Columbia Threadneedle: COP29 - Will it deliver on climate finance?

Vicki Bakhshi
Director, Responsible Investment

In brief

• The COP29 climate talks have been billed the ‘Finance COP’, as negotiators aim to agree a new global goal for the flow of finance to mitigate and adapt to climate change in developing nations.
• With mitigation and adaptation needs running into hundreds of billions of dollars, and public finances stretched, the expectation is that the private sector will need to deliver much of this necessary ‘climate finance’.
• Here we set out Columbia Threadneedle Investment’s view on some of the key measures governments should consider in order to make climate financing more attractive to investors.

The aims of COP29

The COP29 climate negotiations will take place in Baku, Azerbaijan, from 11-22 November. The headline objective is to agree a new target for the provision of climate finance to developing nations, superseding the goal set in 2009 to deliver $100 billion a year by 2020.

Since that target was agreed, estimates of the scale of finance needed have ballooned, particularly as physical climate risks have hit harder and faster than expected. Estimates vary widely, but one analysis from the Independent High-Level Expert Group on Climate Finance1 suggests that the needs of developing countries (excluding China) are in the region of $2.4 trillion a year by 2030. These finance needs span supporting the clean energy transition; adapting to the changing climate; and compensating loss and damage from mounting extreme weather events.

The talks on this target – the New Collective Quantified Goal on Climate Finance (NCQG) – will focus not only on the overall scale of finance needed, but also on the extent to which the private sector could contribute. The prospects for a major scaleup in public finance transfers from developed to developing countries look extremely challenging, given fiscal conditions. The International Monetary Fund recently estimated that global public debt will exceed $100 trillion for the first time ever by the end of 20242 and many developed nations are being hit by the costs of escalating extremes of weather in their own countries, leaving even less space for overseas funding.

The meeting also comes as countries are finalising their updated Nationally Determined Contributions (NDCs), in the third fiveyear cycle since the 2015 Paris climate agreement. These national climate plans, due to be submitted in early 2025, will for the first time extend the current 2030 timeline to 2035. Negotiators will be discussing both the content and level of ambition of these plans in the Baku talks. Alongside the forwardlooking NDCs, countries are for the first time also required to submit Biennial Transparency Reports (BTRs), which track progress against commitments.

Columbia Threadneedle’s view on the energy transition

We believe that the shift to pivot the global energy system toward cleaner energy sources is reshaping the economy and transforming many industries. Our decades of independent research and engagement with issuers on the topic provides insights into how specific companies and sectors are addressing a range of financially material risks and opportunities related to the energy transition.3

Government policies, such as carbon pricing mechanisms, subsidies and regulation, can play an important role in determining the relative economic viability of different energy technologies, and influence how investors allocate capital. We closely monitor policy developments to understand how they impact key energy-intensive sectors.

However, a lack of supportive, clear and well-designed policies is hampering private sector investments in the energy transition, resulting in a geographically divergent pace of the energy transition. Competing national agendas, and complex and shifting policies, can have benefits for investors able to use their research expertise to see through the uncertainties and identify opportunities; but they create challenges to long-term, large-scale changes in capital flows. As such, to the extent it is possible, investors such as Columbia Threadneedle would benefit from more stable and effective policy frameworks . These allow us to analyse company and sector-level policy implications and integrate them into our investment theses.

What outcomes from COP29 would drive greater flows of transition finance?

There is an opportunity for governments to provide investors with greater transparency and clarity on the long-term direction of climate policies via the new NDCs currently being finalised – particularly given the extension to 2035 and the submission of biennial transparency reports. In these documents we would like to see two key issues addressed:

• How do governments plan for high-level, long-term targets to translate into sector pathways? Investors would value detail on what transition planning is in place for the main highemissions sectors such as electricity, transportation and heavy industry, including levels of ambition and the main policy levers, so we can factor it into our research. NDCs have historically been light on such detail, leaving them less useful to investors.
• What adaptation strategies are in place? With the economic impacts of extreme weather ever more present, we have been focusing research effort on the implications of the changing climate to our investments.4 We see adaptation planning by governments as increasingly important, alongside mitigation measures.

We also see a need for the COP negotiations to acknowledge and address investor concerns about a lack of clear rules on the process, standards and guarantees in some emerging markets for ensuring project implementation. Climate finance needs to be supplemented by policies, regulation and financial frameworks that stimulate investments. However, many emerging countries lack these. High-quality NDCs may be one route to providing greater clarity; there is also scope for a more active role for international organisations such as development banks to help create a more enabling environment for international investment, including through strengthening governance and legal frameworks.

The road to Brazil

The next COP meeting, due to take place in Brazil in 2025, will mark 10 years since the signing of the landmark Paris Agreement, and will take stock of how the new NDCs measure up against the goals agreed by governments back in 2015. Good quality, investor-relevant NDCs will help to pave the trail toward this landmark meeting.