The above image is of Attendees arriving for the opening of the U.N.’s COP28 climate summit in Dubai, United Arab Emirates, November 30, 2023. REUTERS/Amr Alfiky Acquire Licensing Rights
Summary
COP28 adopts new fund to help poor nations with disasters
U.S., Japan, UAE among first to announce new contributions
Countries and oil companies urged to work together
DUBAI, Nov 30 (Reuters) – The U.N. climate summit clinched an early victory Thursday, with delegates adopting a new fund to help poor nations cope with costly climate disasters.
COP28 president Sultan al-Jaber said the decision sent a “positive signal of momentum to the world and to our work here in Dubai.”
In establishing the fund on the first day of the two-week COP28 conference, delegates opened the door for governments to announce contributions.
And several did, kicking off a series of small pledges that countries hoped would build to a substantial sum, including $100 million from the COP28 host United Arab Emirates, another $100 million from Germany, at least $51 million from Britain, $17.5 million from the United States, and $10 million from Japan.
The early breakthrough on the damage fund, which poorer nations had demanded for years, could help grease the wheels for other compromises to be made during the two-week summit.
But some groups were cautious, noting there were still unresolved issues including how the fund would be financed in the future.
“The absence of a defined replenishment cycle raises serious questions about the fund’s long-term sustainability,” said Harjeet Singh, head of global political strategy at Climate Action Network International. “The responsibility now lies with affluent nations to meet their financial obligations in a manner proportionate to their role in the climate crisis.”
Adnan Amin, CEO of the COP28 summit, told Reuters this month the aim was to secure several hundred million U.S. dollars for the climate disaster fund during the event.
Pope Francis, who was forced to cancel his trip to COP28 due to illness, sent a message on social media platform X: “May participants in #COP28 be strategists who focus on the common good and the future of their children, rather than the vested interests of certain countries or businesses. May they demonstrate the nobility of politics and not its shame.”
A ROLE FOR FOSSIL FUELS
Earlier on Thursday, Jaber opened the summit by urging countries and fossil fuel companies to work together to meet global climate goals.
Governments are preparing for marathon negotiations on whether to agree, for the first time, to phase out the world’s use of CO2-emitting coal, oil and gas, the main source of warming emissions.
Jaber, who is also the CEO of the United Arab Emirates’ national oil company ADNOC, aimed to strike a conciliatory tone following months of criticism over his appointment at the head of COP28.
He acknowledged that there were “strong views” about the idea of including language on fossil fuels and renewables in the negotiated text.
“It is essential that no issue is left off the table. And yes, as I have been saying, we must look for ways and ensure the inclusion of the role of fossil fuels,” he said.
He touted his country’s decision to “proactively engage” with fossil fuel companies, and noted that many national oil companies had adopted net-zero targets for 2050.
“I am grateful that they have stepped up to join this game-changing journey,” Jaber said. “But, I must say, it is not enough, and I know that they can do much more.”
Another major task at the summit will be for countries to assess their progress in meeting global climate goals – chiefly the Paris Agreement goal of limiting global warming to well below 2 degrees Celsius (3.6 degrees Fahrenheit).
This process, known as the global stocktake, should yield a high-level plan telling countries what they need to do.
Reporting by Kate Abnett, Valerie Volcovici and Maha El Dahan; Additional reporting by William James and Alvise Armellini; Writing by Katy Daigle; Editing by Matthew Lewis, Miral Fahmy and Christina Fincher
A $18 Trillion Capital Gap Is Threatening the Energy Transition because Bridging this $18 Trillion Gap in Net Zero Capital would require as eleborated on below.
The analysis by BCG’s Center for Energy Impact of global energy sector investment needed through 2030 to reach emissions reduction goals yielded the following key findings:
Capital Challenge. An $18 trillion capital gap exists between current commitments and the investments needed for alignment with net zero goals in 2030. Electricity and end-use sectors account for 90% of that shortfall.
Transition Barriers. Higher inflation and supply chain disruptions over the past 24 months have significantly hindered energy transition progress, stifling momentum and increasing costs.
Investor Behavior. Rising risks drive investors to seek higher returns, favoring businesses that prioritize capital discipline and cost efficiency even in high-growth renewables markets.
Sector Restructuring. Energy sector deals surpassed $320 billion in 2023, as companies optimize capital structures for energy transition investment. Oil and gas companies are leading with acquisitions, while utilities offload more assets to access capital and focus portfolios.
Strategic Adaptation. Companies should emphasize refining capital strategies, boosting efficiency, seeking innovative transactions and collaborations, bolstering financial foundations, and fortifying supply chains. These measures are essential to amplify investments, satisfy shareholders, and move toward net zero outcomes.
Government Role. Policy reforms, subsidies for low-carbon solutions, and expedited project approvals are essential for accelerating investment.
Navigating the path to a 2030 net-zero-aligned scenario reveals a staggering $18 trillion capital gap between current energy transition commitments and the required investment levels. Electricity and end-use sectors account for 90% of that shortfall. (See Exhibit 1.) With companies in the industry poised to drive 80% of planned energy transition investments through 2030, their strategies and execution plans are paramount.
However, their journey is riddled with hurdles. In the present climate, higher inflation, persistent supply chain pressures, and rising capital costs cause significant bottlenecks, slowing the pace of the energy transition. The setting is also reshaping investor behavior; companies face more demanding calls for higher returns, more disciplined capital management, and more efficient resource allocation, even within the high-growth renewables space.
The energy sector’s response has been proactive. A flurry of transaction activities signals a strategic push to fine-tune capital frameworks for the energy transition; so far in 2023, total energy sector deals exceed $320 billion. Oil and gas companies have emerged as dominant buyers, while utilities are using carve-outs to raise funds and recalibrate. As capital markets evolve, only projects that strike the right balance between risk and returns will receive sufficient funding. Regions where stakeholders effectively align policy directives and market mechanisms will be the prime recipients of future investments.
To flourish in the face of growing capital demands, energy companies must reassess portfolios, create innovative capital strategies and new partnerships, optimize their financial structures, and emphasize stringent cost and supply chain efficiencies. This report highlights the sector’s crucial capital allocation dynamics and the implications for competitive success in the energy transition.
Follow the Capital: Tracking the Investment Landscape of the Energy Transition
BCG’s Center for Energy Impact recently analyzed the investment plans of the world’s leading energy companies, governments, and private equity players, to compare real-world energy transition investments with net-zero scenario benchmarks.
The study reveals two major trends. One is that energy companies and governments aim to inject an impressive $19 trillion into the energy transition over the next seven years. This includes nearly $2 trillion in new government spending, spurred by US and European legislative initiatives. Company targets suggest a 15% increase in energy expenditures between 2023 and 2027, with an increasing share allocated to low-carbon investments. (See Exhibit 2.)
Yet the shadows of the war in Ukraine loom large. The repercussions of the conflict, marked by skyrocketing commodity prices in 2022 and 2023, have tightened capital availability, particularly for European utilities—the linchpins of European decarbonization efforts. These financial headwinds, coupled with higher inflation and capital costs, have curbed enthusiasm for new investments.
The Pivotal Role of Policymakers in Accelerating Transition Investment
There is an urgent need for global policymakers to address existing challenges and ensure a fair and efficient shift to low-carbon energy. Energy transition investments are most effective in regions where market structures and policy guidelines align to produce favorable risk-to-reward profiles for capital.
BCG’s Blueprint for the Energy Transition outlines six essential steps for public sector leaders to bridge the investment gap and support the flow of capital into transition projects. These steps include electricity market modifications to produce adequate pricing signals for new investments; faster approval processes for projects, particularly grid expansions; enlarged green investment subsidies through incentives and research grants; and revised liability guidelines to enhance investor confidence.
Strategic Imperatives: Shaping the Energy Transition Through Corporate Action
The energy sector stands out for its intense capital demands, marked by a capital intensity rate that is more than double that of other industries. Accounting for approximately one-third of the world’s yearly capex, it encompasses diverse peer groups, segments, and stakeholder interests. Yet organizations throughout the sector share a mission to amplify investments, satisfy shareholders, and navigate toward net zero outcomes.
To accelerate the energy transition, every company in this sector should treat six actions as mandatory:
Refine capital allocation. Evaluate and enhance current allocation processes to weigh trade-offs between traditional investments and low-carbon alternatives, ensuring a comprehensive approach to decision making. Look for processes that need revamping. In particular, low-carbon investments are much more sensitive to cost-of-capital increases than traditional energy sector investments. Improved cost-of-capital assessments across global portfolios would paint a more detailed picture of favorable assets.
Focus on efficiency. Emphasize cost and capital efficiency in energy transition investments. Such an approach may entail completely transforming the way a company runs major capital projects and operations. For example, companies are evaluating the factory model that has successfully reduced costs in the US shale sector for use in large-scale renewables and other low-carbon settings.
Explore strategic M&A and divestitures. Mergers and acquisitions may work for some companies, while others may benefit from divestments that enable them to concentrate their resources more effectively.
Forge new partnerships. Explore alternative deal structures such as minority shareholdings, joint ventures, strategic partnerships, and corporate venturing. These structures can be complex, but they offer strategic flexibility that is essential for navigating capital constraints in certain areas of the energy sector. They also promote specific collaborations to advance decarbonization efforts.
Strengthen the balance sheet. A volatile market forces companies to adopt robust financial strategies. The disparity in valuations between US oil and gas majors and their European counterparts highlights the importance of financial resilience, as does the surge in total shareholder returns by more debt-averse utilities in 2023.
Stress-test the supply chain. It is crucial to rigorously evaluate supply chains for cost efficiency, carbon intensity, and resilience. Reevaluating supplier relationships and identifying dependencies can cut costs and minimize risks.
The energy transition’s immense capital demands underscore the need for companies and policymakers to adopt robust and innovative approaches. As the world advances toward its net zero goal, harmonizing investment strategies with collaborative solutions is paramount. Although the energy sector is already making strides, consistent policy support and forward-thinking financial maneuvers are crucial to bridging the existing gaps and ensuring an ordered, equitable, and sustainable shift to a greener future.
At the COP27 summit in Sharm El-Sheikh, Egypt, an agreement to establish a loss and damage fund was hailed as a major breakthrough on one of the trickiest topics in the UN climate change negotiations. In an otherwise frustrating conference, this decision in November 2022 acknowledged the help that poorer and low-emitting countries in particular need to deal with the consequences of climate change – and, tentatively, who ought to pay.
This following year has seen more extreme weather records broken. Torrential rains created flooding which swept away an entire city in Libya, while wildfires razed swathes of Canada, Greece and the Hawaiian island of Maui.
As these events become routine worldwide, the case grows for an effective fund that can be set up quickly and help those most vulnerable to climate change. But after a year of talks, the fund has, so far, failed to materialise in the way that developing countries had hoped.
I’m writing a book on UN governance of loss and damage, and have been following the negotiations since 2013. Here’s what happened after the negotiators went home and what to watch out for when they return, this time at COP28 in Dubai.
Big questions
Many questions were raised and left unresolved in Sharm El-Sheikh. Among them: who will pay into this new fund? Where will it sit? Who will have power over it? And who will have access to the funding (and who won’t)?
A transitional committee with 14 developing country members and 10 developed country members was appointed by the UN to debate these questions after COP27. The committee has met regularly over the last year, but at its fourth meeting at the end of October – scheduled as the last session – important questions surrounding the fund, such as who should host and administer it, remained. Discussions broke down without an agreement.
In early November, less than a month before COP28, a hastily arranged fifth meeting presented committee members with a text cobbled together by the two co-chairs from South Africa and Finland as a take-it-or-leave-it agreement. Developing countries agreed to having the fund hosted by the World Bank for an interim period, despite reservations.
Developed countries also objected to the final text. The US wanted to add the adjective “voluntary” to any mention of contributions to the fund. Others argued that the pool of contributors to the fund should be widened to include some developing countries, such as Saudi Arabia, and also private sources of finance. These objections were noted but the text was adopted without them.
These recommendations must now be signed off at COP28, which begins on November 30. With almost 200 countries having to reach agreement on these arrangements and dissatisfaction widespread, the process isn’t likely to be straightforward.
The world’s bank?
Developing countries have been sceptical of the World Bank as a potential host of the fund for several reasons.
Many delegates worry about the bank’s reputation, including the dominance of developed country donors, its emphasis on providing loans rather than grants, and the lack of climate-savviness in the bank’s operations. These concerns are likely to reemerge in Dubai.
The US is the biggest shareholder in the World Bank and traditionally, the bank’s president has been a US citizen nominated by Washington. Small-island developing states (among the most vulnerable to climate change due to sea-level rise) have argued for moving the fund away from a donor-recipient model, with all their usual power imbalances, towards a partnership founded on a shared commitment to protecting the planet.
This will require partial or total reform of the World Bank – and some argue this is already happening under its new president. But hosting the fund within the bank would still give donor countries disproportionate influence, despite recommendations by the transitional committee that the fund’s governing board be composed of a majority of developing country members.
High overhead costs are another concern. One board member of another fund hosted by the World Bank has suggested that the administrative fees the bank charges are rising and absorbing a larger share of aid. This could mean that, for every US$100 billion offered to countries and communities reeling from disaster, the World Bank will keep $US1.5 billion. This will be hard for an institution still funding the climate-wrecking oil and gas industry to justify.
The types of finance made available by the fund will need to be at odds with the bank’s traditional mode of loan financing, by offering grants and other forms of highly concessional lending. Developing countries have consistently argued that loss and damage funding should not increase a developing country’s debt burden.
The agreed text says the loss and damage fund will “invite financial contributions”, with developed countries expected to “take the lead”. Developing countries want developed nations (as the largest historical emitters) to provide funding, but rich nations have pushed back against any notion that they have an obligation to pay.
Rather, while making all the right noises on climate finance, they may gain short-term kudos by simply rebranding existing forms of climate finance or development aid, rather than offering any new money.
The compensation taboo
One thing you’re unlikely to hear at COP28 is “compensation”. While newspaper editors love headlines about reparations, liability and compensation when reporting on loss and damage, and a rise in climate litigation is making governments and polluting companies nervous, this language is still totally absent in discussion of the issue in the negotiations.
In fact, research has shown that mentions of compensation in state submissions to the UN declined dramatically after the establishment of the mechanism on loss and damage in 2013. The fine print of the 2015 Paris Agreement noted that loss and damage was “not a basis for liability or compensation”.
I have noticed a taboo emerging around the term within the COP process. Instead, countries are increasingly opting for language such as “solidarity” as the basis for finance. These word choices show where power lies.
All of this is to sound a note of caution going into COP28. Major agreements on loss and damage have historically not lived up to their promises due to bureaucratic forum-shifting (moving topics to venues outside of the UN Framework Convention on Climate Change), delays, and under-resourcing. The adaptation fund was established in 2001 but only approved its first funding in 2010.
How is the urgent need for support among vulnerable communities and countries going to be met when the pace of progress within the climate change negotiations is glacial at best, and tends to be particularly slow and unambitious on loss and damage finance?
At COP28, making the loss and damage fund real is a litmus test for the legitimacy of the entire climate change negotiation regime.
Don’t have time to read about climate change as much as you’d like?
Climate change puts sovereigns at downgrade risk, is found in a study that simulated the economic impact of climate change on current sovereign credit ratings.
Climate change puts sovereigns at downgrade risk, study finds
By Mark John
The above-featured image is of A man walks past a coal-fired power plant in Shanghai A man walks past a coal-fired power plant in Shanghai, China, October 14, 2021. REUTERS/Aly Song/File Photo
Summary
Rising emissions scenario leads to 59 downgrades
Paris Agreement path would minimise credit impact
Heatwaves already seen damaging global economy
Aug 7 (Reuters) – A global failure to curb carbon emissions will lead to rising debt-servicing costs for 59 nations within the next decade, according to a study that simulated the economic impact of climate change on current sovereign credit ratings.
Among them, China, India, the United States and Canada could expect higher costs as their credit scores fall by two notches under a “climate-adjusted” ratings system, the study published in the Management Science journal on Monday found.
“Our results support the idea that deferring green investments will increase costs of borrowing for nations, which will translate into higher costs of corporate debt,” researcher Patrycja Klusak said of the study led by the University of East Anglia (UEA) and the University of Cambridge.
Rising debt costs would be just one extra facet of the overall economic damage which climate change is already causing. Insurance giant Allianz estimates that recent heatwaves will already have shaved 0.6% points off global output this year.
While ratings agencies acknowledge the vulnerability of economies to climate change, they have so far been cautious in quantifying those risks in their ratings exercises because of uncertainties about the likely extent of the damage.
The UEA/Cambridge study trained artificial intelligence models on S&P Global’s existing ratings and then combined that with climate economic models and S&P’s own natural disaster risk assessments to create new ratings for various climate scenarios.
A downgrade to 59 sovereigns emerged from a so-called RCP 8.5 scenario of emissions that keep rising. By comparison, 48 sovereigns experienced downgrades between January 2020 and February 2021 during the turmoil of the COVID-19 pandemic.
If the planet manages to stick to the goal of the Paris Climate Agreement, with temperatures held under a two-degree rise, sovereign credit ratings would under the simulation see no impact in the short-term and only limited long-term effects.
A worst-case scenario of high emissions through to the end of the century would on the other hand result in higher global debt-servicing costs, rising up to the hundreds of billions of dollars in current money, the model found.
While developing nations with lower credit scores are seen hit hardest by the physical effects of climate change, nations with the highest ranking credit scores were likely to face more severe downgrades simply because they have furthest to fall.
“There are no winners,” Klusak said in an interview.
The findings come as regulators around the world seek to better understand just how much damage to economies and the global financial system to expect from climate change. A European Central Bank paper last year urged greater clarity in how those risks were being built into credit ratings.
S&P Global Ratings has published the environmental, social and governance (ESG) principles used in its credit ratings which include reference to the risk of economic damage from climate change and the costs associated with mitigating it. It declined to comment on the UEA/Cambridge study.
Fitch Ratings pointed to its system of “ESG Relevance Scores” as including factors such as exposure to environment impacts as one component in its assessments.
“These are longstanding and increasingly important rating factors which we continue to weigh in our analysis and publish frequent research and commentary upon,” it said in response to a request for comment.
Reuters Graphics
Writing and reporting by Mark John; Editing by Hugh Lawson
MENA countries need to invest more than $500 Billion in urban regeneration programs to unlock sustainable debt and inclusive economic development
A PRESS RELEASE in Al Bawaba Published on 4 July 2023, covered the need for all MENA countries to invest $500 Billion in their respective urban regeneration programs as per a Strategy& Middle East report, part of the PwC network.
Fady Halim
Countries across the Middle East and North Africa region must integrate environmental, social and governance (ESG) principles into their urban regeneration strategies to build inclusive economic development and preserve cultural heritage, according to the latest research by Strategy& Middle East, part of the PwC network.
The necessity for urban regeneration is seen across the region, with unplanned or so-called ‘informal settlements’ continuing their rapid growth: 40% of the populations of both Cairo and Makkah live in such settlements. Meanwhile, emissions from new construction activity and ongoing building operations represent 37% of energy-related emissions and 34% of global energy demand.
“As recently as 2018, roughly 31 per cent of those in the Arab world living in cities did so in decaying neighborhoods and dwellings. Our analysis shows that it would cost the region US$500 billion to regenerate a sample of 15 densely populated cities – such as in Saudi Arabia, the UAE, Qatar, Egypt, Iraq, Syria, and Jordan. This injection of capital and urban planning has enormous potential to transform the livelihoods of millions of people, directly or indirectly,” said Karim Abdallah, Partner with Strategy& Middle East.
While economic growth delivers social and economic benefits, rapid and unplanned urbanization can create economic, environmental and social issues, from sprawl and decay, to displaced communities and neglected cultural and historical sites.
The Strategy& report points out that several Middle East urban regeneration efforts are already underway, notably Jeddah’s Al Balad district and downtown Sharjah in the UAE. However, these programs must strike a balance between improvement without gentrification, meet housing demands while preserving neighborhood aesthetics, and enhance socio-economic conditions while safeguarding their historical heritage and social fabric.
Unlike traditional development, urban regeneration must not only breathe new life into old districts that helps improve quality of life and economic opportunity, but also be financially viable for the government agencies, developers and financial institutions sponsoring these projects.
An ESG-based strategy therefore can ensure that programs conform to growing demand for ESG compliance from investors and banks while opening up further investment and financing avenues. In 2021 alone, over $1.6 trillion in sustainable debt was issued, with a third of that specifically linked to ESG targets. Additionally, by reviving decaying districts, an ESG-based strategy can also restore much-needed housing stock, commercial space and support with tourism development that many Middle East countries are seeking.
“When linked to ESG principles, urban regeneration acts as a powerful tool to mitigate the common challenges of regeneration. Whether we’re talking about better infrastructure, construction efficiencies or energy efficiency, sustainability is integral to the environmental goal,” commented Charly Nakhoul, Partner with Strategy& Middle East.
Several nations, including Bahrain, Saudi Arabia, and the UAE, have set out net-zero strategies recognizing the significance of preserving the social fabric and engaging with communities to maintain cohesive and healthy societies.
“Urban regeneration is integral to the effective management of the MENA region’s population growth,” said Fady Halim, Partner with Strategy& Middle East. “By implementing a ‘LIFE’ approach, which integrates ESG principles into urban regeneration projects, a variety of sustainability, socio-economic, cultural and quality of life goals can be achieved. These outcomes will have a lasting impact; including providing better life opportunities, fostering thriving communities, and creating financial incentives for continuous urban revival and development,” he added.
For GCC countries to achieve sustainable financing and inclusive socio-economic development, they must embed ESG principles in a series of L-I-F-E phases for urban regeneration. Learn (and listen): Projects must begin with a period of listening and learning from residents, businesspeople, and property owners. Sponsors must understand the area’s socio-economic, cultural, and historical characteristics and the community’s needs. Effective communication among all stakeholders is vital to ensure the project aligns within the context of the overall city. Integrate: ESG principles must be seamlessly integrated into every aspect of the project, from exploratory conversations and planning to design and implementation; and from ongoing operations to managing the assets over the long term. Fix: It is important to fix ESG targets and other key performance indicators that translate the commitment into a tangible, measurable effort. Earn: From these actions; stakeholders earn their rewards. Community members gain a higher quality of life, and the public and private-sector sponsors ultimately benefit from their investments.
For governments across the region, urban regeneration is a social and economic imperative – their national security depends on the maintenance of cohesive societies and empowered individuals. Moreover, urban regeneration projects can only deliver these outcomes if they integrate ESG principles built around transparency, fairness, integrity and inclusion. L-I-F-E phases can provide policymakers and developers with a powerful roadmap to successful regeneration and towards building sustainable urban centers of the future.
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Earth has been used as a building material for at least the last 12,000 years. Ethnographic research into earth being used as an element of Aboriginal architecture in Australia suggests its use probably goes back much further.
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