Intense discussions at the UN’s COP27 climate meeting in Egypt around how to finance industrial transition pathways are expected to lead to a raft of innovation in ESG-labelled debt issuance and set the scene for a bigger discussion around the Middle East at next year’s COP28 in the United Arab Emirates.
- As the implementation COP draws to a close, finance and transition are still in focus.
- It is estimated that up to US$100trn is required for the world to comply with the Paris Agreement.
- Sovereigns are expected to make the biggest developments in the green transition.
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COP27 has been billed as the implementation COP, and conversations have focused on how to finance the transition and bring difficult deals to the market for high-emitting sectors.
“In Egypt, the conversation was more about transition and building towards Abu Dhabi. There’s a lot of expectation on Abu Dhabi about how we help the Middle East to be part of the transition in a really fundamental way,” said Anjuli Pandit, head of sustainable bonds for EMEA and the Americas at HSBC.
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Complying with the goals of the Paris Agreement
Up to US$100trn is required to ‘green’ the world’s capital stock and comply with the goals of the Paris Agreement to limit global warming to two degrees Celsius or less. Some US$20trn is for assets that may need to be scrapped or retrofitted to avoid becoming stranded, according to research by BNY Mellon Investment Management.
“Financing is everywhere. There have been finance ministries and financing people in all sessions, and it’s a key part of the agenda. I see this as a maturing [of the situation]. Discussions have moved on from ‘we need to do this’ to ‘this is how we do it’ and the options and transition pathways are hard,” said Sean Kidney, chief executive of the Climate Bonds Initiative.
Some of the biggest developments are taking place in the sovereign space as nations get an opportunity to share information on how to position ESG financing from their country’s perspective and how to have that dialogue in the market – in many cases to tackle challenging stories in fossil fuel-dependent economies, such as the Middle East.
Sustainability-linked bonds
The presence of Chile and Uruguay – which both recently completed sustainability-linked bonds (SLBs) – had a galvanising effect on sovereign debt management attendees, encouraging them to look at a range of instruments, including sustainability-linked bonds and debt-for-nature swaps.
A global sustainability-linked sovereign debt hub was launched in September by the International Capital Market Association and Climate Bonds Initiative, along with development banks and NGOs. They hope to speed the development of sovereign SLBs by adding more nature and climate-related features, including those relating to biodiversity and CO2 emissions.
The Middle East is one of the fastest-growing areas of sustainable finance, but the discussion has been muted this year due to worries about greenwashing and the region’s reliance on money from fossil fuels.
Such sensitivities increased after the UN’s High-Level Expert Group said during COP27 that continued fossil fuel expansion is incompatible with reaching net-zero goals, and this issue is set to top the agenda in 2023 for issuers, investors and banks.
“It clearly poses a question for us about financing specific new fossil fuel capacity in high-emitting areas. We will really have to position ourselves and it’s difficult,” said Jean-Philippe Desmartin, head of responsible investment at Edmond de Rothschild Asset Management.
This article was written by Tessa Walsh.