Achieving Net Zero: The crucial role of the financial sector | Accuracy Guest Blog
How can the financial sector contribute to the decarbonisation of the global economy?
Achieving net-zero emissions by 2050, as laid out in the Paris Agreement, hinges on the involvement of the financial sector. Indeed, this sector bears considerable responsibility for greenhouse gas emissions: its own operations combined with its financing activities account for approximately 60% of total emissions globally. (UN Environment report) And whilst emissions from the direct operations of financial institutions are not inconsequential, those associated with their investing, lending and underwriting activities are, on average, over 700 times higher. (CDP – Disclosing financial institutions report)
However, thanks to its position as an indispensable source of financing, the financial sector possesses considerable power to steer investments towards sustainable and low-carbon projects, which can greatly contribute to reducing greenhouse gas emissions.
For example, in 2022, the world’s 60 largest banks provided $6.73 trillion in fossil fuel financing. (Banking on climate chaos report) Redirecting these investments towards renewable energy and other sustainable projects could have a transformative effect on global emissions.
The Paris Agreement explicitly calls for financial institutions to make their finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. By financing initiatives like renewable energy, sustainable transportation and green buildings, the financial sector can expedite the transition to a low-carbon economy and make a significant impact in the fight against climate change.
To achieve sustainable development goals, including limiting the global temperature rise to 1.5 degrees Celsius, it is imperative to mobilise sufficient resources. According to the UN, this requires an increase of $5 trillion in global gross investment by 2030. (UN Financing Climate Action)
The rising concern about climate change has spurred many investors to seek sustainable financing instruments, including green bonds, green loans and sustainability-linked loans. Such financial tools aim to fund projects that promote directly or indirectly sustainable development and minimise the impact of human activity on the environment.
The popularity of these sustainable financing instruments has grown significantly in recent years as investors seek to align their portfolios with their values. Global sustainable bond issues could reach EUR 880bn in 2023, an increase of 30% over 2022 (CACIB ESG Fixed Income Research – Bloomberg), of which 59% could be dedicated to green bonds.
The acceleration of green bond issues is occurring within the context of an expanding investor base and, as a result, it benefits from increased liquidity. This trend has been particularly evident in the post-Covid era, where sustained decreases in spreads, rather than occasional fluctuations, have been observed.
Consequently, it seems that green and sustainable bond issues are outperforming conventional bonds and facing less selling pressure. By blending profitability goals with environmental considerations, green bonds have become a highly advantageous option for companies.
For decades, changes in gross domestic product have correlated strongly with the consumption of energy and other natural resources. However, the latest projections (from the 2022 STEPS report) indicate that significant changes are on the horizon, with fossil fuel use predicted to decrease to less than 75% of total energy supply by 2030 and to just over 60% by 2050.
As a result, some economies that have traditionally relied on hydrocarbons, such as those in the GCC region, are now exploring the use of renewable energy resources to diversify their energy mix. The success of early adopters in the GCC region, dating back to the early 2000s, has shown the economic feasibility of renewable energy, and recent photovoltaic (PV) projects in the area have demonstrated some of the world’s lowest levelised cost of electricity (LCOE), such as the 600 MW Shuaibah solar project, which announced an electricity cost of only 1.04 cents per kilowatt-hour.
In many cases, renewable energy is proving to be more profitable than oil. But some hydrocarbon-reliant economies still have substantial oil reserves, and we may naturally wonder if that will affect their motivation to accelerate the transition towards renewable energy sources. Will they prioritise the long-term benefits of renewable energy, or will their continued dependence on oil pose challenges to their efforts for sustainability?
As the cost of renewable energy continues to fall year after year, and the cost of fossil fuel continues to rise, the energy market is facing an unprecedented shift in demand in favour of sustainable energy. In Europe, between January and May 2022, solar PV and wind generation alone likely avoided the import of fossil fuels in the order of USD 50 billion – predominantly of natural gas. But the extent of the fossil fuel price crisis, which started in 2022, has overshadowed the fact that without renewables the situation for consumers, economies and the environment would be much worse.
The role of the financial sector in addressing the issue of climate change cannot be overstated. By investing in mitigation finance, economic benefits can be realised, such as reducing the cost of climate change in the long term, improving energy security and creating new economic opportunities. Mitigation finance is critical in achieving the long-term goal of limiting global warming to a maximum of 1.5 degrees Celsius above pre-industrial levels.
However, the equally important adaptation finance must not be ignored. Adaptation finance focuses on addressing the effects of climate change that are inevitable, or indeed, already here, such as rising sea levels and more frequent and severe weather events. The challenge of mitigation and adaptation finance is particularly pronounced in southern countries, which are especially vulnerable to the adverse effects of climate change. The financial sector must confront these dual challenges head-on to ensure a sustainable future for all.
To achieve this goal, the sector must overcome the obstacles that make it difficult to access sustainable finance. Incorporating sustainability into investment decision-making is complicated by a lack of clear and consistent standards that are urgently needed to ensure financing options are aligned with the principles of sustainability, allowing investors and borrowers to support sustainable projects while earning a return on investment or offsetting costs.
This guest blog was written for GEFI by David Chollet and Mehdy Abdelhafidh, on behalf of our partners Accuracy.
Investing in Nature-based Solutions in Brazil | Capital for Climate Guest Blog
Brazil represents a huge opportunity for investment into nature-based solutions for climate change (NbS). The global climate challenge demands innovative solutions, and NbS stands tall as a game-changer. By harnessing nature's inherent capacity to sequester carbon and avoid emissions, NbS is a cost-effective and immediate means to mitigate climate change. As industries struggle to become net-zero through their supply chains, NbS is a potent ally. Compared to the staggering $100T financing gap needed for traditional sectors in energy, transportation & industry, NbS requires a fraction of the investment at an estimated $10T.
Brazil contains 5 critical biomes – the Amazon, Cerrado, Mata Atlantica, Caatinga, Pantanal and Pampa – with a total area of 851.4m Ha. Only ~59% of it remains forested. In 2022 Brazil lost 3.23m Ha of natural forest cover, much of it to destructive farming and grazing practices. The effects have been devastating for farmers, the climate, and biodiversity. Brazil’s total degraded land surface amounts to ~140 million Ha.
But here lies the opportunity. Using NbS to restore this land makes Brazil a prime location to store and remove carbon, whilst protecting biodiversity and enhancing livelihoods. With its world-class agricultural sector and sophisticated investment community, Brazil has the potential to become an NbS powerhouse, a leader in regenerative agriculture, agroforestry, sustainable livestock management, restoration of degraded pasture, ecosystem restoration, forest-based bioeconomy and sustainable forest management.
Following the success of Capital for Climate’s (C4C) NBS Investment Summit held in Sao Paulo in April 2023, C4C is hosting two invite-only no-fee investment NbS opportunity roadshows, which the Global Ethical Finance Initiative are supporting:
- A virtual roadshow on September the 28th
- An in-person roadshow in Sao Paulo Brazil the second week of November (in conjunction with a private UNEP Climate Finance Unit convening). This event is invite-only and limited to 20 in-person participants.
Intended for international investors, the roadshows will showcase Brazil’s investment pipeline of leading NbS-focused asset managers, project developers and enterprises. The roadshows are sponsored by the Brazilian NbS Investment Coalition. Its overarching goal is to scale NbS to millions of ha by 2030 and to attract an additional $5bn to the sector in the next two years.
With two years of extensive mapping in Brazil’s NbS investment landscape, C4C has established the Brazil Investment Collaborative – a consortium of top-tier local asset managers committed to scaling NbS. With deep expertise and invaluable connections, C4C acts as a catalyst, bridging the gap between investors and the transformative NbS opportunities in Brazil.
For investors seeking a nature-positive pipeline and valuable connections for deal-making, both Roadshows will showcase Brazil’s NbS-focused fund managers, leading project developers, and NbS enterprises.This includes opportunities for catalytic capital, venture, growth, private debt, and real assets. Attendees will see pipeline across agroforestry, bioeconomy/NTFP, regenerative agriculture, ecosystem restoration, restoration of degraded pastureland, sustainable livestock management, nature tech and more.
The roadshows are available exclusively to institutional investors seeking NbS pipeline. Register here.
This guest blog was written for GEFI by Matthew Portman, on behalf of our partners Capital for Climate.
What does the EU Nature Restoration Law mean for finance?
After some contentious wrangling, last week saw the EU narrowly pass a substantial new regulation for restoring nature, in line with the European Green Deal.
The Nature Restoration Law integrates an overarching restoration goal aimed at the long-term recovery of nature in the EU's land and sea regions, with binding restoration targets for specific habitats and species. Restoration measures mandated by the law will cover 20% of the EU's land and sea areas by 2030, with the ultimate objective of encompassing all ecosystems in need of restoration by 2050.
However, the law has been a subject of criticism as its current form weakened the proposal and delayed its implementation. The amendments to the proposal was influenced by claims (refuted by scientists) from the European People's Party (EPP) and other groups that the nature restoration law would negatively impact the economy and food security.
What does the Nature Restoration Law mean for finance?
Growing awareness of the interconnection between nature, the economy, and finance has led to the recognition of the economic dependence on nature and the services it provides, where nature and its services support over half of the global GDP. Sectors like construction, agriculture, food, and health heavily rely on nature's contributions. However, with approximately 40% of the world's land degrading, the associated economic costs are high. To put it into perspective, soil degradation alone is costing the EU more than EUR 50 billion annually.
There is a crucial case for investment into the preservation and restoration of nature to ensure sustainable economic development and safeguard essential ecosystems and their services. Investing in supporting healthier ecosystems provides numerous benefits, from climate change mitigation to disaster prevention and improved water quality.
According to the European Commission Impact Assessment Report prepared for the regulation, nature restoration efforts also yield a high return on investment, ranging from €8 to €38 for every euro spent, depending on the ecosystem type. The benefits of restoring various ecosystems, such as peatlands, marshlands, forests, heathland, scrub, grasslands, rivers, lakes, and coastal wetlands, are estimated to exceed €1,800 billion, with restoration costs around €150 billion. This showcases the immense potential of investing in nature restoration across various sectors, fostering economic resilience, health, and recreation.
Investing in nature is certainly recognised as an opportunity, with potential benefits of generating up to US$10.1 trillion in annual business value and creating 395 million jobs by 2030 at the global level. To achieve that, the impact assessment report considers private financing options as a principal way of achieving an overall balance of restoration costs to supplement public funding into nature restoration efforts (Annex XII). Therefore, private investment options are likely to feature in the implemented law and, as referenced in the impact assessment report, these options would include green equity, debt, and bonds.
The developments of the Task Force on Nature-related Financial Disclosures (TNFD), due to release a final publication in September 2023, can be seen to accelerate these efforts for providing a framework to identify and report on nature-related risks and dependencies for financial institutions and corporations. The European Union is also fostering initiatives like the Renewed Sustainable Finance Strategy, Green Bond Standard, EU Taxonomy, and Non-financial Reporting Directive to support a sustainable economic recovery.
There are also various schemes and partnerships, like the Nature+ Accelerator Fund, Rewilding Europe, and others, that aim to channel private investments towards biodiversity objectives. In addition, the EU plans to establish a dedicated 'EUR 10 billion natural-capital and circular economy investment initiative' building on InvestEU. The availability of viable investment proposals will be crucial, and support and tools are provided to encourage biodiversity mainstreaming among businesses and financial institutions. For example, a recent green advisory initiative funded by the LIFE program aims to offer technical assistance for green investments to private and public institutions.
The EU aims to mobilize public and private funds to support the objectives of the EU Biodiversity Strategy for 2030 and related initiatives, including the Nature Restoration Law. The report acknowledges that the cost estimates are not exact but highlights the EU's consideration of market-based instruments as a means to finance restoration, maintenance (including compensation), and enabling measures.
The Nature Restoration Law will undergo further scrutiny and refinement before implementation. Therefore, the availability of funds will depend on the priorities and actions of Member States and the EU, and a legally binding instrument is expected to significantly contribute to achieving the restoration objectives.
To learn more about nature and biodiversity in finance, join us in Edinburgh on the 20th September for Ethical Finance Global 2023, where nature is a key theme.
Tesla v Tobacco – the limitations of aggregate ESG scores
In recent months, Tesla’s re-entry onto the S&P Global Sustainability ratings with a score below that of tobacco giants Philip Morris International (PMI) has attracted comment from the carmaker’s outspoken head, leading to reporting in the mainstream press.
The case seems, outwardly, to be a shock. How could the world’s leading electric-only vehicle producer have an ESG score which trails that of a company whose main product is tobacco, responsible for over 8 million annual deaths worldwide? The answer is that these kind of fringe cases are something of an inevitability in using aggregate ESG scores and taking a neoliberal attitude towards the economy.
According to that view, the smoker’s choice to light up is theirs alone, not the moral responsibility of the tobacco company (never mind that 1.2 million of those 8 million annual deaths are from second hand smoke). It is no business of anyone to question the choices of the consumer, merely to try and ensure those wishes are carried out in the least harmful way possible.
PMI has a robust disclosure regime, ranks among the best in its class for the environmental impacts associated with its operation and has performed strongly on labour rights issues and diversity representation and corporate governance. It has a 1.5C target, unique among major tobacco producers, ranks first among its peers for emissions associated with curing tobacco and has better supply chain procedures.
By contrast, Tesla lags behind most of the corporate world in its disclosure regime, has faced numerous allegations of labour rights violations, from discrimination to union-busting, and has concerns over its corporate governance structures and the power afforded its high-profile chief.
The case boils down to a simple philosophical question: is it better to do the wrong thing the right way, or the right thing the wrong way?
There are, of course, solutions to this problem. While many in the finance industry are sceptical of exclusions-based approaches to ESG and responsible finance, they have a long history, from early exclusions of weapons manufacturers by Quaker and Methodist pension funds, to Islamic finance, to the fossil fuel divestment movement.
Each of these approaches says that there are certain activities which should not be supported. There are certain red lines that must be crossed. Are addictive products like tobacco harmful enough to be treated in the way that we treat slavery, or child labour?
Radical Old Idea event on Faith in Finance and Business hosted in London
Speakers including Prof. Atul Shah joined us in London to discuss how ethical codes can be incorporated into financial practice
On 22nd June 2023, we hosted an event in our Radical Old Idea series in London, at Barclays. The event saw speakers from different faith perspectives share their views on how the ethical values and perspectives of their respective traditions can be incorporated into the everyday practice of financial institutions and the corporations they work with.
Welcome
The event began with an introduction to the work of the Canary Wharf Multifaith Chaplaincy from Chaplain Fiona Stewart-Darling, and a summary of GEFI’s Edinburgh Finance Declaration from Graham Burnside.
Presentation: Sustainable and Inclusive Finance
We then saw a presentation from Prof. Atul Shah. He presented the findings from his latest book, Inclusive and Sustainable Finance: Leadership Ethics and Culture. Prof Shah drew upon interviews he conducted with business leaders from his Jain faith and beyond, to describe how the world of finance has opted for a mathematically-oriented mode of business.
Like much of modern Western society, finance operates from a largely utilitarian, rational worldview. Values are explicitly excluded in favour of equations, and a cynical, amoral understanding of the world is promoted.
This intensifies the short-termism endemic to finance, as the longer-term principles of a business are not seen as important, merely its short-term cashflow.
Prof. Shah provided a number of key takeaways to better incorporate values in the commercial world:
- Don’t neglect small family business and enterprise
- Encourage diversity and community through understanding NOT box ticking
- Restore broken faiths and trust: train differently
- Educate leaders to think and act differently true stories help
- Emphasise patient capital NOT fast returns and tech start ups
- Respect savers and individual borrowers
Discussion
After Prof. Shah’s presentation, GEFI’s Omar Shaikh led a discussion and Q&A, bringing in Prof. Iqbal Asaria of the London Institute of Banking and Finance and Martin Palmer of FaithInvest.
Together, they discussed some of the principles behind faith involvement in finance, starting with unpacking the prohibitions that Abrahamic faiths have had on interest over time, and how these have been eroded, maintained and revived.
Originally, most of the faiths saw debt bondage as not only immoral, but a challenge even to the authority of god. Heavily indebted people may not be servants of god, as the faiths thought they should be, but of their debt.
The speakers discussed some of the practical action taken by faiths on climate, focusing on climate-related investment funds set up, but also drilling deeper to undertand how faith perspectives could promote sustainability.
The Abrahamic faiths tend to emphasise a role of stewardship for humanity, while the Dharmic faiths emphasise a conception of oneness among all living creatures and non-violence towards them.
GEFI and DIFC Academy host Path to COP28 Climate Finance Training Series
The 3rd session of the CPD-accredited Climate Finance Training Series, delivered jointly by the DIFC Academy and the Global Ethical Finance Initiative (GEFI), provided finance practitioners with valuable insights into global best practices and frameworks for climate finance and setting Net Zero targets and policies.
Through panel discussions and presentations by industry experts, participants gained a deeper understanding of key initiatives and frameworks, the importance of transition planning, and the role of the Task Force on Climate-related Financial Disclosures (TCFD) in managing climate risks, as well as insights into the tools required for developing, implementing, and measuring climate policies and targets. This blog post summarises the key takeaways from the training series.
Global Best Practice Initiatives and Frameworks
During the panel discussion, Jonathan Keyes of HSBC, Mitch Reznick of Federated Hermes, Satya Tripathi of Global Alliance for a Sustainable Planet, and Eline Sleurink of the Principles for Responsible Investment (PRI) shared their perspectives on best practice initiatives and frameworks. HSBC emphasised the need for organisations to assess and adopt global disclosure and investment frameworks that align with their specific requirements as institutions. Internal standards and frameworks were deemed essential for ensuring best practices within financial institutions. Federated Hermes highlighted the transformative power of frameworks in shaping investments, such as ICMA, Social Bond Principles, and green bond frameworks, which enable quantification, measurement, and target setting for decarbonisation and carbon emissions. The PRI emphasised the significance of supporting signatory investors in navigating frameworks and the motivations behind investor participation, including public commitment, collaborative opportunities, and resource availability.
Developing, implementing, and measuring climate policies and targets
David Sheasby of Martin Currie and Sebastian Frederiks of ING discussed the importance of regional initiatives and the need to approach climate change, biodiversity, and the just transition in a holistic manner. They encouraged organisations not to wait for perfection but to move forward transparently, as the journey is forgiving. Sustainable linked loans were suggested as a way to incentivise the market, setting reasonably challenging targets to fail for the right reasons. The availability of open-source carbon footprint tools was highlighted, offering valuable resources for financial institutions. Additionally, it was mentioned that green loans and green trade finance are relatively easier entry points compared to sustainability-linked finance, particularly for small and medium-sized banks.
The speakers also discussed the challenges and opportunities associated with reducing exposure to the oil sector. While acknowledging the need to transition away from fossil fuels, they emphasised the importance of engaging with the sector to drive change. Investing in the oil and gas industry was seen as an opportunity to influence and promote decarbonisation. However, it was stressed that a credible pathway to decarbonisation must be presented, and carbon emissions should be captured and handled responsibly. Profit should not be the sole focus, but rather be augmented by a focus upon sustainability and responsible business practice.
TCFD and Transition Planning
The TCFD presentation from Brian Henderson of Mercer shed light on the TCFD framework’s role in managing climate change risks. The speakers discussed the resource-intensiveness of TCFD reporting and the transition from voluntary to mandatory reporting. They emphasised the importance of asset owners, managers, and companies embracing the TCFD framework to facilitate and inform the integration of climate risks into decision-making processes.
In his Net Zero transition planning presentation Nick Robins, Professor in Practice for Sustainable Finance at London School of Economics, highlighted the importance of transition planning, using data to design effective net-zero transition plans. Engaging with value chains was identified as a critical stage in the transition planning process, enabling organisations to align their products, services, and policies with climate goals.
The Climate Finance Training Series provided finance practitioners with valuable insights into global best practices and frameworks for climate finance. By adopting frameworks, organisations can drive investments, measure progress, and set meaningful targets. Regional initiatives, sustainable linked loans, and the integration of climate considerations into transition planning were identified as crucial components of effective climate finance strategies. Furthermore, the TCFD framework and engagement with value chains were emphasised as essential in managing climate risks and achieving a successful transition to a sustainable future. The knowledge gained from this training series equips finance professionals to navigate the evolving landscape of climate finance and contribute to global efforts in addressing climate change.
Contact chris@globalethicalfinance.org to discuss how we can help your organisation's COP28 journey.
Path to COP28 Round Table on Islamic Finance hosted by King & Spalding and S&P Global
The Islamic finance industry, valued at nearly $3 trillion globally, has the potential to support climate action through its focus on tangible assets. To explore opportunities in driving action within the sector, the Global Ethical Finance Initiative and the UK Islamic Finance Council convened an Islamic Finance power roundtable, co-hosted by S&P Global and King and Spalding.
With the aim of leveraging Islamic finance to address climate change and promote sustainability, discussions covered topics such as green sukuk opportunities, Islamic financial institution engagement in global initiatives, and approaches to climate finance. This blog post delves into the key insights and findings shared during the roundtable, shedding light on the weaknesses, positives, roadblocks, and potential opportunities for Islamic finance.
Current Observations: Weaknesses in Reporting and Commitments
During the roundtable, participants highlighted several weaknesses in reporting, commitments, and disclosures within the Islamic finance sector when compared to the conventional sector. It was noted that reporting efforts should place greater emphasis on Islamic finance’s role in addressing social issues. By focusing on social impact and sustainability, Islamic finance institutions can strengthen their commitment to the Sustainable Development Goals (SDGs) and align with global sustainability frameworks.
Positives and Roadblocks
Despite the challenges, there were positive developments discussed during the roundtable. Corporate and sovereign sukuk issuance has been on the rise, indicating growing interest and investment in the Islamic finance market. Additionally, initiatives such as green home financing and commitments to the SDGs showcased the industry’s dedication to sustainable practices.
However, several roadblocks were identified. The dominance of petrodollar-based industries in the jurisdictions driving demand for Islamic finance products presented a hurdle for engaging in net-zero commitments. The notion of pre-certification and reluctance to go beyond existing standards also hindered progress, and the combination of Islamic standards and additional ESG requirements posed a double burden. Furthermore, smaller-scale institutions faced difficulties in making commitments due to limited resources and market reach. However, it was observed that despite these challenges, engagement in sustainable practices within the Islamic finance sector is growing steadily.
Opportunities for Islamic Finance
The roundtable discussion explored opportunities for Islamic finance institutions to play a significant role in various areas. Firstly, as long-term investors, Islamic finance institutions are well-positioned to prioritise sustainability and social impact. Therefore, there is an opportunity for conventional finance to learn from Islamic finance’s approach, particularly in establishing social impact funds. However, some participants criticised the sector for falling short of its ideals on social impact, with regards to poverty alleviation and workers’ rights.
Regional infrastructure support was identified as an area requiring attention, with limited bankability of opportunities. The need to translate national synergies into practical action was also emphasised. Additionally, adaptation-driven products were seen as crucial for appealing to Islamic finance and the wider market. Net-zero commitments alone are not sufficient, and a focus on solutions that address climate change impacts is necessary. Islamic financial institutions should also actively pursue the restructuring of financial practices to address the connection between rising national debt and environmentally harmful practices and industries.
Financing and Demand
The roundtable discussion highlighted the evolving landscape of Islamic finance financing and demand. While sustainability-linked sukuk and funds sector products experienced greater demand due to disclosure requirements and investor interest, the demand for green Islamic finance securities still lags behind conventional offerings. This is primarily due to the higher costs associated with Islamic finance and the challenges posed by reporting and standards for small and medium-sized enterprises.
Generational demands were identified as a significant driver for increased fund demand, with millennials leading the way. However, the lack of subsidies in some jurisdictions was deemed unattractive for Islamic finance investments. Nevertheless, the sukuk market was perceived to offer more opportunities compared to traditional banking and lending environments.
The Islamic Finance Roundtable provided valuable insights into the challenges and opportunities facing the Islamic finance industry. While weaknesses in reporting and commitments were acknowledged, positive developments such as increased sukuk issuance and a commitment to the SDGs demonstrated the industry’s potential. Overcoming roadblocks and capitalising on opportunities will require greater engagement, alignment with sustainability frameworks, and the development of adaptation-driven products. By embracing these changes, Islamic finance can position itself as a driving force in promoting sustainability and social impact within the global financial landscape.
Contact chris@globalethicalfinance.org to discuss how we can help your organisation's COP28 journey.
Private Path to COP28 Round Table on the Just Transition held at DIFC
As part of the Path to COP28 campaign, GEFI, in partnership with DIFC, hosted a private Just Transition round table to delve into the various dimensions of a just transition, including finance, energy perspectives, and agriculture.
This blog post provides a summary of the key points discussed during the event, shedding light on the role of finance in achieving a just transition and addressing the transition’s various dimensions, and the challenges, opportunities, and necessary actions required from financial insitutions and governments for achieving an equitable transition.
The Essence of Just Transition
The concept of the just transition can be understood in terms of the intersection of two Sustainable Development Goals (SDGs): SDG 8, which focuses on decent work, and SDG 13, which addresses climate change. A well-managed transition is vital, as it not only ensures the creation of better jobs but also improves health, reduces inequality, and helps avoid climate catastrophes. Conversely, a poorly managed transition can negatively impact workers, communities, and countries, lead to stranded assets, and create political turmoil and opposition to climate action.
Finance and Just Transition
One crucial aspect highlighted during the round table was the necessity for finance to be readily available, accessible, and affordable to support a just transition, as frequently suggested by Dr Sultan Al Jaber, COP28 President-Designate. Currently, private climate finance flows from North to South are still below $10 billion annually, indicating the need for significant increases across sectors (particularly in agriculture) and geographies (notably in the Middle East). Participants stressed the importance of leaders in this market to help drive economic security through green technology to facilitate the transition.
Finance Sector Perspectives and Actions
Within the finance sector, participants emphasised the importance of the just transition. Asset managers play a critical role through policy advocacy, engagement with businesses and capital allocation. Job security was highlighted, and the role of energy companies in facilitating the transition was discussed, emphasising the need for government involvement. Financial institutions can provide green home financing, contributing to the recovery of affected areas. Additionally, community consultation was deemed essential to address the tangible sense of injustice and ensure meaningful dialogue. The round table emphasised several actions for finance, including strategy, engagement, capital allocation, policy advocacy, and impact measurement and disclosure.
Energy Perspectives and Challenges
Energy security emerged as a crucial dimension of the just transition. The development of a hydrogen economy garnered attention, with discussions revolving around the demand for hydrogen exports in the Middle East and the challenges faced in Africa due to a lack of energy experience, as well as the need for off-take agreements. Participants emphasised the need for scaling up investments, highlighting the chicken and egg problem: without scale, costs remain high, impeding investment, and further hindering scale.
The Role of Governments and Measurement
The role of governments in the just transition was a topic of significant interest. Governments can play a crucial role through proactive industrial policy, regulation, and potentially by acting as first-loss capital. The challenge of measuring social impact was acknowledged, and the need for finding effective language to communicate impact to clients was emphasised. The development of a toolkit to bridge gaps in language and metrics between finance and civil society was proposed, facilitating a comprehensive understanding of the social and environmental aspects of the transition.
Additionally, leadership from entities such as the European Union (EU) and the United States was highlighted, citing initiatives like the EU Green Deal and the Inflation Reduction Act. The latter was described as an economically driven program focused on green technologies.
Ensuring a Just Transition
The round table emphasised the importance of anticipatory measures to address and assess social risks and opportunities and to manage the impact of the transition on various stakeholders. Meaningful dialogue and participation from all affected stakeholders, including workers, suppliers, consumers, and communities, were identified as crucial factors. Additionally, the significance of incorporating the just transition into finance sector climate plans, investor stewardship with businesses, and capital allocation toward just transition assets was underlined.
The Just Transition Round Table shed light on the critical aspects of achieving a sustainable and equitable future. It emphasised the need for accessible and affordable finance, the role of energy perspectives, the actions required from the finance sector, and the crucial involvement of governments. By implementing meaningful strategies, engaging stakeholders, and allocating capital effectively, financial institutions can pave the way for a just transition that prioritises decent work, addresses climate change, and fosters a better future for all.
Contact chris@globalethicalfinance.org to discuss how we can help your organisation's COP28 journey.
Path to COP28 Sustainable Finance Summit held at DIFC
On June 7th, 2023, the Global Ethical Finance Initiative (GEFI) and the Dubai International Finance Centre (DIFC) hosted the second Sustainable Finance Summit as part of the Path to COP28 campaign. Building on the success of the previous summit held in February, this event aimed to mobilise private financial flows and accelerate progress towards achieving the Sustainable Development Goals (SDGs) and the objectives of the Paris Agreement.
The Summit provided a platform for practitioners and global leaders to discuss and advance sustainable finance initiatives. Through keynote addresses, panel discussions, and the launch of a report, participants gained valuable insights into climate-aware investing, the just transition, and the finance sector’s contribution to addressing climate change.
Welcoming Remarks and COP28 Update
The summit commenced with welcoming remarks from Amal Larhlid, Partner & ESG Leader for Tax & Legal Services at PwC, who highlighted the importance of finance in achieving ambitious sustainability goals. Alya Al Zarouni, Chief Operating Officer of the Dubai International Financial Centre, and Omar Shaikh, Managing Director of GEFI, emphasised the need for both public and private finance to align with sustainable principles and contribute to the global climate agenda. A video address from HE Amb. Majid Al-Suwaidi, Director-General of COP28, provided an update on the urgent need for action to limit global warming and achieve the goals of the Paris Agreement.
Keynote Addresses
Peter Smith, Managing Director, Head of Strategy, Policy, and Risk at the Dubai Financial Services Authority, delivered a keynote address from a regulator’s perspective on sustainable finance. He emphasised the role of finance in driving the transition to a low-carbon economy and the importance of managing the just transition, which aims to ensure a fair and equitable shift to a sustainable future. Nick Robins, Professor in Practice for Sustainable Finance at the London School of Economics, discussed the financing of the just transition and the positive impacts it can have on job creation, health improvement, and inequality reduction.
Panel Discussion: Countdown to COP28, Climate-Aware Investing
The panel discussion, moderated by Christian Kunz, Chief Strategy, Innovation and Ventures Officer at DIFC, featured speakers from various organisations in the sustainable finance sector. Eline Sleurink from the Principles for Responsible Investment (PRI), David Sheasby from Martin Currie, Sebastien Lieblich from MSCI, and Mitch Reznick from Federated Hermes Ltd. discussed climate-aware investing, stewardship, and the importance of high-quality and transparent data for sustainable investments. They also highlighted the growing presence of the PRI in the Middle East and the potential of COP28 to drive further commitments.
Report Launch: Islamic Finance and the SDGs
Sam Wheldon-Bayes, Research Analyst at GEFI, presented the key findings of a survey on Islamic banking customer perspectives. The survey revealed that a significant majority of respondents consider it important for their banks to provide products aligned with the SDGs, indicating a strong demand for sustainable financial products within the Islamic finance sector. The report emphasised the opportunity for Islamic financial institutions to lead in promoting sustainability, given the alignment of their principles with the SDGs. Find the survey results at https://www.ukifc.com/islamic-finance-global-survey/.
Panel Discussion: How Sustainable Finance Can Help Decarbonise the Real Economy
The panel discussion, moderated by David Chollet from Accuracy, brought together experts from Emirates NBD, Sedco Capital, Mercer, and King & Spalding to discuss sustainable finance’s role in decarbonising the real economy. They highlighted the risks of greenwashing, the role of litigation in preventing it, and the importance of sustainable finance practices globally. The panellists agreed on the investment opportunities available across various sectors, such as renewable energy, reforestation, and green hydrogen. Their expectations for COP28 included a greater focus on fossil fuel solutions, national contribution announcements, and increased involvement of financial institutions in sustainable finance.
Keynote Presentation and Interview: Understanding How to Finance Nature
Satya Tripathi, Secretary General of the Global Alliance for a Sustainable Planet, delivered a keynote presentation on financing nature. He emphasised the need for collaboration and partnerships between the public and private sectors to address climate change effectively. Tripathi highlighted the potential of the private sector, with its innovation and entrepreneurship, to contribute to sustainable finance. In an interview with Amal Larhlid, they discussed the importance of taxonomies, the urgency of addressing the developing world’s vulnerability to climate change, and the availability of funding for sustainable initiatives. Examples of sustainable initiative cases ranging from biodiversity initiatives to low carbon projects from Tripathi’s experience were highlighted for their profitability and impact on achieving climate targets.
Closing Remarks
In her closing remarks, Amal Larhlid reiterated the significance of taking proactive measures in sustainability, stating that “every investment we make in sustainability is an investment in the future of our planet” and encouraging attendees to become active facilitators of change and to continue driving sustainable finance forward.
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GEFI host private Path to COP28 Roundtable on the PRI in Dubai, in partnership with PwC
As part of the Path to COP28 campaign, GEFI, in partnership with PwC, organised a Principles for Responsible Investment (PRI) private roundtable which brought together banks, asset managers, sovereign wealth funds, and regulatory representatives to discuss and share global best practice.
The roundtable represented participants’ commitment to collaboration and sharing knowledge, a core element of accelerating sustainable action. The discussion focused on the barriers preventing local asset managers in the Middle East from engaging with PRI, as well as the opportunities and support that the PRI can provide to investors. Current PRI signatories also discussed their experience and the lessons learned through their journey.
Overview of PRI and Global ESG Trends
Insights of the PRI principles, its 10-year blueprint vision, and global ESG trends were presented. With half of the world’s institutional capital currently signed up to PRI, signatories’ experience with ESG varies, which is why PRI’s guidance is intentionally co-created with their signatories. The PRI has a growing presence in emerging and frontier markets, with a few signatories in the Middle East, who are expected to publish their reports this month.
Active Ownership and PRI Reporting Framework
Another participant, scoring highly on PRI reporting, emphasized that ESG sustainability is an integral part of investment. They highlighted the significance of active ownership through stewardship and engagement, placing responsibility on investors themselves. The reporting framework was recognized as a valuable tool for learning and improvement in strategy, integration, and ownership. Participants acknowledged the resource-intensive nature of reporting but also noted the evolving focus on sustainability outcomes and the increasing importance of TCFD-aligned climate questions.
Barriers to Engagement and Regional Perspectives
Various barriers to engaging with PRI were discussed, including attracting undue criticism of sustainability policies under development, governance management, and the transition from ESG integration to ESG outcomes impact. Participants emphasised the need for appropriate value provision and regional support to contextualise progress. In contrast to financial institutions based in Europe and the US, which joined the PRI as part of the process of developing their responsible investment policies, those in the Middle East – particularly asset owners – saw well-developed responsible investment policies, accountability, and leadership as a prerequisite for signing up. Participants noted that the level of engagement did not yet reflect the desired impact. The implications of early-stage sign-ups without sufficient demand from asset owners and institutional investors for ESG mandates were also explored.
Leveraging Standards and Accelerating Conversations
The evolution of PRI and its potential mismatch with asset owners’ readiness and capabilities were identified as potential barriers. Participants discussed the significance of standards, such as the ISSB, in expanding PRI’s efforts and addressing the challenge of accessing reliable data. They highlighted the importance of leveraging the collective expertise and challenges faced by the numerous signatories to establish common consensus. Additionally, the role of sovereign wealth funds in accelerating responsible investment conversations was emphasized, and the MENA region was seen as having an opportunity to leapfrog the EU through increased collaboration and incentives.
Shariah Compliance and ESG Integration
Shariah-compliant signatories discussed the integration of responsible investment and shariah-compliant investments. Negative screening, transparency, and ethical investing were determined as common denominators, and shariah financial due diligence has helped analyse ESG advantages and reduce risks. The discussion emphasized that ethical investing is not exclusive to any particular group and highlighted the benefits of financial due diligence and ESG analysis in reducing risks for compliant investors. Balancing portfolios based on quality and growth within the constraints of shariah backgrounds was acknowledged as a challenging factor.
The PRI roundtable facilitated an exchange of insights on advancing responsible investments. The discussions covered a wide range of topics, including PRI’s vision, shariah-compliant investments, active ownership, barriers to engagement, and regional perspectives. By leveraging standards, fostering collaboration, and addressing challenges, PRI aims to drive sustainable change and support investors on their responsible investment journey.
