From ambition to implementation: Connecting capital with climate action

After a rush of net zero commitments ahead of the last UN Climate Conference, the focus at the COP27 summit has shifted to how countries plan to turn their ambitions into action.

Governments from around the world are meeting at Sharm el-Sheikh in Egypt in November to hammer out long-awaited agreements on climate finance and ratchet up commitments to tackle carbon emissions.

“Investment in mitigation but also in adaptation and resilience will have to be massive in order to ensure a just transition that leaves no one behind,” said Christian Deseglise, HSBC's Group Head of Sustainable Infrastructure and Innovation.

Yet government-level commitments are not ambitious enough to avoid the most damaging effects of climate change. The United Nations Environment Programme warned in October that emissions pledges and targets announced so far will likely lead to a global temperature increase of 2.8°C by the end of this century.

Financing remains a sticking point.

Despite stern warnings from the Intergovernmental Panel on Climate Change and signs of extreme weather events such as the devastating floods in Pakistan in 2022, countries are struggling to mobilise the investments needed to meet their emissions targets.

“The physical impacts of climate are hitting very, very hard,” said Sagarika Chatterjee, Finance Lead for the UN High-level Climate Action Champions, speaking at HSBC’s flagship Global Emerging Markets Forum.

"What we need to see is a big shift in the private finance sector, in understanding the physical climate risk impact, and then really working on the innovation that's needed on adaptation."

Pulling together

The private sector is responding to these challenges.

Ahead of last year's COP26 summit, Ms. Chatterjee helped create GFANZ, the Glasgow Financial Alliance for Net Zero, a coalition of financial institutions that have committed to decarbonise their portfolios by 2050.

GFANZ is now pushing to turn those commitments into action by working with the UN High-level Climate Action Champions to connect national climate commitments with private sector financing.

The alliance has called for countries to set ambitious investment roadmaps that are aligned with national targets and independently verified. It also advocates for early involvement for the private sector to ensure that planned investments are deliverable.

“We can't come to things later down the road if we weren't involved in them right at the outset,” said Ms. Chatterjee.

Efforts to connect public and private sector are showing signs of progress. Ahead of COP27, Ms. Chatterjee's team has worked with the UN, UN member states and financiers to identify a portfolio of around 70 high-impact projects that are now getting ready for financing.

These include the African Forest Landscape Restoration Initiative (AFR100), a country-led effort to restore 100 million hectares of deforested and degraded land by 2030¹. Thirty African nations are on board, and the project is now looking for about USD2 billion to put its plans into action.

Egypt, the host of COP27, is also bringing a programme of projects to market, focusing on water, food and energy – the first phase of 26 planned investments under its “NWFE” agenda².

“We have to do more work to crack what financial institutions are going to need before they can even seriously consider these projects, as well as then work with the proponents of the projects to advance them further so that they can be financed,” said Ms. Chatterjee.

There are other examples where the private sector is leading the way. Pollination, a specialist climate change advisory firm, has partnered with HSBC Global Asset Management to launch a series of natural capital funds that aim to deliver returns while protecting nature and addressing climate change³.

A blend of solutions

As governments and business leaders sharpen their focus on financing and implementation, the spotlight is falling on the concept of blended finance – where public and private resources are combined.

Blended finance could help meet the mitigation and adaptation needs of developing countries, but HSBC estimates this currently mobilises just USD9 billion a year – far short of what's required.

Efforts are underway to change this, too.

In Southeast Asia, HSBC and Singapore investor Temasek Holdings have established Pentagreen Capital, a new vehicle focusing on blending commercial and concessional funding to support sustainable infrastructure projects⁴.

The G7 countries are also promoting the use of blended finance to support Just Energy Transition Partnership (JETP) programmes, which combine donations from multiple countries to fund the switch to renewables in developing countries. A USD8.5 billion pilot in South Africa last year has drawn interest from countries including Indonesia and Vietnam⁵.

GFANZ members have welcomed the JETP initiative and other pooled vehicles for concessional capital as a way to build accountability around climate finance and mobilise private capital at scale.

Long-term commitments

Institutional investors have also identified several ways to bridge the gap between private capital and climate initiatives, says Christine Chow, Head of Stewardship at HSBC Asset Management.

This includes direct lending, where long-term asset owners work directly with project sponsors without the use of intermediaries or the public capital markets. This can be especially powerful for smaller projects or companies that are not able to access the public markets.

HSBC Asset Management is also investing venture capital to support early-stage climate tech companies. Chow points to the example of Groundwork BioAg, which has developed a bio-inoculant that significantly increases crop yields and reduces the use of chemical fertiliser, a major source of carbon emissions⁶.

“We've been looking at different kinds of innovations, different methods of engagement, and connecting with different key stakeholders in order to drive change,” said Chow.

And sustainable infrastructure projects can also be a great fit for institutional investors that are seeking to invest over long horizons, Chow added.

"Infrastructure is very much a type of asset class that needs a lot of long-term funding," she said. "And the life insurance industry has been looking for very long duration, high-quality asset classes."

The long horizons involved in the world’s energy transition may also be useful in limiting the impact of current market volatility on the climate investment agenda.

"Despite what is happening in the markets, and with recessions looming or underway in several countries, the fact is that climate - both reducing emissions and adapting to the physical impacts - is going to remain a critical topic for emerging markets and developing countries," said Chatterjee.

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