What happened at Climate Week and why it matters for financiers

In its 15^th edition, Climate Week concluded last week in New York, bringing together thousands of public and private stakeholders from around the world looking for solutions to combat the climate change crisis. The myriad of sessions organized by Climate Group in partnership with the UN General Assembly, as well as during the World Economic Forum’s Sustainable Development Impact Meetings, unfolded during a pivotal juncture. This year marks the midpoint of the United Nations’ 2030 Agenda, and recent progress assessments are deeply alarming: The world is far off track from achieving the Sustainable Development Goals.

Government officials, policy-makers, private organizations, scientists and technology experts, as well as civil society representatives, focused their conversation on two main priority areas, particularly relevant for climate finance:

The success of the net-zero transition depends on the radical reduction of GHG emissions, particularly within the highest emitting countries and industries. The key to unlock the amount of emissions reductions necessary is the large-scale adoption of innovative decarbonization technologies such as hydrogen, sustainable aviation fuels and in some cases carbon capture and storage. However, these technologies are at earlier stages of development and are not readily available to be deployed at commercial scale. Financiers consider these first-of-their-kind projects “not bankable”: The scope and scale require significant upfront investments, but success is not always guaranteed. If a steel company were to decide to re-purpose and re-tool its production processes, integrating hydrogen to produce green steel, the associated cost could amount to millions. At the same time, however, there is little assurance there will be customers willing to pay the green premium of the final green product. Considering this scenario, the risks associated with the project can be exorbitant, and in many cases private investors are not willing to undertake them.

In essence: The market for decarbonization technologies is under-developed. Both supply and demand challenges limit the deployment of capital and the speed at which these technologies are being adopted and scaled.

To solve this challenge, the World Economic Forum in partnership with 13 governments and 86 top global corporations launched the First Movers Coalition, an alliance convening the world’s leading companies who made a total of 112 commitments – resulting in $15 billion in demand – to create a “buyers club” for net-zero-emission products. These companies leverage their purchasing power to create guaranteed early markets for advanced technologies, supporting the adoption of the next generation of emission mitigation solutions for carbon-intensive sectors. Demand signals are one of the most powerful tools to incentivize suppliers, and their combination allows the mitigation of risks associated with net-zero projects, encouraging commercial financiers to invest.

The secret recipe to unlock these deals is addressing the complexities of offtake agreements. Today this challenge represents the biggest hurdle preventing clean hydrogen projects from being financed, for example. The Finance Pillar of the First Movers Coalition is working to identify a framework for bankable offtake agreements, and some early findings indicate that the credibility of project developers, and particularly the parent company, is critical.

The G20 Summit represented an important milestone, with leaders reaching a consensus on the substantial sum required – approximately $5.8-5.9 trillion – for low- and middle-income countries to meet the Paris agreement targets. Though this agreement signifies progress, as does the recognition for the need of debt relief and reform within the Multilateral Development Banks (MDBs), world leaders gathered during Climate Week agreed this is not enough.

In the recent OECD publication Global Outlook on Financing for Sustainable Development 2023, estimates show that the financing gap in developing countries increased by at least 56% in 2020.

Global inflation is not only affecting the capacity of emerging and developing countries to service their debts and secure financing at competitive rates for their net-zero initiatives, but it is also eroding the value of the capital committed so far. Furthermore, emerging economies frequently lack the policy framework and enabling environment necessary to mobilize private capital at scale. Challenges such as transparent project assessments, competitive procurement and the volatility of local currencies continue to hinder these nations' ability to attract commercial capital for their most vital climate projects.

At Climate Week, participants seemed to agree that:

Climate Week served as an important stepping stone towards the 2023 United Nations Climate Change Conference, COP28, scheduled in December in Dubai under the leadership of the UAE government. This year’s conference will place a particular emphasis on the significance of climate finance, seeking to elevate best practices that can mobilize additional sources of public and private capital towards climate solutions.

Financial institutions have an incredibly powerful role to play in driving the climate agenda forward. Finance represents a strong catalyst for change in our economies, channeling capital to create opportunities for innovation, development and economic growth. However, capital will not flow unless financial institutions are able to manage the risks associated with decarbonization opportunities. No actor can do it alone: financiers must work collaboratively with governments and industrial corporations to identify new business models that address these risks, in both developed and emerging economies. This is precisely the collaborations which the World Economic Forum will continue to enable through numerous initiatives such as the Financing the Transition to a Net Zero Future and the First Movers Coalition – stay tuned for more news from COP28.