Mobilising finance on the road towards COP26

November has been a landmark month for green finance, with several groundbreaking announcements made at the Green Horizon Summit in the UK, kicking off the finance industry’s journey towards COP26. Mark Carney, UN Special Envoy for Climate Action and Finance, launched the private finance strategy for COP26 at the event, stating: “Achieving the net zero will require a whole economy transition, involving every company, bank, insurer and investor, and creating the greatest commercial opportunity of our time.”

The City of London Corporation, the Green Finance Institute and the World Economic Forum hosted the conference, which convened experts from across the industry and policy landscape. These included ECB President Christine Lagarde, climate expert Christiana Figueres, His Royal Highness the Prince of Wales, BNP Paribas CEO Jean-Laurent Bonnafé, BNP Paribas UK Country Head Anne Marie Verstraeten and other executives from finance and beyond.

In his address at the Green Horizon Summit, Carney outlined why finance will play a critical role in scaling up private sector funding for innovation, which help companies to align themselves in the direction of a net zero future. Addressing the importance of COP26, he commented: “Our priority for COP26 is to build this market in the transition on the pillars of comprehensive climate reporting, better climate risk management and optimisation of returns.”

The opportunities of engaging on the transition towards a low-carbon pathway are estimated at $26 trillion by 2030 vs the current high-carbon pathway ^[1]. The private finance strategy launched at the Green Horizon Summit centres on four key pillars:

• Reporting: improving the quantity, quality and comparability of climate-related disclosures by implementing a common framework built on the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. 
• Risk management: ensuring that the financial sector can measure and manage climate-related financial risks.
• Returns: helping investors identify the opportunities in the transition to net zero and report how their own portfolios are aligned for the transition.
• Mobilisation: increasing private financial flows to emerging and developing economies by connecting available capital with investable projects and encouraging new market structures.

Throughout the Green Horizon Summit, corporates, policymakers, academics and innovators discussed the levers required to scale up climate action, covering the role of voluntary carbon markets, the importance of climate finance in emerging markets, how nature-based solutions could tackle the biodiversity crisis, and finally pathways towards net zero.

Several experts highlighted the importance of climate and nature-related disclosures. During the conference, Rishi Sunak, UK Chancellor of the Exchequer, announced that the UK would become the first country in the world to make Task Force on Climate-related Financial Disclosures (TCFD)-aligned disclosures mandatory across the economy by 2025.

BNP Paribas CEO Jean-Laurent Bonnafé delivered a key note at the event, addressing “the need for the finance industry to accelerate allocation of financial resources… and learn to build solutions with experts outside of the finance sector itself, to assemble solutions across both the private and public”. Bonnafé also mentioned the significance of disclosures, highlighting: “Along with standards, we must continue to strengthen disclosures. BNP Paribas has been a keen supporter of the TCFD and reports using this strong framework created under the leadership of Mark Carney. We know that next on the list is biodiversity.” 

To meet the goals of the Paris Agreement and keep the planet well below two degrees of warming, Bonnafé outlined how BNP Paribas created the Paris Agreement Capital Transition Assessment (PACTA). This was developed in coalition with four other banks, and in collaboration with the 2° Investing Initiative and UN Principles for Responsible Investment. PACTA is an open source methodology, which is now used by 20 banks to drive their corporate loan book to align with various climate scenarios. It covers the majority of high-emitting greenhouse gas sectors including utilities, automakers, oil, gas and power generation. 

The UK is hosting COP26 and is also targeting reaching net zero by 2050. In this context, Anne Marie Verstraeten, BNP Paribas UK Country Head, was a panellist on a ‘pathways to drive the transition’ panel. The panel was moderated by Lord Turner, Chair of the Energy Transitions Commission, and featured executives from Shell, Ninety One and ACWA Power. In a discussion addressing the role of finance in decarbonising energy-intensive industries, Verstraeten emphasised that “we are firmly convinced that collaboration with science is critical to support innovation in finance markets and in helping corporates to align their climate ambitions”.

In recent years, sustainable finance innovation has included the development of science-based targets in the bank’s lending facilities, as well as incentive mechanisms that integrate sustainability into the financing system. A recent example was a £2.5bn sustainability-linked loan (SLL) completed by UK supermarket Tesco, which embeds scope 1 and 2 CO₂ emissions reduction targets to support Tesco’s decarbonisation strategy.

The key performance indicator (KPI)-linked mechanism in SLLs has been applied to the bond market through the creation of sustainability-linked bonds, which embed transparent and credible targets into bond coupon mechanisms. Recently CHANEL – a luxury company – pioneered a €600m sustainability-linked bond tied to climate targets, which also included a reduction in scope 1 and 2 CO₂ emissions, and shifting to 100% renewable energy in business operations by 2025.

BNP Paribas engagement on energy transition    Policies – In May 2020, BNP Paribas announced the expansion of its coal exit policy to all OECD countries and its target to end the use of coal by its electricity-producing clients by the end of 2030. Renewable energy lending – In 2019, 87% of the project financing BNP Paribas granted in the electricity generation sector was devoted to renewable energy projects, and 0% to coal-related projects. BNP Paribas has raised its target for financing the renewable energy sector to 18 billion euros by the end of 2021 (already 15.9 billion euros in financing at the end of 2019).  Product innovation in sustainable finance – The Bank is #1 in 2020 year-to-date Sustainable Bond Ranking, supporting issuances for clients across the Sovereigns, Supranational and Agency (SSA), Financial Institution Groups (FIG), SSA, FIG and Corporate sectors. The bank has deployed its balance sheet to power the Sustainability-Linked Loan (SLL) market, and has reached #1 in the Global SLL League table H1 2020 (Mandated Lead Arranger). Source: Dealogic Industry dialogues – BNP Paribas is one of the founding signatories of the Principles for Responsible Banking (PRB), an innovative partnership with UNEP FI (UNEP Finance Initiative). The bank was also at the forefront of the EU Sustainable taxonomy published in March 2020 by the European Commission, with bank experts acting as members of the Technical Expert Group.

[1] Source: Building a private finance system for net zero: Priorities for private finance for COP26