Plate/GCGC Weekly Newsletter 2/21/2024 - Financing the Transition: Four Trends to Watch in 2024

RMI Says: Four key trends that will shape the climate finance landscape this year. January 4, 2024 - By Elizabeth Harnett, James Mitchell

As we begin the new year, climate finance is riding a wave of momentum resulting from COP28 and a host of announcements, initiatives, and high-profile transactions. Here we outline four key trends to watch in 2024. Transition topics will dominate and proliferate across existing and new areas of the financial system, but there is potential for bumps in the road as the realities of re-wiring the global economy (literally and figuratively) during a period of high interest rates and political uncertainty start to set in.

1. “Transition” everything, everywhere, all at once

Transition plans. Transition finance. Transition metrics. Transition pathways. The list goes on. Transition is the word of the moment. As the financial system shifts towards, and contributes to, a net zero future we need progress across each of these transition topics. However, it will be important to align on definitions and understand how different activities interact with and reinforce progress elsewhere. For example, credible transition planning will be a key enabler of transition finance, which will inevitably require robust transition metrics and pathways. Furthermore, 2024 is likely to be the year where transition narratives accelerate in diverse geographic markets — with Japan, for example, planning to release transition finance bonds, and efforts to scale transition planning and just transition financing opportunities also gaining traction in developed and developing markets alike. We cannot wait for perfection in any of these pieces or places, but delayed progress in one part of the system could hinder the whole. So, we need to transition everything, everywhere, all at once.

2. Public funding commitments increase — but blended finance at scale remains elusive

Blended finance was arguably the star of COP28 in Dubai, but the implementation of the numerous updated pledges and new mechanisms outlined could still be messy.

A group of ten Multi-lateral Development Banks (MDBs) released a joint statement outlining their next steps to accelerate climate finance, and the World Bank committed to spending at least 45 percent of its financing on climate projects, with an additional $9 billion in funding mobilized at COP28. However, these public finance institutions have been historically poor at getting money out of the door, and private markets are still waiting for the public sector to step in and help de-risk critical infrastructure and technologies, so this remains a key space to watch in 2024. The major announcement at COP28 was the United Arab Emirates’ new $30 billion Altérra climate fund. This includes a $5 billion ‘Altérra Transformation Fund’ which could represent an unprecedented infusion of catalytic capital, providing risk-mitigation capital, such as first-loss reserves, to incentivize private climate investment in least-developed countries and small island nations.

3. Policy and regulation dominated by industrial policies and disclosure rules — with deadlines for rule-making and implementation approaching

The long-awaited disclosure rules from the Securities and Exchange Commission (SEC) have once again been delayed until mid-2024. Final rules are expected to improve the quality and quantity of climate reporting, but investors are running out of patience with the highly politicized regulatory process and increasingly demanding this information directly from clients before the final ruling. Elsewhere, we will see disclosure requirements come into force — including transition plan publication requirements in the Philippines, the UK, and potentially via the European Sustainability Reporting Standards (ESRS). While the United States may be lagging Europe in terms of disclosure regulations, the Inflation Reduction Act (IRA) has already begun to show the power of industrial policy to supercharge the energy transition. 2024 will see several IRA grant programs — such as the Greenhouse Gas Reduction Fund — begin distributing ear-marked money to different decarbonization activities and stakeholders, and we expect this to catalyze market actions, particularly in key decarbonization technologies and among local beneficiary communities and hubs.

4. Economic and geopolitical headwinds could slow capital deployment and increase the cost of transition.

The days of cheap money are over. Innovation necessary to spur the energy transition is more expensive because of persistent high interest rates and inflation in many parts of the world. Incumbent firms with strong cash flows, such as fossil fuel companies, are likely to be relatively better off than start-ups and those with high up-front costs such as renewable energy and clean technology companies. One way in which governments could repurpose the end of free money narratives in favor of the energy transition is through redesigning subsidy programs. During COP28, the Netherlands launched an international coalition to phase out fossil fuel subsidies, and this — if successfully implemented on a broad scale — could accelerate and lower the cost of the energy transition, particularly if those subsidies were redirected to support renewable alternatives. Macroeconomic policies are tied to multiple realities — from the post-pandemic recovery, extreme weather and disrupted supply chains, to geopolitical instability in Europe and the Middle East and the upcoming US elections — each of which has an impact on the economic and political expediency of the energy transition. While we appear to be reaching positive tipping points in the deployment of many key technologies for the energy transition, financial institutions pursuing net zero targets will need to navigate some economic and political headwinds in 2024.

Conclusion: The energy transition is happening, but so is climate change. Finance must adapt to these realities.

2023 was the warmest year on record. It is likely that 2024 will be too. The cost of economic disruption from extreme weather is rising. Yet, at RMI we practice “applied hope” because we also see that the energy transition is well underway. By 2030 renewable technology solutions will dominate new sales in electricity, light transport, and low-temperature heat, sectors that make up 70 percent of fossil fuel demand. More than 80 percent of the largest financial institutions in the world have set net zero targets, and green finance flows topped $1 trillion for the first time in 2023. It is our hope and expectation that 2024 can be a catalytic year for transition-related activity in the finance sector, with financial institutions, governments, and corporations all stepping up to contribute to real-economy transition despite potential macroeconomic and geopolitical headwinds.

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