Financing underpins all aspects of the transition. The world faces a $41 trillion mitigation investment gap to 2030, with emerging markets facing a higher gap as a share of their GDP. There is also an adaptation financing gap of $600 billion required annually to 2050, which is 10–18 times greater than current flows.
Several announcements coming out of the first days at COP28 show how stakeholders are aiming to start bridging this gap. And in McKinsey’s sessions about climate finance, leaders from across the industry discussed current challenges involved in deploying capital at scale, and how policy, innovation, and partnerships can accelerate progress. In addition to scaling investment, several enablers are required, including a rapid scale-up of high-integrity carbon markets.
News and announcements
A joint framework aimed at ensuring the integrity of voluntary carbon markets was announced, covering both demand-side (SBTi, VCMI) and supply-side (ICVCM) standards.
- On the supply side, six carbon crediting programs (responsible for over 90 percent of carbon credits) announced they will collaborate within the new framework and CFTC released draft rules for carbon credits traded on exchanges.
- High-integrity carbon markets are an essential tool for reaching net zero. UNFCCC, TSVCM, GFANZ, and McKinsey analysis shows that up to 9GtCO2e of the 20–24 GtCO2e of emissions reductions required by 2030 to limit warming to 1.5°C could be supported by high-integrity project-based carbon markets. These would include voluntary (with the new framework announced today) and country-to-country carbon markets covered by Article 6, where negotiations are ongoing.
- In addition, conversations have highlighted that “transition credits” could be an important enabler, specifically targeting the early retirement of coal-fired power plants. Key stakeholders such as UNFCCC Executive Secretary Simon Stiell, World Bank President Ajay Banga, COP28 Director General Ambassador Majid, and US Special Presidential Envoy for Climate John Kerry highlighted the urgency of the situation and the need to operationalize Article 6 rapidly and deploy end-to-end high-integrity carbon markets to keep 1.5°C within reach.
Today COP28 announced that $57 billion in climate finance commitments have been made so far this COP. These include:
- Several private and blended climate-related funds and vehicles have been announced at COP28. At the Business & Philanthropy Forum, $5 billion in public and private financing was announced in three separate funds by the Green Climate Fund, Allied Climate Partners, and Allianz Global Investors. In addition, the Copenhagen Infrastructure Partners are raising $3 billion for a new fund to invest in greenfield renewable projects in emerging markets. These announcements are in addition to the $30 billion ALTÉRRA fund and the $750 million investment announced as part of the Innovate for Climate Tech platform. Blended-finance structures such as these have the potential to increase the pool of risk mitigation capital for climate projects.
- Several development finance institutions and funds have made additional climate finance pledges and agreements. For example, the World Bank committed to spending at least 45 percent of its financing on climate projects, with $9 billion more funding than its previous commitments. In addition, the UAE committed $200 million to the International Monetary Fund (IMF) Resilience and Sustainability Trust, which will aim to help low-income and vulnerable middle-income countries fund resilience, mitigation, and transition initiatives. Also, a group of ten MDBs released a joint statement outlining next steps to increase the scale of climate finance. If fulfilled, today’s announcements could provide low- and middle-income countries improved access to lower-cost capital to support their transitions.
- Packages of funding targeting climate adaptation have been announced, including over $1 billion for climate and health initiatives from philanthropies, donors, and multilateral development banks; $2.6 billion in nature conservation finance from public and private sources; and an additional $2.6 billion for climate-resilient food and agriculture projects.
- The UAE Declaration on a Global Climate Finance Framework has been announced; this seeks to make climate finance available, accessible, and affordable. Backed by developed and developing countries, this framework sets out a common set of aspirations around climate finance and includes recognition of the importance of high-integrity carbon markets.
Furthermore, this COP28 has seen the realization of some past commitments on climate finance. Agreement has been reached on operationalization of the Loss and Damage Fund, which will direct funding toward countries most vulnerable to the effects of extreme weather events, including droughts, flooding, and rising seas. 18 countries have now committed to the fund, with $725 million pledged.
There were several events and outcomes related to other topics today, given that trade, accountability and gender equality were co-themes with finance. On accountability, the COP28 Net Zero Transition Charter was showcased; it aims to set out best-practice standards for the private sector in setting net-zero targets and working toward achieving them. Less than 40 percent of organizations have a net-zero transition plan in place, and only 18 percent of companies with targets are on track to reach net zero by 2050, demonstrating the importance of further private-sector action to support country-level net-zero targets. McKinsey collaborated with COP28 to deliver a session on how to drive a world class net-zero transformation, with more than 100 CEOs and business leaders joining us in the women’s pavilion.
McKinsey at COP28: Insights from our events
How can we deploy climate finance at scale? Globally, we need to deploy $55 trillion in low-emissions assets over the next decade to get to net zero by 2030. This is $41 trillion above today’s spending levels. McKinsey’s Cindy Levy and Joseba Eceiza led a discussion on closing this net-zero finance gap with Mark Carney, UN Special Envoy for Climate Action and Finance, and several global finance leaders to explore where progress is being made, what challenges remain, and how partnerships could accelerate climate financing at scale.
Mark Carney underscored the need for bold action amid our “climate crisis.” He described three major gaps in finance with the “loudest” need: data, action, and investment.
- Closing the data gap: Progress has been made by private institutions in the last two years to align on data and disclosure standards—but we need to expand access to that data.
- Closing the action gap: Organizations need to think about the transition as “more than green”—in addition to focusing on solar, wind, and other existing green sectors, leaders will need to “go where the emissions are” to make further progress.
- Closing the investment gap: We need to increase capital flows in emerging economies—blended financing and improved integrity in voluntary carbon markets are examples of recent progress.
Global banking leaders also shared ideas on ways to accelerate climate financing:
- Support for smaller institutions: Deutsche Bank’s CEO Christian Sewing discussed how larger financial institutions can support SMEs, family-owned businesses, and midcap companies in their transitions. “The advisory piece on the transformation is huge,” he noted, encouraging institutions to support others that may have less experience in transition finance or be further behind in their transition journeys.
- The role of government: Sonja Gibbs from the Institute of International Finance outlined the role governments and policy can play to accelerate multiple aspects of investment, from outlining transition pathways for different sectors to incentivizing transition products. She noted that financial policy could help resolve “fragmentation, including in really important areas like disclosure, taxonomy, and consumer protection.”
- Voluntary carbon markets: Standard Charter Group CEO Bill Winters called for the scaling of voluntary carbon markets, adding that public–private partnership in this space could greatly accelerate the effort. “What we want is a market that works and that's big and credible.”
- Public–private partnerships: While many have expressed enthusiasm about public-to-private partnerships, Rishi Kapoor, co-CEO of Investcorp, pointed to the “positive surprise” in private-to-private partnerships. He noted that the private sector “has the talent and the intellectual know-how” to foster innovation and scale up capital deployment.
- Role of capital markets: Francesco Vanni d'Archirafi, Chairman of the Board at Euroclear, discussed the need to reduce borrowing costs for emerging economies and the role capital markets can play. “These countries need access to finance at the lowest cost possible,” he said. "When we've helped emerging-market countries come to the financial international markets, it broadens the investor base of the US, improves secondary-market liquidity, reduces volatility, and also lowers borrowing costs.”
How can transforming multilateral development banks help meet the climate finance challenge? McKinsey’s Rajat Gupta, Peeyush Dalmia, Promila Gurbuxani, and Nitin Jain led a roundtable composed of leading MDBs, national and bilateral development banks, institutional investors, and industry thought leaders. The discussion highlighted that:
- MDBs have an important role to play. “Numerous less-investable projects could attract private capital if MDBs can partially mitigate risks associated with currency depreciation, off-take, policy uncertainties, and similar factors.”
- Innovative financial mechanisms are needed. These include portfolio guarantees, securitization, and accelerated blended finance.
- Currently lower risk tolerance among MDBs creates a challenge to overcome.
How do we ensure an inclusive transition? McKinsey’s Laura Corb joined Secretary Hillary Rodham Clinton and a group of chief sustainability officers for a Clinton Global Initiative roundtable and discussed how women can play a leading role in the transition. Topics included:
- The role of women in driving sustainability. We have learned from microfinance the critical role women play in improving family health, education, and economic outcomes when provided opportunity to do so. The same applies in sustainability, whether we are talking about cookstoves, water access, or nature-based solutions.
- Closing the skills gap. We have skill and labor gaps in critical areas for scaling climate technologies at pace—whether it is building hydrogen or SAF hubs, interconnection for grids, or deploying solar. In addition to efforts to expand STEM education for women and girls, advancing the skilling of women in trades to be welders and electricians would help meet tremendous needs as we scale up climate technologies.
- Women in leadership. McKinsey’s research on women in the workplace has demonstrated that including more women in senior management and on teams improves performance and helps solve the toughest problems. Given the complexity of getting to net zero and addressing other planetary imperatives, we need to ensure women are well represented in the teams and management working to solve the problem.
What would it take to scale green and transition technology finance?
McKinsey’s Daniel Mikkelsen facilitated a discussion on how financial institutions, including development banks, commercial banks, and private equity, can fund green and transition technologies. Panelists discussed the significant need for a shift in mitigation finance flows, scaling up investments in less mature technologies as well as channeling funds to developing economies. The group also discussed the potential for countries to leverage the catalyzing power of their emissions reduction commitments to diversify and green their portfolios.
Questions for leaders:
- How do the finance announcements affect my investment portfolio and criteria?
- How can my organization access the new sources of capital (incl. both public and blended finance)?
- How do I incorporate high-integrity carbon credits in my mitigation strategy?
Chart of the day
Square area charts show the low-emissions spending need and net-zero investment gap by energy and use sectors. From largest spending need to lowest, they are power, mobility, buildings, agriculture, industry, forestry, and hydrogen.
Each square is sized by each sector’s spending need, and each contains a shaded region that shows the proportion of spending need that is the net-zero investment gap. Power and buildings have the smallest gaps compared to other sectors proportionally. Globally, $55 trillion is the total for low-emissions spending need, and $41 trillion is the net-zero investment gap.
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More from McKinsey:
- Climate investing: Continuing breakout growth in uncertain times
- The net zero transition: What it could cost, what it could bring