A whole-of-government commitment to decarbonisation is vital to harness private sector ambition on climate, says Margarita Pirovska, Director of Policy, Principles for Responsible Investment.
We are at a crossroads. Decisions made today will matter for decades in the future. They matter for all of us: governments, the private sector, civil society, and the future generations of leaders and citizens that will live after us. COP28 represents a critical, and perhaps the last opportunity for Parties and non-state actors to deliver on the ambitions of the Paris Agreement to limit global average temperature increase to 1.5°C degrees.
Investors have made pledges towards net zero, they are taking action by engaging with companies, and are increasingly vocal and responsible stewards of the capital they manage. But they cannot do it alone. They need support from policymakers and regulators, they need rules and regulations to steer global economies in an effective, sustainable, and coherent transition to net zero.
Barriers on the road to COP28
Three quarters of the investment needed to maintain us on track for the climate goals will need to come from the private sector, according to the IPCC. But to channel this capital, policymakers need to provide investors with the tools and frameworks they need to steer the capital they manage towards a net zero economy. An effective policy approach should seek to align climate commitments with economic resilience, competitiveness in the face of growing economic turbulence, and the systemic shift to a more sustainable economy better placed to deliver returns well into the future.
Addressing system-level risks and considering climate goals is not only permitted but may be required by existing investor duties and obligations. Research conducted by PRI, UNEP FI and the Generation Foundation, with legal analysis by law firm Freshfields, indicates that many investors have a legal obligation to consider how they can address the drivers of climate-related financial risks, and to consider if and how they can do so by taking action to contribute to improve the climate impacts of investments in line with delivering the Paris Agreement goals.
But this is not widely recognised. The way investors understand and discharge their legal duties in practice can discourage them from pursuing positive sustainability impacts individually and in collaboration with others. Consequently, investment portfolios may remain exposed to sustainability risks from climate change. Reforms are essential to establish legal and regulatory frameworks that support and facilitate investors seeking to contribute to delivering a net zero transition to safeguard the interests of their clients and beneficiaries.
PRI’s work to date underscores the vital role policymakers such as national finance ministers can play, by leveraging political capital to foster reform at the national and multilateral level. As World Bank President Ajay Banga recently put it: we need “a greater appetite for risk, meaningful private sector financing, and […] a sense of urgency” to meet the challenges facing the world.
Clear challenges, solutions needed
All finance and investment policies, strategies, and standards developed at the national and multilateral levels should from now on incorporate climate targets to support sustainable, resilient, and inclusive economies. On a more fundamental level, the very foundations of our multilateral financial architecture are in need of a rethink given the critical future importance of developing economies in meeting future global challenges.
In practice this means governments should implement robust carbon pricing mechanisms to encourage investment in low-carbon innovations and increase the long-term economic attractiveness of sustainable solutions. Key to this is providing predictable price signals, minimising competitive distortions, fostering international cooperation, and delivering on a just transition.
A benchmark to measure the success of COP28 will be the ability to provide clarity for the private sector. Nationally determined contributions (NDCs) for G7 and G20 economies should clearly indicate the pathways towards a collective greenhouse gas emissions reduction of 43% by 2030, and 60% by 2035 (relative to 2019 levels) in order to keep global temperature rise below 1.5C. Relatedly, G20 governments should commit to a clear timeline for the phaseout of all fossil fuel subsidies, hydrocarbon exploration and production, and they should commit to clear objectives for increasing global installed renewables capacity and energy intensity, in line with the IEA Net Zero Emissions by 2050 Scenario.
Finally, considerations of human rights and socio-economic impact should be embedded throughout policy reforms, including minimum work safeguards, labour standards or due diligence requirements. These should be clearly articulated in policy terms in order to provide certainty and clarity for long-term investments.
Building our future together
In short: what is needed is a whole-of-government approach to achieve decarbonisation goals. The science of global warming is clear, and governments need to be equally clear in setting climate change targets.
Meeting the challenge of climate change is beyond the capacity of the public sector alone, but these ambitions can be realised by harnessing the true potential of private investment.
As 200 governments meet, COP28 offers a crucial opportunity to forge a meaningful global public-private partnership for the climate. Let’s not squander this chance.