Finance at COP26 JULY 2020 Finance will play a crucial role in the - - PowerPoint PPT Presentation

JULY 2020

Finance at COP26

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Finance will play a crucial role in the transition to net zero, but there is a vast gap, and too much money still flows to carbon-intensive activity

Source: OECD—Financing Climate Futures 2018, UNFCCC Standing Committee on Finance, 2018 Biennial report

Estimated infrastructure investment per year required to meet Paris is $6.9 trillion per year $2.5-3.5T $3.4-4.4T Current global financing Gap $6.9T Required financing Power & Electricity Transport Energy supply chain Water & Sanitation Telecoms Energy demand

$295bn

Renewables investments

$150bn

Renewables subsidies

$742bn

Fossil Fuel Investments

$373bn

Fossil Fuel Subsidies

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Developed countries have contributed most to climate change but the impacts will be felt disproportionately by developing countries

High climate variability Growing season reductions High temperatures during growing season Combination of two or more climate hazard

Source: Carbon Dioxide Information Analysis Center ,Prepared by Philip Thornton, CCAFS, for the Global commission on Adaptation

Developed world represents largest historical contributions to global emissions Climate change will massively impact agriculture, principally in developing countries

China USA Russia 25% UK Germany Japan India France Canada Poland 13% 6% 6% 4% 5% 3% 2% 2% 2% Cumulative CO2 emissions, 1750 -2014

Developed Countries Emerging markets/ developing countries

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Developed countries have committed to providing $100bn per year of climate finance by 2020; demonstrating momentum is essential for sustaining developing countries’ confidence in the UNFCCC process

Source: OECD

27 71 100 28 15 29

Gap Export credits Bilateral public Multilateral public (attributed) Paris commitment Total Mobilised private (attribtued)

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Total progress towards $100bn/year of climate finance ($bn)

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Bilateral donors and existing funds will need to scale their investments and facilitate fund access to meet Paris commitments

10.50 5.50 4.60 3.80 3.50 3.40 2.90 1.60 1.30 ($B) 0.02 1. Development Finance Institutions 2. Commission of the European Communities and the European Development Fund

• 3. Japan Climate commitments include financing for "Clean Coal" and headline funding does not account for differing qualities of finance (e.g. grants vs loans)

Sources: OECD 2016-2017 Climate related development finance database

Top 10 multilateral DFIs1 & institutions Top 10 bilateral donors3 Key Climate Funds

World Bank Group EU institutions2 Asian DB Inter-American DB

• Int. Finance Corp.

EB for Restr. & Dev. European Inv. Bank Asian Infr. Inv. Bank African Dev. Bank GGGI Japan Germany France United Kingdom USA Norway Netherlands Sweden Switzerland Canada Green Climate Fund Global Env. Facility GEF general Least Dev Count. Fund Climate Inv. Funds Clean Technology Fund Strategic Climate Fund Adaptation fund Nordic Dev. Fund

• Int. Fund for Agr. Dev.

7.2 6.7 4.3 1.5 1.3 0.8 0.7 0.6 0.5 0.4 ($B) 1.2 1.0 0.9 0.1 0.6 0.3 0.3 0.5 0.1 0.1 ($B) UK to increase to $3.5bn PA by 2025

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MDBs have committed to aligning finance with Paris, but have not laid out clear plans to this end

Energy-related climate finance($B) Fossil finance ($B) Inter-American development bank African development bank World bank group European bank for reconstruction and development European investment bank Asian development bank

Energy related climate finance vs. fossil finance (2015- 16 average) in MDBs

13.9:1 5.3:1 1.2:1 1.2:1 1.0:1 0.9:1

Green/brown energy ratios for MDBs

Source: E3G—Aligning Development Banks with the Paris Climate Agreement

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Finance for the transition is currently evenly split between public and private, and flows predominantly to mitigation; increased private finance mobilisation is essential to meet goals

56% 60% 54% 40% 2013/2014 46% 44% 2015/2016 2017/2018 365 463 579 Private Finance Public Finance

Source: The Climate Policy Initiative (CPI)—Global Landscape of Climate Finance 2019

Mitigation 37% 56% Adaptation 5% 537 2% Dual Benefits 30 12

Vast majority of finance flows to mitigation rather than adaptation

Total global climate finance, two-year averages 2013-2018 ($bn)

Private Finance needs to represent greater proportion of total finance

Recipient sector, Ø 2017-2018 ($B)

Public finance is essential but not sufficient to meet climate needs Scope for further public finance commitments more limited than private finance To meet the trillions of funding gap to decarbonize the economy, public finance will need to be used effectively to mobilise additional private finance Rebalancing of adaptation/mitigation finance flows essential for negotiations

~50% of UK funding is committed to adaptation

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Capital allocators are increasingly aware of the financial risks posed by climate change, thanks in part to initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD)

Source: TCFD, Recommendations of the Task-Force on Climate-related Financial Disclosures, 2017

Disclose the organization’s governance around climate-related risks and opportunities Disclose the actual and potential impacts of climate-related risks and

• pportunities on the organization’s businesses, strategy, and financial

planning where such information is material Disclose how the organization identifies, assesses, and manages climate-related risks Disclose the metrics and targets used to assess and manage relevant climate- related risks and opportunities where such information is material

TCFD currently has more than 1000 supporters of TCFD from 54 countries Representing a market cap of $16.7T Includes 473 financial firms responsible for $138T in assets under management TCFD mandates reporting across four areas:

Governance Strategy Risk management Metrics and targets

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At a macro level, Central Banks can help speed the transition by including climate scenarios in Bank's stress tests

• The Prudential Regulation Authority in April released a supervisory

statement noting that few firms today are taking a strategic approach considering how actions today affect future financial risks

• The Bank of England will be the first regulator to stress test its major

firms against different climate pathways, including early action, late action and the disastrous Business-as-usual scenario

• The test will show how major financial firms expect to adjust their

business models, and the impact of these responses on the wider economy.

• It will expose those that have prepared, and those that have not, and

results will be share in the second half of 2021

• The Bank of England will share its experiences, and create best

practice to facilitate the refinement of methodologies as other central banks conduct future stress test

• 15 other authorities have committed to run stress tests, with further

expansion of this coalition a key ambition for finance at COP 26

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Awareness of climate risks are changing underlying private finance incentives, with capital costs for renewables projects decreasing steadily

2009 2018 12% 2012 2015 2006 2013 2007 2008 2010 15% 2011 2016 2014 2017 0% 3% 6% 9% Cost of equity Cost of debt (before tax) Cost of debt (after tax) 2006 2008 2016 2014 2010 2012 2018 0% 3% 6% 12% 9% 15%

Changing cost of capital for oil and gas vs. clean energy, %

Drivers of weighted average cost of capital (WACC) for listed energy company

Top oil and gas companies (by production) Top power companies (by renewables ownership) 2018 capital structure: 75% equity/25% debt 2018 capital structure 50% equity/50% debt