COP28: Is change on the horizon for banks?

On November 30, the UN Climate Change Conference 2023, also known as COP28, will begin at Expo City in Dubai. This year, the focus is once again on the banking sector.

This year's COP28 is hugely important as the Global Stocktake (GST), a progress report, will be published for the first time. This will describe how well or poorly the world is progressing towards its climate goals in the Paris Agreement. It is already foreseeable that this report will not be positive. For example, the International Energy Agency (IEA) states that global energy-related CO2 emissions increased by 0.9% or 321 million tons in 2022, reaching a new high of over 36.8 gigatons. The energy sector and the use of coal, oil and gas are key drivers here, with the banking sector playing a crucial role in financing. It remains to be seen how the COP countries will react to this report.

Coal

Part of this response will focus on the energy mix. The banking sector will be closely monitoring the outcome of negotiations at country level on the transition pathway for the energy sector with decarbonization targets for coal, oil and gas. The banking industry is firmly in the public eye due to its ongoing financing activities in the area of fossil fuel production and expansion. Increased support from governments to curb demand for fossil fuels would make it easier to cut back on financing. Although some banks have already set their own ambitious targets to suspend the financing of, for example, coal-fired power plants in the future, it is mainly the larger banks that continue to invest in fossil fuels and make high profits. A uniform target, such as the planned phase-down for fossil fuels like coal, could lead to a stronger rethink among financial institutions.

Oil and gas

The topic of oil and gas is particularly explosive, if only because of the venue of the COP. Furthermore, it cannot be ignored that the presidency of the COP is held by Adnoc, the national oil company of the United Arab Emirates, which benefits the oil and gas industry. This inevitably entails conflicts of interest.

The banking sector will pay particular attention to whether and how the oil and gas industry will reduce its CO2 emissions. The oil and gas industry is primarily interested in negotiating a reduction in emissions in the operational area - i.e. Scope 1 & 2 emissions. Although this would lead to lower-emission production, it would hardly restrict demand and production volumes. However, a large proportion (40%) of emissions are attributable to the consumption of oil and gas goods - so-called Scope 3 emissions. Any agreements that do not include these types of emissions would not create incentives for banks to restrict oil and gas-related financing.

It is worth mentioning in this context that, despite the acute threat of climate change from fossil fuels and efforts to curb it, more and more banks are backing away from their ambitious targets and the associated responsibility. For example, four major European banks recently withdrew from the global climate initiative "Science Based Targets" as they want to continue investing in the oil and gas industry.

Environmentally friendly technologies

The outlook for low-carbon technologies is generally more positive. At COP28, not only will there be a greater focus on the global use of clean technologies, but recent reports also show an increase in the use of these technologies over the last three years. The banking sector in particular will continue to focus on promoting low-carbon technologies. Countries such as the United Arab Emirates have already announced plans to triple the capacity of renewable energy sources by 2030. Current talks between the USA and China indicate that multilateral efforts to create economic incentives will be the focus of negotiations. This creates attractive conditions for financial institutions that are already focusing on green assets.

Multilateral Development Banks (MBI) Reform

Another important component of the COP28 agenda is the reorganization of development aid financing. This topic was first discussed in depth at COP27 in Egypt and focused heavily on public financing for adaptation in those markets most affected by climate change. The finance industry has long called for more public support to create an efficient financing system for channeling private funds into green transition projects in developing markets. Unfortunately, the approaches of multilateral development banks today are often too slow to identify regions and sectors in need of financing. The frustration in the current system is also evident in private development finance institutions (DFIs). For example, a consortium of JPMorgan, BlackRock and McKinsey is working on a private DFI to finance the reconstruction of Ukraine, bypassing the inflexible development bank model. A new reform that integrates a unified and improved financing system would greatly facilitate development finance.

Conclusion: COP28 in Dubai is hugely important and can set another milestone for the future. The financial sector has an important role to play and should attach particular importance to this year's climate conference. Decisions and resolutions in the areas of fossil fuels, sustainable technologies and development financing directly influence the investment behavior of customers and thus the strategic orientation of financial institutions. We will keep you up to date. More at www.curentis.com