This year's Conference of the Parties to The U.N. Framework Convention on Climate Change (COP29) prioritized negotiations on a new climate finance goal and carbon markets. The agreement reached at COP translates into a tripling (in nominal terms) of the previous climate finance goal. S&P Global Ratings considers this to be an important step toward the development of functional global carbon markets, while ensuring that sustainable finance remains in focus.

Why it matters:   Developing countries, among the most exposed to physical climate risk, could become larger emitters unless their development and efforts to eradicate poverty are low carbon and climate resilient. Failure to address their growing climate transition and adaptation investment needs could heighten long-term economic and social risks locally and globally.

What we think and why:   COP decisions provide a direction and steer momentum in policy action. But full implementation stills depends on individual countries' commitment and capacity to deliver. The significant increase in funding goals, alongside emphasis on private-sector involvement, could spur a steady increase in overall climate finance.

Yet current geopolitical uncertainties and strategy shifts within countries could affect execution. Overall, we believe governments' near-term policies still fall short of steering sufficient capital toward climate-resilient development.

Our Five Takeaways

1. Amid estimates that climate finance needs in nationally determined contributions (NDCs) total $455 billion-$584 billion per year, the previous collective goal of $100 billion annually was tripled.   Public and private-sector funding of $300 billion annually by 2035, while a significant increase, is still insufficient to fully address developing countries' investment needs. Some developing countries with high incomes and robust capital markets have seen a rise in sustainable debt issuance, including in local currencies. But lower-income countries are still struggling to obtain climate financing that doesn't also inflate their debt.

Broader mobilization of funding from all stakeholders and effective cooperation will be needed to address the climate finance gap. This explains COP29's broader investment target of $1.3 trillion a year by 2035. The new goal calls for investors and multilateral development banks to consider increasing their risk appetites when it comes to climate finance, given the urgency to address climate change, sustainable development, and poverty.

Blended finance and other innovative sustainable finance structures, such as first-loss and foreign exchange risk instruments, alongside guarantees and local currency financing, can help derisk investments. We see, for example, the Climate Investment Fund Capital Markets Mechanism's listing of its bond issuance program earlier this month--the first from a donor multilateral trust fund for climate finance--which aims to attract private-sector investments. This could serve as a model for other climate funds to issue investment-grade debt. Stock exchanges setting up green equity designations could channel more non-debt investments toward climate projects.

2. Expect more, higher-quality transactions in the carbon market.   Carbon market rules (covered in Article 6 of the Paris Agreement) agreed at COP29 forge the way for a fully operative global system. The agreed rules could unlock more demand for annually traded credits, including in developing countries, at a time when controversies in voluntary carbon markets have subdued demand. They include Article 6.2, governing bilateral country-level trading to help achieve NDCs, and Article 6.4, which establishes an international carbon credit market.

Although some details are still to be resolved, the agreements reached in Baku could spur new projects generating carbon credits that can be traded to meet carbon-reduction targets. This includes mandatory preapproval checks, verification processes, and reporting. As of Nov. 7, 2024, 91 bilateral agreements to trade carbon between countries have been agreed or are in the pipeline, according to the U.N.'s Copenhagen Climate Center. The COP29 agreements, if implemented as proposed, should provide greater clarity on how carbon credit trading is authorized and tracked between these agreements, as well as with the Article 6.4 mechanism. Methodologies for calculating credits can be approved, which is expected to increase quality.

Market participants are already taking action. For example, the government of Singapore is working to create a crediting protocol to leverage voluntary market standards and methodologies for Article 6.2 transactions: Companies in Singapore can offset up to 5% of their carbon tax liability with eligible credits.

3. Despite the urgent need for funding to address climate change, the adaptation finance gap is widening.   This year's conference saw many participants push for an increase in financial commitments to support climate adaptation efforts, particularly for developing nations. But, in the end, there were fewer pledges than at COP28 for the Adaptation Fund, which provides targeted financial resources for resilience building in vulnerable areas.

If COP26's goal to double adaptation finance is achieved next year, this would provide only 5% of the amount needed, according to figures from the U.N.'s Adaptation Finance Gap report. Future COPs may well focus on ways to close the adaptation finance gap, alongside metrics and targets to make the global economy more climate resilient. We also anticipate clarity next year on how to assess countries' delivery of National Adaptation Plans (NAPs). With little progress on adaptation finance at COP29, developing countries face increased uncertainty about how these plans will be funded, and the deadline for submitting their NAPs comes at the end of 2025.

COP agreements call for instruments, such as debt-for-nature swaps, to free up fiscal space. For some vulnerable countries, the debt-service burden is already heavy, while the amount of financing received to address adaptation challenges is seen as negligible. So any debt relief, whether small or temporary--for instance, through climate-resilience clauses--could allow for more investments to improve such countries' economic resilience. For our views on these structures see Debt-for-Nature Swaps and Sovereign Debt Restructurings.

4. The need to measure the impacts of sustainable finance (including on society), while recognized, was not universally supported.   Some countries called for disclosures of the impact of climate finance on protections and opportunities for workers, local communities, women, youth, and indigenous peoples affected by climate change and the transition. Reporting on the social co-benefits and risks of climate finance projects could support investment decisions through more robust data. Market standards for sustainable issuance--such as the Green Bond Principles--call for impact reports, which often only include carbon emission reductions. However, social impact data has often been challenging to gather, due for instance to scarcity of information and insufficient accounting.

From a risk perspective, stakeholders' opposition to climate finance projects (such as mining of critical minerals) could impede the implementation of companies' transition plans. In some cases, this could have financial consequences, for example if the delay results in operational disruptions and litigation. The new climate finance goal encourages governments and relevant actors "to promote the inclusion and extension of benefits to vulnerable communities and groups in climate finance efforts."

5. NDCs and NAPs may serve as a yardstick for the impact of COP29.   Following COP29, nations are expected to submit their revised NDCs and NAPs, whose content may represent policy signals for the rest of the decade and beyond. Many developing countries believe a more ambitious finance goal would result in more ambitious plans. The ambition of these could provide key insights into the potential impact on industries in those jurisdictions, particularly if governments follow through on these commitments and plans.

COP29's progress report on implementing COP28's decision did not include language on fossil fuels and includes a reaffirmation of the role of transition fuels in energy security, which could signal reduced political will to transition away from fossil fuels. In discussions, governments were also asked to create an investment roadmap to deliver on their transition, where possible.

We expect that sound investment plans may not only attract more climate financing, but also facilitate comprehensive efforts to meet the Paris Agreement objectives.

Related Research

• Debt-For-Nature Swaps Are Gaining Traction Among Lower-Rated Sovereigns, Feb. 27, 2024
• Sustainable Bond Issuance To Approach $1 Trillion In 2024, Feb. 13, 2024
• Credit FAQ: How Would MLIs' Participation In Sovereign Debt Restructurings Affect Our Preferred Creditor Treatment And Ratings? Nov. 28, 2023

External Research

• Launching a New Solution to De-risk Carbon Markets, Nov. 14, 2024
• Initial recommendations of a Article 6.2 Carbon Crediting Protocol, Nov. 8, 2024