- The agreement reached at the COP27 climate conference calls for transforming the financial system to deliver the trillions of dollars in clean energy investment annually that the low-carbon transition will demand.
- The conference underscored the need for action on corporate climate pledges, the critical importance of data and a series of initiatives to help developing countries cut emissions and adapt to climate change.
- Members of MSCI’s climate research team will discuss top takeaways from COP27 for companies and investors — as well as what to expect from the COP15 biodiversity summit — at a virtual briefing on Nov. 21. Watch on demand here.
Investors, companies and other capital-markets participants will play a critical role in achieving the goals of the agreement reached at COP27, which calls for transforming the financial system to deliver the estimated USD 4 to 6 trillion annually that will be needed this decade and beyond for sustainably produced energy and the transition to a low-carbon economy. The agreement establishes a fund through which wealthy countries would compensate vulnerable developing countries for loss and damage caused by global warming, a historic step that charges the fund with identifying innovative sources of funding.
The conference also underscored the need for action on corporate climate pledges, the critical importance of data and a series of initiatives designed to spur both public and private investment to help developing countries cut greenhouse gas emissions and adapt to a warming world. Here are some of the developments impacting companies and investors that stood out for us.
Cracking down on climate commitments
Companies and financial institutions must back up their climate commitments with actions and investments, the United Nations’ High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities said in a report that aims “to prevent dishonest climate accounting.” Among its recommendations:
- Net-zero pledges should contain interim targets measuring progress along a 1.5°C pathway five years at a time, reaching net-zero by 2050 or sooner; targets should account for companies’ complete Scope 1, 2 and 3 emissions.
- Net-zero pledges should include specific targets aimed at ending support for fossil fuels; companies and financial institutions should disclose their affiliations with trade associations.
- Companies may use high-integrity carbon credits to mitigate emissions beyond their value chain but cannot count such credits toward interim targets.
- Financial institutions should have a policy of not investing in or financing businesses linked to deforestation.
- Financial regulators should develop regulation and standards governing net-zero pledges and transition plans and disclosure, starting with companies, including private and state-owned enterprises and financial institutions.
“Greenwashing undermines the credibility of efforts by companies and investors who are taking concrete steps to reduce emissions and align with net-zero,” says Sylvain Vanston of MSCI climate investment research. “The U.N. watchdog has assembled the right list of requirements to restore trust.”
Data for decision-making
The Net-Zero Data Public Utility (NZDPU), a central repository of climate-transition data, is expected to be up and running in the second half of 2023. The NZDPU will have four key goals:
- To be a trusted central source of verifiable data, with an initial focus on standardized data for greenhouse gas emissions across all emissions scopes
- To augment transparency and align with global regulatory frameworks and standards where possible
- To be open and available to the public at no charge
- To be designed to be part of the global climate action portal hosted by the United Nations Framework Convention on Climate Change
- The repository will incorporate a foundational layer of data from CDP, which collects climate data from nearly 20,000 companies and other disclosing entities.
- Data provider representatives on the committee include MSCI Inc., Bloomberg LP, London Stock Exchange Group plc, Moody’s Investors Service, Morningstar Inc. and S&P Global Inc.
“The Net-Zero Data Public Utility will soon form the unified global basis for companies’ Scope 1, 2 and 3 carbon accounting,” says Oliver Marchand, head of MSCI’s Climate Risk Center. “Companies will have to conform their reporting to this standard, data providers will have to build this data into their impact and risk models, and investors who pursue net-zero targets will have to reallocate their portfolios based on this new data set.”
U.S. Climate Envoy John Kerry unveiled a system of carbon credits designed to finance the clean-energy transition in developing economies.
- The Energy Transition Accelerator will aim to catalyze private sector investment to phase out coal plants and speed investment in renewable energy.
A new initiative sponsored by Bloomberg Philanthropies aims to improve the infrastructure for voluntary carbon credits.
- The Global Carbon Trust will create standardized contracts for carbon credits, embed third-party monitoring and verification of project performance, and provide arbitration and compensation mechanisms for projects that fail to meet targets
Another new initiative aims to spur the voluntary market for high-integrity carbon credits in Africa.
- The African Carbon Markets Initiative aims to produce 300 million carbon credits annually by 2030 worth an estimated USD 6 billion that would be distributed among local communities.
A framework aims to guide the development and purchase of blue carbon projects and credits.
- Credits for carbon captured by ocean and coastal ecosystems should safeguard nature, empower people, employ the best information and carbon accounting principles, operate contextually and locally and mobilize high-integrity capital.
“Avoiding the worst outcomes of climate change will require steep carbon-emissions reductions as well as innovations, including carbon removals for residual emissions and the development of robust carbon markets,” notes Chris Cote, MSCI’s Americas Lead for ESG and climate research. “Consensus on the most appropriate way to develop these markets is still emerging: more transparency, standardization, and detailed verification of carbon credit projects will be required. Investors, companies, and other stakeholders need to be able to trust and verify that carbon credits actually remove or avoid emissions.”
CDP said it would use the climate-disclosure standard being developed by the International Sustainability Standards Board (ISSB) in its corporate environmental disclosure platform starting in 2024.
- The organizations said the decision by CDP would speed adoption of the ISSB standard, which is being finalized.
The ISSB unveiled a partnership framework designed to support climate-investment capacity in developing and emerging economies.
- The framework aims to support investors, regulators, multilateral institutions and other market participants by providing high quality, comparable and timely information for investment decisions in priority jurisdictions, which the ISSB said it aims to identify between now and this April.
“What gets measured, gets managed,” says Simone Ruiz-Vergote, MSCI’s head of ESG and climate policy. “Over the next two years, we anticipate an exponential increase in standardized climate data from companies that will enhance the capacity of investors to influence them on aligning with net-zero. The pickup of the future ISSB climate disclosure standards – which closely follow the TCFD’s approach – by national regulators and existing reporting platforms like CDP will bring rigor, comparability and reliability to the measurement of climate-related risks and opportunities, helping investors find and reward the best climate performers.”
Blended finance for the climate transition in less-developed economies
Turning project pipelines into investable opportunities will top the list of initiatives the Glasgow Financial Alliance for Net Zero (GFANZ) aims to pursue through its Africa network in 2023.
- GFANZ also said it would work “to reduce the cost of climate finance in Africa by better understanding what is needed on de-risking investments to crowd in private finance.”
- The alliance said it would engage members “to understand risk drivers and real versus perceived risks” that hinder investment and co-develop solutions to mitigate risk and lower the cost of climate finance on the continent.
Half of a USD 20 billion package designed to help Indonesia phase out coal will come from a group of banks convened by GFANZ.
- The Just Energy Transition Partnership announced on Tuesday aims to mobilize public and private financing that includes USD 10 billion over a three-to-five-year period facilitated by The Bank of America Corporation, Citigroup Inc., Deutsche Bank AG, HSBC Holdings plc, Macquarie Group Limited, MUFG Bank Ltd. and Standard Chartered plc.
A series of initiatives proposed by the COP27 presidency aim to reduce the cost of green borrowing for African countries. They include:
- A liquidity and sustainability facility that aims to lower the cost of borrowing for governments by increasing demand for their sovereign bonds
- Adoption of the global baseline for sustainability disclosures being developed by the ISSB
- A proposal for a sustainability sovereign debt hub for debt designed to lower the cost of capital for climate- and nature-resilient development in developing countries, support investments in adaptation and mitigation and make sovereign debt markets responsive to the underlying needs of countries facing exogenous, destabilizing shocks.
- Guarantees from multilateral development banks that lower the cost of borrowing by improving the issuer’s debt profile
A new initiative aims to raise up to USD 500 million in early-stage capital for green infrastructure projects in Africa.
- The Alliance for Green Infrastructure, which is backed by the African Union and the African Development Bank, aims to “provide the requisite de-risking instruments” to mobilize private equity and debt financing for projects projected to spur USD 10 billion of investment.
“The initiatives coming out of COP27 point the way forward for the creative partnerships that will be needed to strengthen climate financing for developing and emerging markets,” says Meggin Thwing Eastman, MSCI’s global ESG editorial director. “Countries, banks and both public and private investors are going to need to jump into that collaboration if we’re going see a pipeline of projects whose risk profiles match investors’ needs.”