Hello from Dubai’s sun-baked Expo City, where the United Arab Emirates’ leader Sheikh Mohammed bin Zayed al-Nahyan has just announced that his nation will put $30bn into a new fund that will invest in “global climate solutions”.
FT subscribers knew that already, after yesterday’s scoop with all the details by Aime Williams and other colleagues.
The UAE’s new fund is a useful contribution to the vast amounts of green investment that are needed globally.
But its announcement today also throws the big COP28 news from yesterday — the first pledges to a new climate loss and damage assistance fund for developing nations — into sharp relief.
The UAE’s $100mn commitment to the loss and damage fund was just one 300th of the green investment sum that it revealed today. Yet that was still enough for it to tie with Germany as the most generous contributor in yesterday’s announcement, far ahead of other developed countries.
As I discuss below, rich-world governments have a massive amount more work to do if they are serious about helping other nations cope with climate disasters. — Simon Mundy
COP28 in brief
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A new report, commissioned by the COP27 and COP28 leadership, warned that global climate finance — even after tripling over the past decade — is still falling way short of what’s needed to fulfil the Paris agreement.
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Indian foreign minister Vinay Mohan Kwatra stressed that coal was “an important part of India’s energy mix”, hours ahead of Prime Minister Narendra Modi’s arrival at COP28.
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The UK announced £465mn in funding for global forest protection, part of a wider £887.8mn green finance package to be announced at COP28.
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Germany will stand by all its existing climate finance commitments despite a budget crisis, said foreign minister Annalena Baerbock.
‘Clearly inadequate’: loss and damage pledges are just a start
It only took 28 years.
Since the very first COP climate summit, held in Berlin in 1995, vulnerable developing nations have pushed for a funding mechanism to compensate them for loss and damage caused by climate disasters.
The logic for such a fund seems unarguable, given the disproportionate responsibility that developed nations bear for climate change, and the disproportionately heavy toll it takes on poorer ones.
Yesterday at COP28, a basic agreement on the key features of a global loss and damage fund was finally reached by member states, with several nations collectively pledging an initial total of $420mn to get it going.
The deal is a significant step forward, and was greeted with a standing ovation by delegates here at the sprawling conference venue in Dubai. But the discussions leading up to it have showcased some troubling features of the climate finance debate — and yesterday’s announcement still leaves some key questions unanswered.
Let’s start with the money. The United Arab Emirates made the joint-biggest pledge of any nation, at $100mn. This might not seem surprising. As the host nation, the UAE has an interest in COP28 producing headlines containing big numbers, and is particularly hungry for an image boost after intense criticism of its plans to increase oil and gas output.
But the UAE’s move has set an important precedent. So far, the terms of engagement around international climate finance have been set largely by definitions of “developed” and “developing” economies that were agreed in the 1990s.
Contributions towards international climate finance have been expected primarily of the 38 countries that were defined as “developed” three decades ago. The UAE is not among them. By agreeing to contribute to this loss and damage fund, the UAE is strengthening pressure on other large economies not among those 38, such as China and Saudi Arabia, to do the same.
That will please wealthy nations who have been pushing for contributions from a wide range of sources. But they have much further to go if they are to pull their own weight. The US in particular has been a notably unenthusiastic — arguably obstructive — participant in these talks, leery of anything that smells even slightly like mandatory reparations. In pre-COP negotiations last month, it formally objected to a clause in a draft agreement that “urge[d]” developed nations to contribute to the fund, complaining that this language was too strong.
Yesterday, the US allowed that wording to stand. Yet its financial contribution to the fund was meagre: just $17.5mn. “The amount announced by the US is embarrassing,” said Mohamed Adow, director of Nairobi-based think-tank Power Shift Africa, warning that all the initial funding pledges were “clearly inadequate”.
Germany matched the UAE’s pledge of $100mn, with other EU nations committing a further $145mn. The UK promised $50mn, and Japan $10mn.
These sums are orders of magnitude below what’s required. Avinash Persaud, the influential climate envoy of Barbados, estimates that climate-related loss and damage costs already exceed $150bn each year. Other estimates are even higher. Last year’s floods in Pakistan alone caused loss and damage worth $30bn, according to its government.
Optimists will argue that yesterday’s agreement is far better than nothing, and that this should be regarded as seed capital ahead of far larger sums to follow. But no one has yet made clear how these initial hundreds of millions will lead to the hundreds of billions that are needed.
Another thorny area of argument was over the running of the fund. The US and other advanced economies wanted it to be housed within the World Bank, whose head is in effect appointed by the US president. Developing countries worried that this would give the US and its allies too much influence over the new fund, and called for a wholly new institution to be set up instead.
The doubts over whether the World Bank is the right home for a fund of this sort are justified. As the institution’s head Ajay Banga pointed out in a speech just last month, “currently, a World Bank project takes 27 months — on average — before a single dollar gets out the door”. That kind of delay is bad enough for long-term infrastructure projects; unacceptable when it comes to financing responses to natural disasters.
A compromise has been reached: the new fund will be set up and run under the World Bank for an initial period of four years. This looks sensible, considering the precedent of the Green Climate Fund (set up to finance climate change mitigation and adaptation projects), which took years to get going. This arrangement should make the new fund’s establishment smoother and faster, without necessarily locking it into the World Bank on a permanent basis.
That the loss and damage agenda has got this far is thanks in part to Saleemul Huq, a prominent Bangladeshi academic who was a leading thinker in this area for decades. Huq died last month aged 71, prompting a wave of plaudits from across the climate finance space and beyond.
In one of his final articles, Huq warned: “As far as I am concerned, if all you can say at the end of COP28 is that ‘progress’ has been made on the issue of funding loss and damage, that will be the kiss of death.” Nations — particularly developed ones — must now build on yesterday’s announcement to make clear how this new fund will be equipped to make a real impact. (Simon Mundy)
Quote of the day
“Unless we rapidly repair and restore nature’s economy, based on harmony and balance, which is our ultimate sustainer, our own economy and survivability will be imperilled.”
— The UK’s King Charles III, in a keynote address to COP28
Beyond COP28: ESG fund flows show a mixed picture
Despite a challenging macro environment for environmental, social and governance (ESG) investing, dedicated ESG believers have reasons to be hopeful in 2024, despite a US presidential election that is expected to extend headline risks for the sector.
In the third quarter of 2023, the MSCI World Socially Responsible Investing index dropped 4 per cent, underperforming the broader market by more than a percentage point, according to a Morgan Stanley report this month. But the MSCI SRI’s performance for the year through the third quarter outperformed broader markets, the Wall Street bank said.
And investors have not given up on ESG. Sustainable funds globally received $13.7bn in the third quarter, according to Morningstar. That compares with the net outflows for the broader fund universe. And despite the challenging macro backdrop, European sustainable funds hauled in $15.3bn net new money in the third quarter.
Notably, ESG bond funds drew cash inflows of $26.7bn in the first nine months of 2023, according to Bank of America. In September alone, ESG bond funds raked in $2.3bn, which contrasts with outflows of $6bn from non-ESG bond funds, the bank said, adding that ESG bond funds were now 12 per cent of all bond funds, up from 10.6 per cent at the end of 2022.
“There is still a strong appetite for ESG investments in Europe and that’s reflected in the flows,” Hortense Bioy, head of sustainability research at Morningstar, told me. “We expect to see continued inflows into ESG funds, globally, mainly driven by Europe, which is the largest and most diverse ESG fund market.”
But in the US, ESG faces a tougher environment. “Outflows in the US could continue” in 2024, Bioy said. “The ESG backlash could last until the presidential election in November 2024.”
In the US, investors pulled $2.7bn from sustainable funds in the third quarter, according to Morningstar. It marked the fourth-consecutive quarter of net outflows.
Republicans clearly scored some wins against ESG investing in 2023. But it remains to be seen whether core Republican voters care enough about ESG for the politicians to continue punching it. (Patrick Temple-West)
Smart read
Delegates in Dubai need to pay more attention to fossil fuel subsidies, “the polluting elephant in the COP28 room”, argues Gillian Tett.
Read the full article here