Finance at COP 27: with investor group GFANZ ending its UN Race to Zero partnership ahead of the conference, what climate action is the finance industry promising at this year’s event?

GFANZ announced it will remove requirements to sign-up for the UN's Race to Zero campaign, instead providing its own voluntary guidelines. With green campaigners warning of ‘watering down’ over climate action, what measures is the finance sector proposing at COP27?

Published

November 14, 2022

Before COP27, Green campaigners warn of ‘watering down’ on climate ambitions

Ahead of COP27, it was announced that more than 550 institutions had signed up to GFANZ (the Glasgow Financial Alliance for Net zero), an additional 100 in the past 12 months. Founded in April 2021, GFANZ, led by former Bank of England Governor Mark Carney, was widely praised at COP26 for its partnership with the UN race to Zero campaign. At the time, the alliance required members to sign up to science-based guidelines to reach net zero emissions by 2050 and set interim targets for 2030. However, according to Investment Week, tensions within the alliance have caused it to remove requirements for its members to sign-up for the UN's Race to Zero campaign after some leading banks pushed back against the more stringent reporting rules and targets required for firms signing up to the Race to Zero initiative. This has resulted in accusations from green campaigners that the group was seeking to water down its climate ambitions and providing cover for investors who continue to support new fossil fuel projects[i]. As an alternative, GFANZ has provided its own set of voluntary goals for members.

Round-up of finance day at COP27

Day 3 of COP27 was scheduled as ‘finance day’, an opportunity to hear how climate action is set to be financed by the government, as well as measures being proposed by those within the financial services sector. Below we look at some of the key stories emerging from the day.

Investor groups update on progress

Alongside GFANZ, several other investor groups shared their progress, including the Net Zero Asset Managers (NZAM) alliance, a sector-specific group within GFANZ which has added 21 new members to reach a total of 291. Fellow GFANZ member Paris Aligned Asset Owners (PAAO) initiative has now reached 57 members, representing over $3.3tn of assets under management. Even though this increase in signatories sends a positive sign about the direction of travel for the finance industry, there is criticism and concern from environmental groups. For example, just last month, British lawmakers were informed by several of the world’s biggest financial firms, including BlackRock Inc. and Vanguard Group Inc, that they have no plans to halt the financing of new fossil-fuel supplies[ii]. The response came as the Environmental Audit Committee of The House of Commons looks at how it can meet net zero obligations; it has said it expects the finance sector “will play a significant role in helping determine whether the UK Government’s carbon budgets and its net zero target are likely to be met,”[iii] A news report from Bloomberg adds that BlackRock has reminded critics that it is “obligated to always act in our clients’ financial best interests,” and that the firm has expressed its overall approach to the energy transition doesn’t include fossil-fuel exclusion policies, as well as that it doesn’t support the International Energy Agency’s net-zero scenario, which calls for no investment in new fossil-fuel supplies[iv].

Further, campaign group Global Witness published its findings that asset managers who form part of GFANZ continue to increase investment in companies accused of driving deforestation. The analysis notes that GFANZ members have acquired an additional ten million shares in Brazilian meat-packing giant JBS since COP26. Veronica Oakeshott, forest campaigns leader at Global Witness, was noted by Investment week as describing GFANZ members' approach towards deforestation as "woefully inadequate". She said: "Protecting forests is essential to tackling the climate crisis, as GFANZ itself recognises. A year on from COP26, GFANZ membership is at risk of becoming little more than a badge to be worn by banks and financiers, who continue to plough money into practices that are destroying our forests."[v]

US announces action on carbon markets

The US climate envoy, John Kerry, revealed plans for a voluntary carbon trading market scheme, the aim of which would be to increase private investment in clean energy projects in developing countries. Dubbed the Energy Transition Accelerator (ETA), the scheme will reportedly be created in partnership with the Rockefeller Foundation and the Bezos Earth Fund to help deliver the trillions of dollars of investment needed to help poorer countries transition to renewables[vi].

John Kerry said that the US wanted to "put the carbon market to work to deploy capital to speed the transition from dirty to clean power, specifically for two purposes: to retire unabated coal-fired power and accelerate renewables"[vii].

Essentially, the United States wants to raise funding from purchasing carbon offsets and use this money to assist with the energy transition in developing nations. According to a press release by the US government, Chile and Nigeria are among the developing countries expressing early interest in exploring the ETA’s potential benefits. Further, Bank of America, Microsoft, PepsiCo, and Standard Chartered Bank have expressed interest in informing the ETA’s development, with decisions on whether to formally participate pending the completion of its design.[viii]

However, environmental groups are concerned that carbon credits could be used as a means for companies to avoid reducing their emissions and to spend their way out of environmental pressure. A further concern is that carbon credits are often generated in low-income countries. Edie.net quoted Navroz Dubash, Professor, Centre for Policy Research, as saying: “'Kerry's announcement may solve a political narrative problem- telling a story about unlocking finance - but is highly unlikely to actually get sufficient, predictable finance moving. At best, the 'Energy Transition Accelerator' will lead to limited, unpredictable flows; at worst, it could undermine the Paris machinery.”'[ix]

Mohamed Adow, director of the think tank Powershift Africa, told the Guardian that it was shameful that the US continued to try to evade paying its fair share towards climate mitigation, adaptation, and loss and damage. He said:

“What we need is robust rules around emissions cuts and a comprehensive climate finance system that forces rich countries to deliver what they’ve promised, not try to find finance down the back of the sofa at the backwaters of the private sector. Private sector finance should be separate from the country’s obligations under the [United Nations Framework Convention on Climate Change].”[x]

The US announcement came a day after the Africa carbon markets initiative was launched by a consortium of African countries, including Kenya, Malawi, Gabon, Nigeria and Togo, alongside carbon credit buyers and financiers. This scheme is intended to produce 300m carbon credits annually by 2030, rising to 1.5bn credits by 2050, which proponents claim will unlock $120bn (£105bn) and 110m jobs by 2050[xi]. This, too, saw criticism with Adow saying: “African carbon credits, bought by corporations in the global north, is a false solution that will create emissions reductions loopholes and won’t deliver the climate finance Africa needs. Paying Africa to allow polluting industries and companies to carry on wrecking the planet is just another type of neo-colonialism.”[xii] The language here is important, with accusations of climate coloniality being levied at COP26 in Glasgow last year, with criticism that voices from those communities on the frontline of the climate crisis were being censored. Farhana Sultana elaborated on the term “climate coloniality” by “pinpointing how hierarchical imbalances of power created during the colonial period are reflected in ongoing forms of neo-colonialism fuelled by global market systems.”[xiii] You can read more here.

UK Export Finance to pause debt service payments for nations hit by natural disasters

Lastly, the UK Export Finance (UKEF) has announced that it plans to introduce mechanisms to offer direct lending to low-income and developing states to help them combat climate change through adaptability and resiliency plans. The UKEF has claimed it will be the first export credit agency to pause debt service payments under climate-based conditions. Treasury Minister, James Cartlidge, was quoted as saying:

“Climate shocks are increasing in frequency and severity which is why we are supporting countries hit hardest. In the wake of a disaster, they face painful trade-offs between rebuilding their communities and making debt repayments. Today is a significant milestone in our work to find innovative solutions to these global challenges, and I am proud that UK Export Finance is the first export credit agency in the world to offer loans which suspend debt service payments for countries hit by climate catastrophes and natural disasters. Building on our COP26 legacy, we are committed to climate-resilient development, as the UK continues to play a leading role in reducing carbon emissions to net zero by 2050.”[xiv]