The 2023 edition of the annual COP gatherings was always going to be lively. The choice of venue, the appointment of a president from the oil industry, and record attendance by fossil fuel representatives all got the media talking. One thing that wasn’t expected was that money isn’t the primary issue hindering firms’ progress.
During my five days at COP28, in Dubai, I met and spoke with dozens of financial services executives. They represent a wide array of funders, from commercial and multi-lateral development banks to asset managers and investment funds. Yet their message is remarkably consistent: they accept their role as key facilitators of the transition to net zero emissions, they see the opportunities that it presents and they are willing and able to help finance it.
Think about that for a moment. Estimates of the cost of this mammoth undertaking run well into the trillions of dollars. More than $300 billion was pledged during the conference alone, with the UAE Banking Federation committing itself to $270 billion.
This can go a long way to helping companies reach net zero, including those in the heavy industries —steel, metals and mining, cement, chemicals, and freight and logistics — which are the world’s biggest emitters and key to breaking the stalemate toward decarbonization. Fewer than one in five companies (18%) across all sectors are currently on track to reach net zero emissions in their operations by 2050, and over a third (38%) say they cannot make further investments in decarbonization in the current economic environment.
What quickly became apparent from my conversations at COP was that funding, while still challenging for many, isn’t the main obstacle — it’s the difficulty of launching and implementing the thousands of projects needed to move the needle on carbon emissions.
There are five critical obstacles that stand in the way of this mountain of money being spent to good effect:
- The business case for many investments would look different if carbon already today had a price tag. But the carbon credit markets have not been standardized and are not yet working properly.
- Financial institutions need to build R&D muscle to better understand new sustainability technology deals in order to not overprice them. While theoretically much funding is available, the very innovative projects are still little understood by banks and insurers and would only get funding with unhelpfully high-risk multiples latched on top of them.
- Many potential projects involve multiple funders with a blended finance approach. Each funder has its own objectives, priorities and preferred approach. A lot of financial innovation is needed to structure the funding tranches into a workable set of instruments.
- There is a crucial gap between the private and public sectors, especially in developed markets. For example, while everyone agrees that electric vehicles are a good thing and should be supported, this requires investment not only in manufacturing but also in the creation of vast recharging grids. Securing approval from the thousands of local authorities affected is a huge and complex undertaking.
- And then of course there’s data. I was struck by how often this came up in the various debates, including on a panel of financial services leaders that I moderated. From the identification of assets and the measurement of baseline carbon emissions to transparent audit trails and reporting on investment outcomes, data is a vital enabler. Financial services firms, which are experts at dealing with data, have some way to go to resolve the shortcomings of its availability, standardization, management and use.
The good news is that most of the large financial institutions I spoke with are undaunted by these obstacles. In fact, the consensus is that this is the biggest opportunity of their lifetimes. This is a very positive change.
And they’re not alone. At the other end of the spectrum are the multitude of fintechs and other small, specialist firms that are laser-focused on some aspects of the net zero challenge. They are applying their technology, data and connections to tackle the various obstacles so that the funding can start to flow and projects can get underway. For them too, the potential is enormous.
One such example is ESG Book, which provides a central data repository that is accessible to all participants. Users, such as potential borrowers, upload their credentials and other data in a standardized format. This makes it readily available to lenders and saves the borrower from having to compile and send it over and again.
There is still a great deal of work to be done before we see pledges converted into a significant number of actual projects. The hardest part lies ahead, but let’s not downplay the progress that was made last week in Dubai.