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Freshfields Sustainability

| 3 minutes read

Road to COP28: Climate finance - unlocking private capital to beat climate change

At COP28, finance is (once again) at the heart of the policy agenda. COP28 President Dr. Sultan Al Jaber has stated that “transforming climate finance” is one of his four priorities for the COP28 summit. But what does this mean in practice?

In COP terminology, ”climate finance” typically refers to funding provided by developed countries to developing ones to help with climate change mitigation and adaptation. Outside the political sphere, its meaning is somewhat broader, with the UNFCCC defining it as “local, national, or transnational financing—drawn from public, private and alternative sources of financing—that seeks to support mitigation and adaptation actions that will address climate change”. Domestic low carbon investment programmes like the U.S. Inflation Reduction Act and Europe’s REPowerEU are therefore examples of climate finance, as are climate-linked bonds, loans and related sustainable finance instruments.

At COP28, the main climate finance discussion will likely centre on two themes. The first is the mechanism for the “loss and damage” fund to provide financial assistance to vulnerable countries as they deal with the effects of climate change. This fund was agreed at last year’s COP, but without specifying who should pay into it or how much. The second theme is the continuing negotiations on a new climate finance goal, which will need to be agreed by the end of 2024. Back in Copenhagen in 2009, developed countries set a target of mobilising U.S.$100 billion per year from 2020 for climate action in developing countries, but that target has never been met.

Critically, the discussions at COP28 will also focus on unlocking more private capital in the fight against climate change. One way of doing this is improving collaboration between public and private funding sources, where public money can be used as a catalyst to mobilise private capital in so-called “blended finance” transactions.

In the run-up to COP28, there have been calls for multilateral development banks (“MDBs”), such as the World Bank, to be reformed to better help countries affected by climate change, including by mobilising more private money. Research by the Natural Resources Defense Council and the World Resources Institute found that for every dollar of climate finance provided by MDBs in 2021, they only mobilised 25 cents in private capital. This is totally insufficient given the so-called "wall" of private capital waiting to be invested in net zero projects.

MDBs can point to some successes, such as the growing market for “debt-for-nature” swaps, where poorer countries refinance existing debt at lower interest rates thanks to credit enhancements by MDBs in exchange for commitments to invest the savings into conservation or climate efforts. In August, Gabon became the first African country to make use of the instrument. However, blended climate finance still has some way to go. Overall deal volumes in 2022 decreased by more than half compared to the previous year, according to research by NGO Convergence, with the current macroeconomic environment and geopolitical tensions impacting the flow of finance to emerging market and developing economies.

Efforts are underway to create frameworks and best practices to scale blended finance. At COP28, the Network for Greening the Financial System (“NGFS”), a group comprising the world’s major central banks, is due to launch its NGFS Blended Finance Handbook to identify key success factors for a blended finance ecosystem and make policy recommendations to achieve a higher level of institutional investor participation, among other things. 

At the other end of the spectrum, in the world of sustainable or transition finance, which aims to channel private capital to sustainable economic activities, more progress has been made. The evolution of market-based principles in the sustainable bond and loan markets have supported growth in the sustainable finance markets. For example, total issuance volume of sustainable bonds increased by 7% during the first half of 2023 when compared to the same period last year, while overall bond issuance volumes went down, according to Moody’s.

New laws and regulations to improve climate disclosure and combat greenwashing are also moving in the right direction, with California’s new emissions disclosure laws and the EU’s first sustainability reporting standards being published earlier this year, among many other developments. 

But regulatory innovation comes with its own challenges as companies operate in global markets with unique jurisdictional requirements and are accountable to stakeholders such as investors. There is a growing need for interoperablity in sustainability reporting and green taxonomies. This is critical to give investors globally comparable, consistent, decision-useful and auditable information to help with investment and capital allocation decisions and to reduce greenwashing.

One such example is the launch earlier this year of the International Sustainability Standards Board’s inaugural global sustainability standards, which are meant to act as a global baseline for sustainability-related disclosures for capital markets, or the industry consultation currently underway by the Glasgow Financial Alliance for Net Zero on creating more detailed definitions of transition finance strategies. However, more efforts will be needed at COP28 and beyond to provide investors across different markets with robust and comparable disclosure to make their green investment decisions.

Al Jaber hopes that COP28 will “facilitate a holistic conversation about climate finance, to enable a radical increase in ambition”. As the need for significant and sustained progress on climate finance becomes more urgent, the scope of the challenge should not be underestimated.


climate change, economy, financial institutions, sustainable finance, global, private capital