Joining the dots of climate finance

Cop29 ended with agreement that wealthier countries will increase the amount they pay developing nations to $300bn a year by 2035. That is three times more than the last “goal” – $100bn a year by 2020 – agreed at Cop15. Confusingly, there is also the “aspiration” of $1.3trn – the figure developing countries had asked to be the goal – by the same year.

The devil is in the detail, so the saying goes, but really the devil prefers blank pages. In other words, it is not clear how these sums will be raised and who will deliver the finance.

A growing number of coalitions of financial actors have highlighted the imperative for a more collaborative global financial architecture. This would bring together the public and private financial sectors from developing and developed countries, including policymakers, supervisors and regulators, credit rating agencies, philanthropy etc.

That “etc.” includes, surely, re/insurers.

It is no secret that re/insurers are brimming with innovations – a recent example is Zurich Insurance Group’s launch of a digital solution to help customers uncover climate risks up to the year 2100. There has also been joined-up-thinking. A fine example of this comes from Aon and the first time ever a single, worldwide, commercial indemnity insurance policy was paid out to the emergency humanitarian costs of disasters. That type of innovation needs to become usual rather than exceptional.

Polluter doesn’t pay

Cop29 was supposed to build on Cop28’s call for a transition away from fossil fuels, but countries failed to reach agreement on what to do with the “global stocktake” and instead kicked that ball into the Brazilian goal of Cop30. The final text of the Cop28 communique had not mentioned gas by name, creating the feelgood but misleading notion that fossil fuels – still 80% of global energy – will not be burned in decades to come.

A fading notion is the “polluter pays principle” but if that mantra were put into action and fossil fuel companies were taxed, it would be possible for public climate finance to be delivered at scale. What’s missing is the political courage to do so. Fun fact: oil and gas producers pocketed more than $280bn in profits in the two years following Russia’s invasion of Ukraine. The polluter does indeed pay, but mostly to its shareholders. And as for the trillions of dollars that went into fossil fuel subsidies, let’s not waste our breath.

Finance is crucial for climate action, but it must not be allowed to create more debt for those least able to pay. With the Earth’s systems creaking as they are, the claim that climate finance is charity is at best delusional and at worst an act of self-harm. The core of funding must be public and grant-based, but at the same time international development banks and financial institutions must be creative. The question is how to attract private sector cash. Some of the answers were to be found at the end of a trail of breadcrumbs that went straight past the auditorium at Cop29 to the rooms along the perimeter.

Initiatives galore

The Net-Zero Export Credit Agencies Alliance’s first target-setting protocol provides guidance to export credit agencies and export-import banks on setting long-term and intermediate science-based climate targets and related disclosures. It could be a model for aligning large-scale financing with the goals of the Paris Agreement.

The United Nations Framework Convention on Climate Change and convened Forum for Insurance Transition to Net Zero launched the first global guide on transition plans for insurance companies. The UN Environment Programme (UNEP) argues insurers – in their triple role as risk managers, risk carriers and investors – play an important role in helping to support a just transition to a resilient net-zero economy.

In the lead-up to Cop29, the Net-Zero Asset Owner Alliance and the Net-Zero Banking Alliance published progress reports demonstrating that financial institutions “continue to join the pioneering groups” and reporting the “advances they are making” in setting science-based targets, publishing transition plans, and by showing increasing portfolio alignment with the Paris Agreement.

The final iteration of the Global Investor Statement on Climate Change was published just ahead of the talks in Baku, with more than 600 institutional investors representing over $30trn in assets under management, asking governments to take action in several areas such as ensuring 2030 and 2035 targets in Nationally Determined Contributions align to limit a global temperature rise to 1.5°C and are submitted to the United Nations Framework Convention on Climate Change by early 2025. This year, more than 30 banks also added their name to the list, “signalling to policymakers that these requests come from financial institutions across the industry and the globe”.

The UNEP Finance Initiative (UNEP FI) helped bring together financial experts from public and private financial communities worldwide, from developed and developing countries, to craft a set of consolidated recommendations as to how countries should design and implement the New Collective Quantified Goal (NCQG) for maximum climate mitigation and adaptation investment and impact, particularly in developing countries and emerging economies.

They said the NCQG needs to play a “catalytic role” in quadrupling climate finance flows over the next two to four years, with a focus on directing resources to developing countries. UNEP FI emphasised the need to leverage public finance to unlock private capital, particularly through concessional financing mechanisms, policy reforms, and systemic interventions that create investment-friendly environments. UNEP FI’s involvement in the NCQG framework “demonstrates its commitment to bridging the gap between public and private finance, as it advocates for policies that enhance financial flows for climate mitigation, adaptation, and resilience”.

The Adaptation and Resilience Investors Collaborative, supported by UNEP FI, showcased strategies for leveraging public finance to unlock private capital for resilience-building initiatives in climate-vulnerable regions. These discussions underscored the importance of “integrating adaptation finance into the broader climate finance framework, ensuring that developing countries have access to the resources needed to build resilience against escalating climate impacts”.

UNEP FI urges a reinforcement of the existing characterisation of climate finance – finance that generates direct positive climate impacts – and Paris-aligned finance – finance that is consistent with countries’ differentiated low greenhouse gas-emission and climate-resilient pathways in the context of sustainable development. That means the establishment of a systematic characterisation of finance, aiming at the sustainable transformation of entire systems.

To that end, UNEP FI is inviting financial stakeholders to help facilitate the “convergence of views” from financial practitioners to promote a whole-of-finance approach to climate action. The climate talks in Baku were dubbed the “finance Cop” but for that to have any meaning, the next round in Belém will need to be the “joining-the-dots Cop”. Re/insurers should help make it so.