01 October 2021
The will exists among the private sector to commit to the goals of the Paris Agreement. What is needed, however, is closer coordination between governments and businesses to ensure everyone is on the same page, argue Jahan Chowdhury and Margaret-Ann Splawn.
The Paris Climate Agreement is now just over five years old, and the window for countries to "up their ambitions" for the next phase of target-setting has come to a close.
Only a handful of countries have hit their climate targets while many others have fallen short, some have announced ambitious new targets for 2030, and still others are yet to revise their goals.1
While ambition and updating of Nationally Determined Contributions (NDCs) – which are the only recognised instruments by the UNFCCC to determine whether the world achieves the long-term goals of the Paris Agreement – are progressing, action to implement on the financing of the mitigation and resilience plans are falling dangerously far behind.
Furthermore, while countries have fixed an initial price tag to their NDC targets, global NDC costs vary greatly, and achieving the goals of the Paris Agreement means countries will require some combination of domestic budgetary allocation, bilateral and multilateral finance mechanisms and development assistance, and importantly financing from the private sector to meet NDC commitments.
To address the economic crisis emerging from both Covid-19 and climate change, a recent independent report recommends setting a collective goal to raise annual investment by 2% of GDP above pre-pandemic levels for this decade and beyond, and improve the quality of investment to support a strong recovery and transformation of growth 2. For G7 countries, this would amount to an additional investment of around $1 trillion per year from now until 2030. That investment, if well executed, would have high returns in terms of productivity, new opportunities, and the environment.
Raising capital from the private sector
Raising this amount of capital requires significant financing from the private sector. In order to attract private finance, governments need to give consistent and persistent market signals, and also provide the private sector with opportunities to have buy-in when it comes to accomplishing the specific goals defined in countries' NDCs.
These opportunities will come with the developing and shaping of the NDC investment plans, which is the next phase of strengthening NDCs worldwide.
The desire and will exists among private sector actors to commit to the over-arching goals of the Paris Agreement. What is needed, however, is closer coordination between governments and businesses to ensure everyone is on the same page.
Since the NDCs are the only recognised tool to deliver on Paris Agreement, the private sector needs to become more involved with the NDCs specifically, and co-creating NDC investment plans with governments provides the ideal opportunity.
These investment plans represent an entry point for the private sector to "co-own" the NDCs with policymakers and a way to maximise profits from sustainable investing while still significantly contributing to the end-goals of the Paris Agreement.
"With recent announcements by some of the world's largest institutional investors and asset managers to double down on Paris Alignment, we will likely see a significant shift toward investments in renewable energy, green technologies, sustainable supply chains, and other areas that contribute to NDC realisation"
Finding optimal roles for the private sector
In the process of developing and designing the NDC investment plans, the private sector can potentially play three roles, possibly simultaneously. If we think of a sporting metaphor:
- First, they can play the role of team owners, with a view toward the larger structure of the league itself, taking the accountability and ownership, being the steward and leader for the community. As principles, the private sector can further inform the public by being clearer about the specific impacts their investments are having on meeting their net zero commitment and subsequently NDC targets.
- Second, the private sector could be coaches with a longer-term strategy of representing the business community in the preparation of NDC investment plans. They could take part in the design of the investment plans through structured discussion with governments. There is still ample time to provide meaningful, indeed essential, contributions to the risk-informed, national and sectoral NDC investment plans. However, the time to act on this is fast-approaching, and businesses should, as part of this process, communicate to policymakers during the investment plan formulation process what they want to see in terms of targeting investments toward the Paris goals.
- Lastly, they can be the players whereby they make field decisions about the on-the-ground local situation. In this case, it is in decoding the national level NDC investment plans and checking their consistency with the overall global corporate-level strategy.
Whichever role, or combination of roles, businesses choose to play, it requires communication between the private and public sectors to ensure they are no longer "dancing to different music" when it comes to achieving climate goals.
Seizing the moment and planning for action
With recent announcements by some of the world's largest institutional investors and asset managers to double down on Paris Alignment, we will likely see a significant shift toward investments in renewable energy, green technologies, sustainable supply chains, and other areas that contribute to NDC realisation.
These investments will be far more impactful if they are formally aligned with government goals and targets, which underline the importance of more meaningful communication and coordination between the two groups.
To facilitate and strengthen this alignment, a three-pronged action plan can be deployed to facilitate and strengthen this alignment.
First, a convening of a C-level roundtable – or perhaps a series of roundtables – to raise awareness of the NDCs and the preparation of the NDC investment plans in the business community. This would be a relatively easy, cost effective, and yet impactful task to complete. The high intensity of interest in net zero commitment among private sector interests means bringing together key players to raise awareness of what NDCs are, and how they are relevant to their firm level net zero commitment, is eminently feasible and it could go a long way in terms of generating buy-in among corporate actors.
Second, the development of a common methodology to help shape and design the NDC investment plans. This would help guarantee that not only would businesses be able to make informed decisions about what they want to see from the NDC investment plans, but they could also maximise the influence they could exert over the process. Having a standardised methodology for designing NDC investment plans can result in setting the minimum criteria for a) level of participation, including by finance and planning ministries, business entities, b) data quality for better comparability and scoring of investment plans, c) risk rating division of labour amongst public and private entities, and d) setting time horizons for investment.
And third, a common approach to integrating the NDC investment plans and SDGs from the national side and how they could potentially feed into first ESG rating/investing and subsequently financial disclosure. This last step would be informed by the first two.
Taking these actions will help ensure that NDC investment plan formulation will:
- be innovative and mark a real departure from the Business As Usual scenarios;
- be risk-assessed in terms of avoiding any unintended consequences from private sector investments;
- actually be a game changer and not a pace changer, meaning private sector action in the investment plan development process will significantly move the needle in favour of accomplishing the goals laid out in the Paris Agreement rather than merely be supplemental support for government action;
- be practical and profitable, so as to encourage businesses to act within the parameters of the investment plans; and
- can get broader stakeholder support in terms of buy-in from not just the businesses but also their consumer base.
In the end, these alignments will not only help bring about the common goal of lower carbon emissions, it will, just as importantly, give the private sector a stronger stake in the global climate change regime in its totality, and thereby maximise ways to financially benefit from it.
It is not an exaggeration to say the world is at an inflection point, both policy-wise and in terms of private sector practices. The active input from the private sector in the process of integrating the NDCs with their own net zero commitment and relevant decision tools will allow companies to take advantage of this changing landscape.
Jahan Chowdhury is part of the Support Unit at the NDC Partnership. Margaret-Ann Splawn is Executive Director at the Climate Markets & Investment Association.