Why COP28 will be remembered for more than its historic agreement on fossil fuels

An historic agreement to transition away from fossil fuels was finalized at the recently wrapped COP28 conference, an annual summit convened by the United Nations to address climate change.

But Kara Succoso Mangone, Head of the Sustainable Finance Group at Goldman Sachs, says there were two other big takeaways from the conference that could prove pivotal in the world’s response to global warming. One was the strides conference attendees made to address significant capital gaps in emerging markets that will be necessary to meet global climate goals. The other revolved around discussions about scaling the financing that is critical for hard-to-abate sectors to contribute to decarbonization efforts.

The following is an edited transcript of a conversation we conducted with Mangone upon her return from the conference.

Welcome back, Kara. What do you think was the number one takeaway from COP28?

There was a unanimous agreement among the 197 countries that attended the COP28 conference to transition away from fossil fuels in the energy system. That marks the first time that fossil fuels have been referenced in a global climate agreement, and this also included agreement to phase down “unabated” coal power and phase out “inefficient” fossil fuel subsidies, as well as tripling renewables capacity. This is particularly notable given the extraordinarily complex macroeconomic and geopolitical background coming into negotiations where energy security and affordability are central.

Having the energy sector at the table was a crucial element to the deal – which happened in the final hours.

What’s the likelihood this commitment will be realized?

While this was a landmark step, it is not entirely clear how this commitment will translate into individual country policy incentives and regulations to ultimately flow into private sector investment. But it is important to note that independent of the agreement there has already been an acceleration of deployment of low-carbon solutions.

Can you give us some examples of that – what progress has been made to date?

Sure, there are several. One example is that there’s been $225 billion in new investment in the manufacturing and deployment of clean energy, clean vehicle, building electrification, and carbon management technology in the US over the past year. That’s up 38%. Another example is that sales of passenger electric vehicles are on pace to hit 14 million this year, up 36% from the prior year’s record in 2022.

Were there any other big developments at the conference that might not have gotten as much attention?

In addition to the COP agreement on fossil fuels, there was an industry-led Oil & Gas Decarbonization Charter and government expansion of the Global Methane Pledge with specific grants for methane abatement and a commitment to reduce methane emissions by 2030. Given methane is 28x more powerful in trapping heat than CO2 is, this is quite notable.

Another critical issue addressed is the significant capital gaps in emerging markets which will be essential to meeting global climate goals. In the early stages of the two-week conference there were a significant number of announcements addressing this issue, including the official launch of a loss-and-damage fund that would provide government support from developed markets to emerging markets countries that are facing the impacts of climate change.

Why is this important?

Countries in emerging markets are already struggling to service their debts as interest rates have gone up, and they are short of the finances needed to shift to clean energy. And the gap is significant – an estimated $1 trillion a year.

How will this issue be addressed?

The capital gap is so large it’s going to take using all the tools in the toolkit. So, in addition to governmental support, the focus was on how public and private sector, along with philanthropic capital, can work together to amplify the impact of public sector financing.

Are there any specific examples of how this is going to happen?

We see a ladder of options to get more capital into bankable projects – from pre-commercial philanthropy that can be used as concessionary capital, to commercial work with development banks, and innovative structures like debt-for-nature swaps or managed phaseout of coal.

As mentioned, the Loss and Damage Fund that was announced at last year’s conference and operationalized at this year’s will bring substantial opportunity to scale investment in emerging markets who are disproportionately affected by climate change and lack the tools to combat these shifts.

This is also an area in which Goldman Sachs is directly engaged. During the conference, we closed a Climate Innovation and Development Fund with Bloomberg Philanthropies and the Asian Development Bank that leveraged $25 million in grant capital to catalyze $500 million in total investment toward seven innovative low-carbon solution projects in India and Vietnam.

Let’s move to your third key takeaway from the conference. What’s notable about the news around scaling up financing in sectors that are hard to abate?

While the urgency of meeting global climate goals was clearly front and center throughout the duration of COP28, there was also a growing recognition that as hard-to-abate sectors decarbonize, the financing and investment portfolios that support those industries will abate as well. The reality is that it is very difficult for the financial sector to move faster than the real economy’s ability to decarbonize.

So how is this going to work – where is the scaled-up investment going to come from?

Two things can be most effective in driving additional investment. one is policy incentives like the Inflation Reduction Act introduced in the US and other policy frameworks being developed and implemented across jurisdictions. The second is innovation, which includes technological advancement but also private sector innovation that can help drive demand signals through joint ventures or off take agreements. As regulations are developed for the financial sector, it is also important that these complement and encourage financing around transition and low-carbon deployment rather than an increased regulatory burden.

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