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As nations worldwide gear up for the upcoming UN Cop 29 climate summit, the discussion is increasingly focused on involving the private sector to reach the new financial goals essential for the energy transition. Investors, in response, are urging governments to enhance their policy ambitions for facilitating substantial investments. At Cop 29, parties are expected to finalize the new collective quantified goal (NCQG), with developed nations advocating for the inclusion of private finance within a “multi-layered goal.”
According to the International Energy Agency (IEA), approximately $1.9 trillion per year is currently directed toward clean energy investments. However, this figure must more than double by 2030 to achieve net-zero emissions by 2050. The Institute of International Finance (IFF) highlights the need for governments to establish conducive environments to mobilize private capital effectively. This sentiment is reinforced by more than 500 institutional investors who manage a combined $29 trillion in assets, along with 100 chief executives representing $4 trillion in revenues. They have collectively called on governments to enhance their nationally determined contributions to provide the transparency businesses require for investment.
The investors are also advocating for economy-wide and sectoral policies, along with mechanisms to mitigate risks and remove barriers such as lengthy permitting processes for renewables. Bertrand Millot, head of sustainability at pension fund CDPQ, underscores the importance of stable policy environments in facilitating private finance flows into green industrial technologies. “We are prepared to finance, but we need a stable policy environment for that,” he states.
In the United States and the European Union, initiatives such as the Inflation Reduction Act and REPowerEU have played pivotal roles in unlocking private financial flows, despite some investors encountering challenges navigating EU regulations. “It’s not just about policies setting carbon emission limits or incentives, but an industrial policy designed to create quality jobs,” explains Kirsten Spalding, vice-president of non-profit group Ceres.
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However, some debt-laden developing economies face budgetary constraints and are often viewed as high-risk investments. “That’s where developed nations and multilateral development banks (MDBs) need to step up with blended finance solutions,” says Ben Way, head of Macquarie Asset Management Group. According to a high-level expert group on climate finance, these expanding economies, excluding China, will require at least $1 trillion annually in private capital by 2030 to meet their climate and development objectives.
MDBs play a crucial role in mitigating investment risks and leveraging private finance, although the reform of global governance institutions is progressing at a sluggish pace. While the World Bank and International Monetary Fund (IMF) have initiated some changes, more efforts are needed, as highlighted by UNFCCC chief Simon Stiell. He also emphasizes the importance of honesty concerning the private sector’s role in climate finance.
According to Heather McKay, senior policy adviser at think-tank E3G, one of the primary barriers to scaling up private investments is ensuring that public finance is effectively used to mitigate risks in new areas. National transition planning and country platforms, building on Just Energy Transition Partnerships where governments strive to offer long-term policy clarity, could gain momentum at venues like the G20 or Cop 29, thereby enhancing investor confidence.
Another obstacle is the fact that numerous projects in developing nations are not yet ready for investment. MDBs can collaborate with these countries to unlock potential projects and support investments in energy transition sectors. Hans Peter Lankes, managing director of think-tank ODI, notes that institutional investors often hesitate to invest in developing economies due to regulatory concerns, such as Basel III, and entrenched habits, leaving significant gaps to be addressed.
As delegates congregate to discuss and strategize at Cop 29, the focus will undoubtedly be on creating a conducive financial ecosystem to spur the energy transition. Only with concerted efforts from both the public and private sectors can the world hope to mitigate the pressing challenges presented by climate change and achieve the ambitious targets set for the coming decades.
