Global finance and governance

Considerable financial resources and targeted investments are needed to address climate change at both a domestic and global level – not only to reduce emissions, but to promote adaptation to the impacts that are already occurring, and to build global resilience to the impacts of a shifting climate. As made clear by multiple financial assessments, including Chris Skidmore’s recent Net Zero Review, the benefits of these investments – both societal and economic - vastly outweigh the upfront costs. 

The focus of previous COP summits has rightly been on garnering financial support for the global transition. COP27 closed with countries delivering a package of decisions that reaffirmed their commitment to limit global temperature rise to 1.5 degrees Celsius above pre-industrial levels. The package also strengthened action by countries to cut greenhouse gas emissions and adapt to the inevitable impacts of climate change, as well as boosting the support of finance, technology and capacity building needed by developing countries. The Glasgow Financial Alliance for Net Zero, established in the lead-in to COP26, has raised some $130tn of assets with more than 450 finance companies involved. 

Despite this momentum, tensions exist over the intended beneficiaries of the finances raised. To add to an already complex problem, issues on the governance of climate financing, and the impact of global economies on the climate, remains a murky world. With financing now firmly embedded in the COP agenda, policymakers must play a vital role in securing commitments to implementation, measurement, and reporting. 

In the run-up to COP28, national and international policymakers have a unique opportunity to advocate for impactful interventions which are vital when ensuring that committed funds are channelled effectively, implemented efficiently, and reported on transparently – allowing the global community to fully understand the impact of global finance initiatives. This paper recommends a series of national and international interventions which if adopted, would build on existing expertise, and go some way to addressing the challenges we face.

Working with business for a responsible and sustainable financial future

National Policy Recommendations

  • The government should closely monitor the public and private firms that have financial ties with Sovereign Wealth Funds originating from countries with weak governance mechanisms and institutional features and limited institutional ties.
  • The government should develop a comprehensive regulatory framework, surpassing the standards set by Santiago Principles, that would require any Sovereign Wealth Funds to be transparent and accountable regarding their investment objectives, funding sources, governance structure, state independence, and public holdings.
  • The government must enhance its governance codes and practices and bolster its monitoring capability to help limit and mitigate the negative externalities of Sovereign Wealth Funds investments, especially related to ESG risks, while also benefitting from the positive externalities such as a source of cheaper financing. 

Global Policy Recommendations

  • International policymakers should encourage firms to adopt climate adaptation and risk management strategies to mitigate the negative impact of extreme weather events on their financial performance.
  • Global coordination is imperative to strengthen the Santiago Principles and broaden its outreach to countries where Sovereign Wealth Funds exhibit deficiencies in their transparency, disclosure, and accountability. An increase in SWFs transparency and accountability would help reduce the unintended negative consequences while also allowing countries to benefit from the increased capital inflow.
  • Given the substantial size and influence of Sovereign Wealth Funds as institutional investors, all states must ensure that these Funds adopt sustainable investment practices and integrate Environmental, Social, and Governance (ESG) considerations into their decision-making processes, taking inspiration from the investment model successfully implemented by the Norwegian Government Pension Fund Global.
  • Governments should consider the indirect effects of global supply chains, and develop a new economic impact model based on the input-output techniques.
  • Governments worldwide should use the fallout of the Covid-19 crisis as an opportunity to tackle global climate change, at the very least to avoid further carbon lock-in effects of ‘dirty’ energy infrastructure.

Policy brief contributors

Professor Hisham Farag

Professor Hisham Farag

Business School Director of Research
Professor of Finance
Founding Director of the Sustainable Financial Innovation Research Centre (SFIC)

The Department of Finance

Hisham Farag is Professor of Finance and Director of Research at Birmingham Business School. He is also the Founding Director of the Sustainable Financial Innovation Research Centre (SFIC).

Telephone
+44 (0)121 414 3101
Email
h.farag@bham.ac.uk

Dr Yuli Shan

Dr Yuli Shan

Associate Professor in Sustainable Transitions

School of Geography, Earth and Environmental Sciences

Dr Yuli Shan is an expert in climate change mitigation and sustainable transitions. His interdisciplinary research aims to reveal how human activities affect global and regional climate change. He also seeks alternative low-carbon approaches towards the achievement of climate targets and a net-zero emission society.

Dr Yuli Shan is a Global Highly Cited Researcher since 2020 and a contributing ...

Telephone
0121 414 5525
Email
y.shan@bham.ac.uk