COP27 may be over but it is clear from this year’s conference that there is an urgent need to accelerate progress towards meeting climate change goals. How does COP27 affect financial institutions? We set out the key points below.

  • Financial institutions need to achieve net zero without greenwashing. Guidelines published by the UN High Level Expert Group on preventing corporate greenwashing focus on bringing integrity and transparency to net-zero commitments by financial institutions and world governments. They recommend that financial institutions implement a policy of not investing in or financing business linked to deforestation and that they eliminate such business from their portfolios by 2025. The guidelines also concluded that the Glasgow Finance Alliance for Net Zero (GFANZ) – a global coalition of banks, insurers, asset managers and other financial institutions which are committed to facilitating the net zero transition – needs to improve its standards and be prepared to remove poorly performing members if it is to achieve its net zero aims.
  • There were calls for reform of multilateral development banks, including the World Bank. A report by an expert panel convened by the G20 made five recommendations for reform, aimed at increasing the multilateral banks’ lending capacity and freeing up billions of dollars in development finance.
  • Linked to this, there was a strong focus on aiding the flow of climate finance, to support actions addressing climate change, including by the use of innovative financing instruments and by making green finance more affordable:
  • The Network of Central Banks and financial supervisors (NGFS) announced the launch of a Blended Finance Initiative which aims to scale up financing to emerging markets including by utilising innovative financing instruments. The NGFS also aims to provide climate-related data so that financial institutions can better manage their climate risks and account for net zero commitments.
  • COP27 saw the launch of a number of initiatives which aim to assist developing nations in accessing affordable green finance for climate positive initiatives.
  • The Sharm El-Sheikh Guidebook for Just Financing was launched, which is a framework aiming to accelerate flows of climate finance towards developing economies, which encourages stakeholders to use innovative climate finance instruments to build a climate-resilient future.
  • From the UK perspective, Treasury Minister James Cartlidge, in a speech at COP27, set out how innovative new loan agreements will support countries vulnerable to the effects of climate change. He called for all creditors, including international financial institutions, to consider implementing Climate Resilient Debt Clauses, which allow developing nations to defer debt repayments in the event of a severe climate shock or natural disaster.

Comment

There remain significant challenges to the global efforts to curb climate change. However, the commitments of international bodies, financial institutions, and governments at COP27 are positive steps in the right direction. In the UK, greenwashing remains a key area of focus for banks and other financial institutions and it will be interesting to see whether calls for financial institutions to stop financing business with links to environmentally unsound activities like deforestation will translate into any hard-edged measures. There are opportunities for banks also to aid the flow of climate finance through green financing and innovative financing instruments.