“We need a CFO for the Paris Agreement”

There is much talk about “mobilising the trillions” to meet the goals of the Paris Agreement, yet when it comes to the Conference of the Parties (COP) climate summits and the Nationally Determined Contributions (NDCs) that are negotiated there, there is a notable absence of private-sector financial expertise. 

“There are various ways you can finance the NDCs, but we haven't got a plan at the moment, and I find that a bit odd,” says Steve Waygood, Global Head of Responsible Investment at Aviva Investors. “The people who work in the UN, while they have deep expertise in other areas, tend not to be experts in the market.” 

But Waygood has a proposal he hopes might change all that – and with finance set to be more important than ever at next year's COP26, it could be coming at just the right time. 

The IPCF would “take the temperature” of each member state on an annual basis by assessing the Global Warming Potential (GWP) embedded in national financial markets to determine 2°C alignment.

He’s proposing what is being provisionally called an International Platform on Climate Finance (IPCF), to help UN member states ensure that their public and private finance flows become consistent with the pathway set out in the Paris Agreement. It would, in Waygood’s words, act as a kind of CFO for the Paris Agreement, identifying ways to securitise the elements of the NDCs that generate revenue, with the ultimate goal of mobilising at least a trillion a year to finance the low-carbon transition.

“We're a fund manager for a large insurance business and we're deeply exposed to the physical risks associated with climate change. So strategically, we need the Paris Agreement to be delivered,” Waygood says. “And we want to make sure that we are in a position to deploy our capital in a way that can deliver that.”

Waygood envisages needing 400-500 people within the executive to advise member states, supported by tens of millions in terms of budget. Waygood says he is “convinced” that foundation funding will flow, and hopes government funding would bring it up to the total amount required.

Aviva Investors isn’t alone in this. A coalition to help get the idea off the ground had its third meeting last week, with nearly 30 participants, and public backers including John Elkington, UCL’s David Bent, Ario Advisory’s Mike Clark, Business Declares, the Eiris Foundations, the Institute of Chartered Accountants in England and Wales and law firm DLA Piper. The heavy UK focus perhaps reflects the fact that COP26, although delayed, will still be hosted there next year. 

And Waygood hopes the initiative can be soft-launched at COP26, in the same way that Mike Bloomberg announced the TCFD at COP21 in Paris. However, the initiative hasn’t yet got official COP or UN backing – Waygood refers to it as “just a modest Aviva Investors idea that we're putting forward as something that we think is a contribution to the debate”. 

It may be just an idea, but it’s been discussed with the likes of Mark Carney, Christiana Figueres, Nigel Topping and Nick Robins. And Aviva Investors has had significant experience of incubating projects, having been one of the drivers of the European Commission's High-Level Expert Group on Sustainable Finance back in 2015 – an initiative that led to Europe's Action Plan on Sustainable Finance. Aviva was also a founding member of the World Benchmarking Alliance in 2018. 

"It's about presenting a kind of market-facing version of the Paris Agreement to enable the finance sector to start funding the transition" — Steve Waygood

It's the COP presidency and the UNFCCC that are vested with the power to make the idea a reality, by creating an official mechanism to host the platform. And preliminary conversations have garnered tentative interest (the UNFCCC was “very pleased” to hear about the initiative), although UN representatives advised against the original name of the initiative, the Intergovernmental Panel on Climate Finance, because the word “intergovernmental”, in UN-speak, would require any output to be signed off, something that would stand to slow down an initiative that needs to move at market pace, Waygood says. 

Another option is for the body to be hosted by UN Foundation, which Waygood notes is “incredibly well connected and used to incubating institutions from the outset”. “It's got the benefits of being close to both physically and metaphorically, without actually needing a negotiated consensus agreement like that,” he adds.

Discussions to date, though tentative, have identified three core functions: 

     1. A market thermometer

The IPCF would “take the temperature” of each member state on an annual basis by assessing the Global Warming Potential (GWP) embedded in national financial markets to determine 2°C alignment. The London Stock Exchange's Global Warming Potential, for example, is around 3.8°C. The IPCF could produce an annual report at each COP to better inform politicians, negotiators and policymakers. 

     2. A platform to share best practice on climate finance policy 

The initiative would also provide advice and capacity building to national governments on climate and Just Transition policy options, including helping structure fiscal measures, market mechanisms such as emissions trading schemes, and standards and regulations in the real economy, as well integrating climate risk into financial services regulation.

It would, in Waygood’s words, “provide a forum where some of the world's largest banks, insurance companies and asset owning sovereign wealth funds can speak back to the intergovernmental process and the national regulators and say, at the moment, we think the current structure of markets and how they're regulated is undermining the Paris Agreement, not supporting its delivery. Things like prudential regulation, listing rules, fiduciary duty, how we're governing the whole distribution process…there are a whole series of policy mechanisms that collectively build what are effectively our global capital markets and haven't been designed on the basis of climate change being a problem.”

     3. National and global capital raising plans 

The platform could help develop “national capital raising plans” for member states, mapping the infrastructure, and capital, required to transition to a low-carbon economy. A global plan could then be built, possibly in coordination with global bodies like the UN, IMF and World Bank. 

Waygood uses the Apollo programme and the rebuilding of Europe after WWII as points of comparison to demonstrate the scale of the challenge – although the IPCF would aim to mobilise four times those projects combined, every year. 

“Both of those projects were financed through government bonds. This needs to be financed through all sorts of investment instruments. We need, therefore, a coordinated global idea, not a command and control structural plan, of how we're going to move money on that scale. How do we match the projects that need it with the international financial organisations that have got the money? It's a hugely complicated challenge.”

Initial concept papers suggest the IPCF could estimate the potential financing from the various asset classes and vehicles, looking at the national financing capacity of banks, insurers and institutional investors, as well as quasi-governmental pools of capital.

“The market needs to be inspired, and then facilitated. The way you would inspire the market is… to make this stuff matter more to the financial flows of capital, by internalising the externalities. And then you provide an investment pipeline,” Waygood says. “It's about presenting a kind of market-facing version of the Paris Agreement to enable [the finance sector] to start funding the transition.”

One aspect that will clearly require some working out is how exactly the IPCF fits in with existing initiatives and networks. Among the “ecosystem of institutions” seen as necessary collaborators are the IMF, World Bank, UN, OECD, Financial Stability Board, Network for Greening the Financial System, Helsinki Principles, and the G20. 

“All of those institutions have a role here, and having them brought together periodically to crystallize that plan is what we're proposing,” says Waygood. That’s not to mention the PRI, UNEP, IIGCC and Climate Action 100+, which have also been raised as having potential roles.