Leaders must commit to green finance at COP26 to avoid climate catastrophe

Author: Christoph Nedopil Wang, Fudan University

Greening finance will be front and centre at the 26th Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change this November in Glasgow. The main program features a finance day on 3 November, putting finance ahead of the other seven themed days. But there is a danger that leaders’ hopes for ‘mobilising finance’ in the fight against climate change are over-simplistic and over-optimistic. Leaders risk overpromising and underdelivering.

To improve green finance as a powerful tool for reducing climate emissions and increasing climate change resilience in Asia and beyond, leaders at COP26 must make tough choices. They must decide which commitments they will negotiate within the different workstreams and the leaders’ summit. The risk is that leaders will focus on topics that require lengthy discussions. These discussions may not yield (new) results or may produce underwhelming outcomes, such as global emission trading schemes or finance for developing countries.

While development finance is urgently required across Asia and the Pacific, the topic has become a quagmire consisting of different politically motivated initiatives, such as China’s Belt and Road Initiative, Europe’s Global Connectivity Strategy and the G7’s ‘Build Back Better World’ strategy. For development finance, leaders from developing countries should require their peers from developed countries to deliver on the already promised US$100 billion of annual development finance and green technology transfer. But they should avoid wasting time on possibly minor distribution questions, which risk diverting attention away from the broader issues.

Rather, for COP26, leaders should focus on three green finance priorities. Reaching commitments on these priorities could affect up to 70 per cent of global emissions.

First, leaders should negotiate a commitment that all government spending at home and abroad aligns with the Paris Agreement. Most governments of large economies in the West and in Asia finance more than 45 per cent of their national GDPs through direct government spending, subsidies, state-owned enterprises and public banks. Public finance has an obvious responsibility to lead the way in greening finance.

Phasing out the use of public money to pay for harmful projects, like subsidies for fossil fuel, is complex but should be implemented before 2025. World leaders should agree to more — all public funding and particularly overseas financing through policy banks must become climate neutral. It would be a great outcome to commit public banks to stop funding any new non-climate-aligned projects by 2025 and divest from all non-aligned projects by 2040. By accelerating investments in green technologies, greening public finance may also drive down the cost of green technologies, with massive benefits for emerging economies.

Second, leaders should negotiate a commitment to accelerate green commercial finance and cut greenwashing. Global frameworks are crucial for this. Two areas are particularly relevant: taxonomies and climate disclosure. Both have been discussed for a few years to reduce uncertainty for financial institutions and to create more efficient markets for greening finance — for example, in ASEAN or between China and the European Union.

For COP26, a big challenge will be the transition finance standards that will help firms in polluting industries, like gas companies, receive finance to inch towards carbon neutrality. The debate about whether to develop a transition standard — between the science-based green finance experts who worry about undercutting climate goals and incumbent industries and less developed economies who worry about being ‘phased-out’ too quickly — is heated. At COP26, leaders should develop a common, science-based ‘dirty’ finance taxonomy that signals the need for the immediate phase-out of harmful industries. The middle ground between the dirty and the harmonised green finance taxonomy could be the basis for transition finance.

Addressing the challenge of transparency is necessary to stop often bogus ‘net-zero’ promises and greenwashing. Ideally, leaders at COP26 would agree on a roadmap that requires the application of a standardised climate disclosure framework by 2025, which includes disclosing at least all the emissions necessary to produce a given good or service, including those produced by suppliers.

Third, leaders should negotiate a commitment on green trade finance — the highly complex issue of financing the cross-border flow of goods. One important challenge is to cut financing for illegal activities that lead to climate emissions, such as illegal logging. Yet, the ambitions must be grander: we can no longer ignore the climate impacts of trade in soft commodities such as wheat or palm oil, as well as the trade of tens of millions of tons of meat, with Asian economies quickly increasing their consumption.

The production of meat products alone is responsible for 35 per cent of annual emissions. Global policymakers and financial institutions must acknowledge the climate impacts of such trade and commit to developing standards for green trade financing, for example by committing to reporting on climate emissions from trade finance.

Reaching consensus on these three priorities alone will not achieve the net-zero transition and will only succeed if people whose jobs are at risk are sufficiently supported. Yet, negotiating commitments and quick implementation are crucial given the urgency of accelerating green finance and phasing out dirty finance. By agreeing on tangible commitments at COP26 for greening public finance, world leaders can make ambitious yet achievable progress in the fight against a climate catastrophe in Asia and beyond.

Christoph Nedopil is Associate Professor and Director of the Green Finance & Development Center at Fanhai International School of Finance, Fudan University.

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