Thoughts from COP26: A broader role for finance

Sefton Laing reflects on COP26 and the broader role that finance must play in the transition to net-zero.

Whilst there’s plenty of cynicism to be found that this was the ‘most corporate COP ever’ with its podiums for billionaires and its hard-to-fathom $130 Trillion climate commitments, it’s certainly clear that big finance has well and truly arrived in climate negotiations. A few years ago, people bemoaned the lack of finance for solutions, of investors and lenders being too cautious, sceptical and unwilling. Encouragingly, it’s quite the reverse now. If there’s one message it was hard to escape at COP26 it’s that there’s a “wall of money” in the capital markets just waiting to be unleashed on the solutions and the “capital in the funnel” has never been bigger.  

 

So is it simply a case of opening the taps and letting the money flow? Clearly that is happening to a degree, especially in areas where the technology is mature (like wind and solar) or where the policy direction seems clear (like electric vehicles in some markets). But one of the other important messages to be heard at COP26 was about the persistent blockers that mean finance still isn’t finding its way into the transition at the scale and pace needed.

Fridays for future protest sign

Listening to the voices of those involved in actually creating the solutions to climate change on the ground - and those dealing with the physical and economic impacts of climate at the same time - the sense that finance isn’t the main problem was clear. In some countries, poor local governance and ineffective legal frameworks still represent a major hurdle. The frustration that bad government and even corruption get in the way of good investment is palpable, with one ex-Prime Minister of a developing country commenting that “democracy is the most important climate adaptation measure there is for countries like ours”.

 

As well as not being corrupt, governments also need to set the right policy and regulatory direction for finance to flow. It’s not particularly common to hear business calling for more regulation but when it comes to transforming the energy system it’s a familiar cry. Left entirely to market forces, most recognise that the transition will not come quickly enough - such is the inertia and complexity in the system.  

 

There’s a need for governments to take some big calls now or we risk living in an experimentation phase for too long. Even simple things like technology standardisation (think EV charging networks for example) are important to move forward at pace. And there’s a very practical need for skilled workforces of engineers, planners and builders to actually construct things in real life. In most parts of the world, people say there aren’t nearly enough of them.  

...But the thing about what’s been agreed at COP26 is that it needs to involve everyone - all parts of society and all parts of industry.

All of this isn’t to say that finance is no longer an issue – far from it – but it’s clear that other things need to be tackled with urgency at the same time. And if we look beyond the energy transition and into the emerging intersection of climate, nature and ecosystem services (a key theme of COP26) there is still, unfortunately, a basic lack of capital. The age-old problem of the ‘tragedy of the commons’ persists: nature isn’t valued properly and the rewards from destroying it often outweigh those from preserving it. Even where nature is preserved, it’s usually at a financial cost to whoever’s preserving it.

 

Again, multi-sector collaboration and leadership from governments is needed. Attendees at COP26 talk of a lack of established channels or financial instruments to facilitate investment in nature. The carbon offset market is to some extent acting as a proxy that lets some capital flow, but there is a need to create more ‘proofs of concept’ that demonstrate how protecting nature can generate returns. 

 

It would be nice to think that the world’s most innovative and disruptive companies can sidestep most of these practical issues and find profitable solutions that can be deployed at scale. Based on the evidence we see from some of our most forward-thinking holdings they can certainly play a role. But the thing about what’s been agreed at COP26 is that it needs to involve everyone - all parts of society and all parts of industry. This is a point made particularly forcefully by those campaigning for a fair and just transition who say the shift to net zero must not result in the kind of negative social impacts that accompanied the de-industrialisation of richer countries in the past. 

 

For those of us working in the finance industry, it’s important to challenge ourselves to think well beyond our roles as providers of capital. If we’re serious about supporting the transition to net zero, we also need to play a role in helping to solve the more practical and, frankly, difficult challenges that need to be overcome if the true potential of climate solutions is to be realised.

Sefton Laing

Senior climate and environment specialist

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