COP27 signals it’s time for changing finance

Dec 12 2022 · 5 minute read

Guest blog by member of Snowball Leadership Council

Nick Robins is Professor in Practice for Sustainable Finance at the LSE Grantham Institute. He attended the climate summit in Sharm El Sheikh (COP27) and highlights the big themes for impact investors that emerged and which will need to be pursued in 2027.

The COP 27 agreement to provide ‘loss and damage’ funding for vulnerable countries hit by climate disasters was a landmark step, justifiably billed as the flagship announcement to emerge from this year’s summit.

But that decision should be set in a broader context, a recognition that the status quo is simply not good enough and that changing financial practice is essential to ending climate harm and building a sustainable economy that works for all people across the world. Here, COP27 produced three big shifts in sentiment around transformation, integrity and justice.

First, governments of the world agreed that ‘a transformation of the financial system’ is required to mobilise the $4-6 trillion of annual investment needed to achieve net zero. For the first time in a COP decision, central banks were highlighted as a key agent of change. The role of finance ministers was also singled out as needing a step-change in terms of fiscal policy and building a sustainable investment framework (The Coalition of Finance Ministers for Climate Action). While the role of finance has been clear for many years, there is now a discernible shift, an admission that voluntary disclosure and fine words do not cut it. Simply put, the ‘anything goes’ approach has not worked and needs to be replaced by robust action from policymakers, regulators, central banks and the financial community itself.

Initial signs show signs of momentum. In the EU, the Strategy for Financing the Transition to a Sustainable Economy comprises a package of measures designed to steer capital in the right direction. And in the UK, the Treasury launched a Transition Plan Taskforce to develop a gold standard for private sector climate transition plans.

But more needs to be done. Initiatives need to be translated into policies that will ensure that asset managers create products that are genuinely aligned with net zero and incentivise savers to buy them.

This aligns neatly with the second development, Integrity Matters, a report from the UN High-Level Expert Group, which says decisively that it is time to ‘draw a red line around greenwashing’. As we know, businesses and financial institutions are only too happy to make net-zero commitments. And some are extremely well-intentioned. Nonetheless, there are growing concerns about, and increasing evidence of, greenwashing. This has to end, as the report makes clear before trust is completely eroded among key stakeholders, including investors.

Again, action is already underway in the EU and over here, where the FCA intends to introduce wide-ranging measures to clamp down on greenwashing, including sustainable investment labels and disclosure requirements, ‘to build transparency and trust’ among consumers.

The third development to emerge from COP27 is arguably the most important: that rapid carbon reduction will only be delivered through a just transition that generates positive social outcomes. Governments took the one-line mention of the just transition in the 2015 Paris Agreement and will now develop a fully-fledged programme to ensure that the imperatives of workers and communities are at the heart of climate action. South Africa and Indonesia also came forward with their own Just Energy Transition Partnerships (JET-Ps) to speed the shift from coal to renewables in ways that leave no one behind. This means overcoming the artificial division between the environmental and social pillars of sustainable finance. The financial sector is starting to adopt just transition principles, and based on inputs from over 50 institutions; the LSE released guidance on how banks and investors can incorporate the social dimension in their net zero transition plans. The Impact Investing Institute has also launched the Just Transition Finance Challenge, bringing together financial institutions with over £4tn of assets and assets under management who are committed to financing a Just Transition. And with the International Labour Organization, we have developed a Just Transition Financing Tool, which goes beyond investors to focus on the key actions that banks can take, particularly in developing and emerging economies.

So, COP27 delivered more than many expected but still far less than what was needed. The case for strategic action on climate and biodiversity is now even stronger following Russia’s invasion of Ukraine. Avoiding future energy shocks will only about come by phasing out fossil fuels and redirecting capital to renewables, resource efficiency and nature-based solutions. Technology is no longer the constraint to net zero progress. Instead, it is replacing out-of-date institutional frameworks that reward the wrong things in the financial system.

This is why the three messages on transformation, integrity and justice from COP27 are so important for impact investors and the wider financial sector to pursue in 2023. Impact investors have often been in the vanguard of connecting green goals with social outcomes, and this work will need to be stepped up in the year ahead as energy, and food poverty deepens worldwide. With leading investor CEOs, such as Aviva’s Mark Versey, recognising that the global financial architecture is no longer ‘fit for purpose’, it’s time to be bold on reshaping the financial system, bringing real integrity and impact to all transactions and making sure that the gulf between climate and people is closed once and for all.

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Nick Robins, Professor in Practice for Sustainable Finance at the LSE Grantham Institute
Nick Robins, Professor in Practice for Sustainable Finance at the LSE Grantham Institute