Climate finance and carbon markets took centre stage at the 2024 UN Climate Conference (COP29), which strongly focused on increasing funding and creating effective carbon-market mechanisms.
Source: Supplied. Ben April, Associate Director: ESG leader for KPMG in Africa.
COP29 was also the first ever “Finance COP,” agreeing to mobilise $300bn of climate finance, falling short of the trillion-dollar annually demanded by developing countries. While no progress was made on fossil-fuel phaseout, COP29 marked a key milestone for operationalising carbon markets.
Although Africa contributes less than 4% of global greenhouse gas emissions, it bears a disproportionate load of the climate crisis. The continent receives just 3 to 4% of global climate finance, although it is home to nine of the 10 countries that are most vulnerable to climate change.
The African Development Bank estimates that African countries alone need at least $277bn annually until 2030 to tackle the climate crisis effectively. Currently, Africa receives just $30bn a year.
COP29 key priorities included ensuring financial support translated into tangible impact and mobilising substantial private-sector investment. Parties agreed on a New Collective Quantified Goal for climate finance to support developing countries in two parts:
- Target $1.3tn climate finance per year to be “enabled” by all countries by 2035. Imposes no obligations, serving instead as a signal to guide investment.
- Pledge $300bn in climate-finance assistance annually from developed countries by 2035 from a wide variety of sources, public and private, bilateral, multilateral, including alternative sources.
Both targets can be met through public and private sources but fall short of the financial needs of vulnerable nations. The New Collective Quantified Goal will replace the previous commitment to provide $100bn per year in climate finance to developing countries by 2020. That earlier goal was met two years late, in 2022, and expires in 2025.
COP29 Africa private-sector implications
An increasing and greater focus than ever before will be placed on the private-sector environmental, social, and governance (ESG) factors to enable African countries to meet their climate objectives and their 2030 UN Sustainable Development Goals. Changing customer preferences, investor requirements and ESG local and global regulations have led to changes in the options available to corporate borrowers in how they raise and use capital.
The point of sustainable finance is that it is designed to reduce the cost of finance for entities that perform well on ESG factors. Integrating ESG criteria into an organisation’s investment decisions means considering these material factors alongside traditional financial metrics when evaluating potential investments.
In this so-called double materiality way, a company is assured of making choices that align with sustainability goals, while still delivering a competitive financial return.
Financial institutions are now required to adapt their investment, lending, or underwriting strategies, as well as their risk-management processes and reporting on non-financial matters. This will allow them to benefit from the growing demand for ESG-focused investment products, and those financing and insurance solutions that support their clients’ transition to a more sustainable approach.
These products include more conventional types, such as green, sustainable and social bonds, loans and equity investments. These products are financial instruments that raise money for projects with positive environmental or social benefits, and sustainability-linked loans.
Innovative solutions
Beyond the more conventional products, the market is poised to adopt more innovative financial solutions, including carbon finance, natural capital solutions, and blended finance.
Carbon Finance, for example, is where businesses can purchase carbon credits – usually generated by projects like renewable energy initiatives or forest conservation - to compensate for their own emissions.With Natural Capital, businesses invest in nature-based solutions, ensuring that biodiversity is protected and that such investments contribute to climate-change mitigation, as they play a vital role in carbon capture.Finally, Blended Finance helps with those projects that struggle to attract traditional investors, who are concerned with both real and perceived risk, or are worried about poor returns for the risk, relative to comparable investments. The blended approach helps to bridge this gap, by obtaining a range of investors, with different risk- and return appetites, to help fund these projects.As sustainable practices gain prominence, integrating ESG factors into investment decision-making has become a pivotal paradigm shift. This is because organisations with firm ESG profiles tend to generate superior risk-adjusted returns over the long term, delivering what could be called ‘sustainable profitability’.
Incorporating ESG factors in this way delivers multiple benefits, such as improving risk management - by identifying potential weaknesses in a company’s operations, supply chain, or governance. Obviously, investing in businesses like these enables investors to profit from the value generated by responsible practices.
Proactively managing ESG risks and opportunities makes an enterprise more likely to succeed over the long term, because they are well-positioned to meet future challenges, and thus to deliver sustainable growth.
Investors, meanwhile, are more aware of their investments’ impact on the world around them, so they wish to invest in companies that align with their values and beliefs, and which also have a positive impact on society and the environment.
The net-zero economy
The world is currently on track for up to 3.1°C of warming by the end of this century, according to the 2024 UN Emissions Gap Report, as global greenhouse-gas emissions and fossil-fuel use continue to rise. Europe's Copernicus Climate Change Service forecasts that 2024 was "virtually certain" to have been the hottest year in human history, and likely to have been the first full year to surpass warming of more than 1.5 °C above pre-industrial levels.
Climate woes are stacking up, with widespread flooding killing thousands across Africa, deadly landslides burying villages in Asia, and drought in South America shrinking rivers. Developed countries have not been spared. Torrential rain triggered floods in Valencia, Spain, last year that left more than 200 dead.
Ultimately, investors have to commit to businesses focused on the net-zero economy, because today’s profits cannot be chosen at the expense of creating tomorrow’s losses. It is thus imperative that financial institutions ensure that their lending and investment activity supports a net-zero carbon economy.
With such an approach, these entities can ensure that climate-related risks and opportunities translate effectively into governance, strategy, risk management, and clear targets to reach a net-zero economy.
With climate risk being integrated into other risk types - including credit, market, operational and funding risks - banks need to offer innovative client solutions, to facilitate the transition to a greener economy.
Expanding sustainable finance
To this end, we are seeing an increase in the number of sustainable finance products servicing the various segments within the financial sector, from asset- and wealth management, through corporate and commercial banking, to investment banking, capital markets, and everyday consumers.
Thanks to this widespread market expansion and adoption, a multitude of sustainable investment options are now available, meaning that the investment landscape can appear daunting.
It is clear that sustainability will continue to be critical factor in determining future investments. Thus, embracing the innovative approaches mentioned above is vital if South Africa aims to position itself to attract the kind of investment required to help the nation accelerate its transition towards a cleaner, more equitable future.
