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This year's Conference of the Parties to the U.N. Framework Convention on Climate Change (COP29) in Azerbaijan resulted in a collective goal of $300 billion in public- and private-sector climate funding—an agreement that we believe will be an important step toward developing functional global carbon markets, while ensuring sustainable finance remains in focus.
What We're Watching
Decisions at COP provide direction and steer momentum in policy action. 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.
This is particularly important for supporting developing countries' energy transition and investment needs. Developing countries—which are disproportionally at risk of economic losses from, and are most exposed to, physical climate risks—could become larger emitters unless their progress 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.
Although the agreement reached at COP29 translates into a tripling (in nominal terms) of the previous climate finance goal, full implementation still depends on individual countries' commitment and capacity to deliver. The new goal calls for investors and multilateral lending institutions to consider increasing their commitments when it comes to climate finance, given the urgency to address climate change, sustainable development, and poverty. The gap in private sector mobilization to help achieve COP's Sustainable Development Goals and net-zero targets is driven by multiple factors, including unfavorable local institutional frameworks, a lack of standardized and replicable blended finance structures, and a shortage of first loss or other types of de-risking instruments.
What We Think And Why
We have witnessed a rise in sustainable debt issuance in developing and emerging markets, including in local currencies. But lower-income countries are still encountering challenges in obtaining climate financing that doesn't also inflate their debt.
While climate finance commitments were in the spotlight at COP29, there was little progress on adaptation finance. COP agreements call for instruments like debt-for-nature swaps to free up fiscal space. Because some vulnerable countries' debt-service burdens are already heavy and the amount of financing they receive to address adaptation challenges is considered negligible, even small or temporary debt relief could allow for more investments to improve such countries' economic resilience.
S&P Global Ratings recently updated its rating approach to reflect ongoing market developments and provide transparency on how we rate debt-for-nature swaps as well as climate resilience deferral clauses in debt instruments issued by lower income countries--which are the most exposed to extreme natural disasters.
What Could Change
Following COP29, nations are expected to submit revisions to both their nationally determined contributions (to reduce emissions for climate mitigation under the Paris Agreement) and national adaptation plans (to identify medium- and long-term needs for climate adaptation, particularly for vulnerable countries). In our view, these may represent policy signals for the rest of the decade and beyond.
Many developing countries believe a more ambitious finance goal will result in more ambitious plans and these could provide key insights into the potential impact on industries in those jurisdictions, particularly if governments follow through on these commitments.
Writer: Molly Mintz
This report does not constitute a rating action.
| Sustainable Finance Development: | Beth Burks, London + 44 20 7176 9829; Beth.Burks@spglobal.com |
| Global Head of Sustainable Finance: | Bernard De Longevialle, Paris + 33 14 075 2517; bernard.delongevialle@spglobal.com |
| Global Social Specialist, Sustainability Research & Methodology: | Bruce Thomson, New York +1 2124387419; bruce.thomson@spglobal.com |
| Secondary Contact: | Alexandra Dimitrijevic, London + 44 20 7176 3128; alexandra.dimitrijevic@spglobal.com |
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