALTÉRRA transformation fund is a welcome recognition of this problem, although there is still flesh to be put on the bones of how its “risk mitigation capital” approach will work to attract investors to least developed countries and small island developing states. For other institutions, such as the World Bank, this has meant conducting due diligence assessments and providing technical expertise, providing risk guarantees and offering equity-backed investments.

 

However, there may be limitations too. Of course, climate activists have expressed cynicism about the incentives of UAE, the COP28 host, given its wealth is based on oil. Some have accused the UAE of using COP28 to do new oil deals in the background which will add to global GHG emissions, and of using the fund to silence critics, accusations which the UAE has denied.

 

For me it comes down to a pragmatic question about where the money goes. If the financing vehicle predominantly helps to attract and direct finances towards the places where they are needed most, then it will be a helpful and catalytic initiative that can cause a green wave in ESG investing in countries that have less capital available and more urgent needs. These countries don’t  usually benefit from ESG or many other types of investing.

 

U.S. policy appears to reflect a similar view. President Joe Biden said, “I welcome President Mohamed bin Zayed’s announcement of the ALTERRA Fund—a $30 billion catalytic climate finance vehicle aimed at mobilizing the capital and investment needed to fight the global climate crisis. ALTERRA can play an important role in supporting the clean energy transition and enhancing resilience, particularly the $5 billion focused on making it easier to invest in least developed countries and small island developing states.” 

 

As for the bigger question of raising adequate global climate finance (the Paris Agreement called for US$100 billion per year by 2020), the ALTÉRRA finance is a new and large piece of a global effort that is still falling short. The UN Green Fund Climate Fund has fallen very far short of its $100 billion per year fundraising target, having raised a total of around US$20 billion. At COP28, a new World Bank Loss and Damage Fund was agreed for developing countries to prevent and respond to disasters caused by climate change. So far, countries committed just over US$700 million in total. Relatively speaking, UAE’s US$30 billion for private climate finance is substantial.

 

 

What comes after COP28?

 

The landmark Paris Agreement, agreed at COP21, stands as a beacon, rallying nations towards collective efforts to curtail carbon emissions. This accord has triggered a surge in efforts directed at the transition to net zero. According to the UN, through subsequent COP meetings, “More than 140 countries, including the biggest polluters – China, the United States, India and the European Union – have set a net-zero target, covering about 88% of global emissions.” At COP28, the UAE brought its own net zero target forward by five years to 2045.

 

COP28 is likely to be the last highly important COP because many of the processes launched through the UN Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP) have already concluded or are expected to conclude at COP28. This includes the launch of the Loss and Damage Fund for least developed countries, and final negotiations that will set global standards for carbon markets trading.

 

Climate diplomacy, however, must continue to thrive. Regional forums are growing in significance and the UN, World Bank, countries and companies must continue the struggle to raise enough finance for the global climate transition. A groundswell of investor interest in sustainability-aligned investments is needed to reshape market dynamics. Both institutional and individual investors can increasingly seek companies with robust ESG and sustainability practices, influenced by supportive governmental and global policies. This growing demand has the potential to not only steer investment patterns, but also compel companies and government to realign their strategies with environmental objectives.

 

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Tags :
Climate Change,Environment,Green finance
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