COP28 threw down marker on climate finance, now banks get to play their part
The challenges are many, but banks will put funds where it matters most
As COP28 culminates in Dubai and the international community returns home following 13 intense days of climate talks, we must reflect on the insights gleaned from this conference, which will hold profound implications for businesses and banks.
We witnessed the urgency, challenges, and opportunities of the sustainable transition, gathering valuable insights that extend beyond the financial industry.
The conference illuminated the pressing need for sustainable finance, with estimates indicating a required $4 trillion to $5 trillion annually by 2030 for global clean energy investments, which might be doubled - or even tripled - if we include the requirements of social finance. The financial industry has recognised its responsibility to enable the transition to a more sustainable economy and its unique position to facilitate it.
Financing commitments
One of the key highlights of COP28 is the commitment by the UAE Banks Federation to pledge Dh1 trillion in sustainable financing by 2030, which signals a collective determination in the sector to align with the government's climate ambition.
Mashreq’s remarkable commitment to facilitating Dh110 billion in sustainable finance by 2030, builds on years of sustainable finance deployment, supporting projects like water initiatives in Egypt, the UAE, Qatar, Saudi Arabia and Bahrain.
Another notable achievement at COP28 was the increase in the ‘Loss and Damage’ commitment from an initial $2 million to $420 million. This breakthrough emphasises the impacts of climate change and the vital role of transparent governance in climate finance distribution.
It underscores the importance of clear methodologies for fund distribution, continuous monitoring, and equitable allocation among affected communities, as well as the indispensable role of climate finance as the cornerstone for effective climate action.
The challenges
Despite clear commitments to sustainable finance, challenges persist.
The need for a disruptive approach and innovative financial products to expedite climate action is evident. Obstacles such as regulatory uncertainty, unproven business models, inadequate project pipelines, and the need for business process restructuring pose key challenges in 2024.
Varying regulations across regions further complicate global institutions' adaptation of lending policies and business practices.
Redefining public-private partnerships (PPP 2.0) is crucial as the absence of a taxonomy for ‘green’ and ‘social’ initiatives hinders the materialisation of subsidies, incentives, and tax rebates for such projects in the economic ecosystem.
Globally, embedding climate-risk factors into decision-making processes is a key challenge. Financial stress testing exercises initiated by some regulators evaluate their influence on interest rates, insurance, and investment decisions.
This evolving regulatory landscape globally is part of the financial and regulatory taxonomy, marking the beginning of the learning journey to converge ESG-related risks into opportunities.
Addressing data collection
When discussing how to reduce emissions, specifically Scope 3 emissions, the availability and tools for data collection arises as a key challenge. The commitment around it requires a big learning curve and a joint approach for banks, clients and even government.
Recognising the paramount need for data collection, especially under today’s non-obligatory regulations, is essential. Adopting the term of ‘ESG KYC (Know Your Customer)’, this allows for the establishment of a monitoring system and the collected data can offer foresight, influencing strategic investments and contribute significantly to achieving Sustainable Development Goals (SDGs).
Moreover, it can impact local policies, regulations, and Nationally Determined Contributions (NDCs) - the core of the Paris Agreement. Accurate data is imperative for realising the objectives of emission reduction and climate change adaptation, ensuring the implementation of a realistic futuristic roadmap with predefined targets.
In a few years, it is expected that collecting data to calculate climate risk will become part of the regulation landscape. Some regulators are already incorporating these questions into their principles and regulations, aligning with the commitment of countries outlined in the Nationally Determined Contributions (NDCs).
The new year presents an opportunity for banks to address these challenges through collaborative advocacy. By forging partnerships with industry peers as well as with governments and regulators, the banking sector can advocate for consistent regulatory frameworks that will shape an environment conducive to sustainable finance in what could evolve into an ESG & Sustainable Finance Ecosystem Accelerator.
Social finance
COP28 provided a platform to discuss the intersection of finance and the UN’s Sustainable Development Goals (SDGs). As businesses and banks, particularly in the Middle East, navigate the landscape of social finance, it becomes evident that collaboration between the public and private sectors is essential.
The regulatory authority and policy influence held by public institutions play a pivotal role in fostering an enabling environment for social finance to thrive.
Inclusive financial products and services tailored to the specific needs of underserved communities can be a powerful driver for societal progress. Banks can contribute to sustainable development by embracing partnerships, collaboration, and cross-sectoral cooperation, echoing the sentiment that projects involving both sectors maximise social value.
One noteworthy example of innovative financial instruments fostering social impact is the concept of Social Impact Bonds (SIBs) in the UK. These bonds represent a financial mechanism where private investors provide upfront capital for social programmes, and the government only repays them if predefined social outcomes are achieved.
This approach aligns financial incentives with social objectives, encouraging efficiency and effectiveness in addressing societal challenges.
Introducing a new label for society enablement within financial products underscores a commitment to reducing the reliance on subsidies. This shift in perspective emphasises the proactive role of financial institutions in promoting social well-being while encouraging financial sustainability.
Youth focus
When it comes to encouraging youth to develop sustainable financial habits, banks have a unique opportunity to support Generation Z, the newest members of the workforce who face distinct challenges.
Banks can play a crucial role in helping them achieve personal success and build resilient financial futures by offering tailored products supporting financial literacy for younger generations through partnerships with educational institutions.
To leverage this opportunity, banks can create a comprehensive life solutions ecosystem, offering financial and non-financial products and services tailored to the real-time needs of the youth. Initiatives focused on personalised experiences, including mortgages, investment products, savings schemes, and other services, can assist Gen Z in setting financial goals and cultivating sustainable financial habits.
Looking ahead
The role of banks in shaping a sustainable future becomes paramount as ever. With a new year, there is an opportunity for the banking sector to make further progress in sustainable finance efforts, enable climate action, and raise awareness of environmental causes by empowering individuals and corporations to make informed and climate-conscious decisions, in turn supporting their own sustainable transition journeys.
This involves consolidating information to help individuals and businesses understand the environmental impact of their choices, from utilities to real estate, fostering a mindset shift toward sustainability.
As practice shows, patchwork measures are unlikely to yield long-term results. To make tangible progress on climate banking, financial institutions must focus on embedding ESG into their banking practices, investment processes, and culture.
This includes upskilling their lending teams and training their staff on key ESG considerations in investing, from supply chain to corporate resource management strategies. As a result, forward-thinking banks are acting now to integrate ESG data into their credit risk models and upskill their staff in lending practices.
COP28 has provided invaluable insights into the challenges and opportunities within the banking sector in driving the sustainable transition. As businesses and banks navigate this landscape, the lessons learned from COP28 emphasise the need for the financial sector to embrace its role as facilitator of capital flows towards the projects that will shape a more sustainable and resilient future.