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How national climate plans can reshape global investments
In this episode of the Sustainability Matters podcast, the host explores the pivotal role of Nationally Determined Contributions (NDCs) in shaping climate policy and investment strategies.
The host explores the pivotal role of Nationally Determined Contributions (NDCs) in shaping climate policy and investment strategies. He interviews four experts to get their insights.
Joanna MacGregor, a senior advisor at the UN Climate Change (UNFCCC), explains how NDCs have evolved into comprehensive national climate plans that can drive economic growth and resilience. Antonina Scheer, Policy Fellow at the London School of Economics and Research Project Manager at the Transition Pathway Initiative Centre, discusses the challenges of financing climate action in emerging markets and introduces a tool that helps assess the credibility and ambition of NDCs. Pablo Carvajal, Director in the Climate Change and Sustainability Services team at EY UKI, shares insights from his work with governments and banks, highlighting the disconnect between policy targets and business implementation. Claudia Gollmeier, Managing Director at Colchester Global Investors, emphasizes the importance of investors considering NDCs and the rise of innovative financial instruments like sustainability-linked bonds.
Together, the guests underscore the urgency of making NDCs investable and inclusive, involving businesses and investors in their design and execution. Despite delays in countries submitting their NDC plans, they remain optimistic about the potential of NDCs to unlock financial flows and accelerate the global transition to a low-carbon economy.
Key takeaways:
NDCs are evolving into powerful economic tools that can drive growth, resilience and clean energy transitions.
Businesses and investors play a crucial role in implementing NDCs, even though governments set the targets.
Transparent information and innovative financial products are helping bridge the gap between climate ambition and investable action.
For your convenience, full text transcript of this podcast is also available.
Disclaimer:
This podcast contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Member firms of the global EY organization cannot accept responsibility for loss to any person relying on this podcast. The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Matthew Bell
What if I told you that over 190 countries have or plan to publish their secret blueprints for the next decade, detailing exactly where they're going to invest billions of dollars, where industries will boom and which may vanish?
These plans are being unveiled right now in plain sight, and if you're not reading them, maybe you're flying blind.
Joanna MacGregor
This is one of the most, if not the most important, policy documents of this decade.
It will be the signal of in which direction is the economy that you sit within going, and how does your sector fit into that?
Bell
Compelling stuff!
Hello and welcome to the new season of the EY Sustainability Matters podcast, a regular look at the sustainability topics reshaping the world around us and how they impact businesses around the globe.
I'm Matt Bell, Global EY Climate Change and Sustainability Services Leader and your host for this episode.
It's been 10 years since the Paris Climate Agreement, establishing the aspiration that we collectively would come together to limit global warming and to avoid the most catastrophic impacts of climate change.
In this episode, we explore the road maps to achieving this, the so-called nationally determined contributions or NDCs, where each nation sets out a clear target and trajectory for both them and business to stay on track toward our 1.5°C future.
However, despite plans being due by February of 2025, very few countries, as of today, have submitted their updated NDCs, and those that have are putting themselves on a highly ambitious track.
But why should you care whether governments prioritize the development and implementation of NDCs?
And how can business and the finance community help governments to make these NDCs investable?
And why are experts nevertheless hopeful about the prospects of these NDCs?
Well, I sat down with four experts to get their views as to whether NDCs might actually unlock finance flows toward a low-carbon economy.
Let's start with the basics.
What are the NDCs?
There's probably no one who is better placed to answer this question than our first guest, Joanna MacGregor from the UNFCCC, the United Nations Framework Convention on Climate Change.
MacGregor
I'm Joanna MacGregor, a senior advisor at the UN Climate Change.
I work across all areas that we have in UN Climate Change to tackle the climate crisis.
I started my career in the development sector, worked in the UN and then transitioned over to working on climate change.
An NDC, that stands for Nationally Determined Contribution —
you can think about it as your country's climate plan —
it's what they are going to do to tackle climate change, and how they're going to deal with it.
So, initially, NDCs were really just focused on cutting emissions. They've evolved.
We get them from countries every five years, and this time, they're more about economic growth.
We'd see that this a really a strong national climate plan to cut greenhouse gas pollution and build their climate resilience is the thing that can build the economy, be the huge driver of growth, jobs, lowering health costs, secure and affordable clean energy.
They can encapsulate all of this into this one document. And I'd say that we think it's one of the most important policy documents of this decade, if not longer.
Bell
If every country has a target that they will try to reach, how do those goals differ from country to country?
Antonina Scheer, a policy fellow from the London School of Economics (LSE) and a research project manager in the Transition Pathway Initiative Centre, explains.
Antonina Scheer
How you divide that carbon budget is absolutely crucial, and it changes the picture completely.
The Paris Agreement itself, it doesn't impose any way of dividing that carbon budget other than enshrining this principle of common but differentiated responsibilities. And that's a mouthful.
And it just means rich countries should be shouldering a larger burden, because they're developed, they have the capacity and they also have caused the problem.
Joanna from UN Climate Change agrees that there's a degree of inequality when it comes to shouldering the responsibility.
MacGregor
You will find that the inequalities, they increase over time, and you will find that there are parts of countries that will be increasingly vulnerable and others that are more resilient because they have more money behind them — more kind of funding and better-quality infrastructure.
So, it is something that we're going to see people being pulled apart on every spectrum on every corner of the planet.
And it's not just that developed countries in the global North are safe from this.
They are most definitely vulnerable in their own unique ways, and particular communities within them are extremely vulnerable as well.
Bell
NDCs are supposed to be submitted every five years, but this February, the submissions have been underwhelming, as explained by our next guest, Pablo Carvajal.
Pablo Carvajal
I'm a director in EY Sustainable Finance practice in London. I'm leading our net-zero transition advisory work with UK and global banks.
My background is in energy and economics scenario modelling which is actually super important to assess the transition pathways under climate change considerations. And I've spent over 10 years working in energy and climate nexus. I’m a former IPCC lead author for the investment and finance chapter and this work has included assessing and developing NDCs. I was an advisor in the Ministry of Energy of Ecuador, my country of origin. And I was developing the energy scenarios that were underpinning the targets set in Ecuador's first NDC. So I've got a firsthand experience from the government’s perspective on how these documents are produced and also presented in the international space.
We've seen underwhelming submissions on NDCs.
That's why the UNFCCC has extended the deadline to September. And the reason why they wanted to be this year because they want to have a stock take report presented in COP30 in Brazil in November.
So, they're really struggling to get that report for COP30, if countries don't submit their NDCs on time.
Antonina Scheer from LSE, however, says that it's not necessarily a cause for alarm.
Scheer
That's actually not very surprising. It was the same in 2020, with the 2030 targets that were published in 2020. Most countries were late in publishing them. That's actually not necessarily the most worrying thing.
It's rather this dance between holding ambition, but still implementing those targets you've already set, and that is going to be a constant dance all the way to net zero.
I think some people were thinking, OK, we set the ambition: net zero by 2050.
We just hold that ambition and then run to it with the implementation.
But once you start implementing, things get really difficult, and there's so many headwinds now more than ever that that implementation challenge starts to weaken the ambition.
Pablo from the EY organization says some countries could be holding back because of the ratcheting mechanism
Carvajal
… which means that each NDC that you publish has to be more ambitious than the previous one.
It's a challenge because you need to always consider what you're putting out, because you know that the next one has to be more ambitious, and you can't really backtrack.
So, every five years, you need to produce them.
And within those five years, countries internally organize and start mobilizing to align internally.
onwhat is the commitment level they want to issue in that NDC?
It takes a huge amount of effort and work and their interim review periods in those five years as well.
Bell
So, we've established what NDCs are, why they're important, but what do they mean for business?
Pablo's here to explain that that's where the catch is.
Carvajal
So, the curious thing about NDC is that governments set them, but the most likely stakeholders to implement them are civil society and businesses.
In most countries, you will have a distribution of economic actors, which will be responsible for decarbonizing the economy.
So, for the steel sector or for the automotive sector or transport sector, those may be in private hands in businesses.
So, there is a clash between the government setting the targets and then businesses being the ones that need to implement them in a discreet amount of time.
So, you need regulation, but you also need incentives for that to happen.
Bell
Indeed, one of the main barriers for implementation of the NDCs has been finance.
Antonina explains why and how her research at the LSE helps to tackle this problem.
Scheer
If we want to think about emerging markets, it's been estimated it's about US$2.4 trillion per year that's going to be needed in investments to run the low-carbon transition, adaptation and nature protection in those places.
And about half of that is domestic and about half is going to be international.
And a large part of that international segment, so about a quarter of the total, is from the private sector.
What that can look like is sovereign bonds — that's one part of the way that you can finance an NDC and finance climate action.
But also really important is that the country at the national level, the sovereign, puts in place all of the coordination for governance, for sectoral industrial policies that will make decarbonization investable in all of the little entities that operate and large entities that operate within that jurisdiction.
So, that's kind of the story about making NDCs investable is that the country, the government coordinates a transition basically so that all through the economy, all the other actors are having investable decarbonization projects.
Bell
Antonina's research has culminated in LSE creating the ASCOR tool that stands for Assessing Sovereign Climate-related Opportunities and Risks.
It's an open-source library of NDC-related data from around the world.
Scheer
What we've done with the ASCOR tool, building it in collaboration with investors and looking at this question of investable NDCs. So, what does it look like in our tool?
What have we been able to find?
So, what the ASCOR tool does is basically evaluating the ingredients of implementing climate targets and building a national transition plan to do that.
And from our research, then we have that framework which measures those ingredients. And then we actually have the results which can give us lessons that we can then deliver to country governments as well to highlight emerging best practice.
That's what we've been doing in our reports.
Bell
Echoing that again from the investors side is Claudia Gollmeier, who's been working with the TPI, the Transition Pathways Initiative Centre, on creating that framework.
Claudia Gollmeier
My name is Claudia Gollmeier.
I'm Head of Investment Management for APAC, Middle East and Africa, and Managing Director at the Singapore office for Colchester Global Investors.
We are sovereign specialists, and we cover the full country spectrum from developed to emerging to frontier markets.
And we have been mindful how climate change is likely to impact countries via economies, via physical and transition risks.
And I also co-chair now the steering committee for the ASCOR project.
Before the ASCOR project started, there weren't any internationally agreed frameworks available for assessing climate-related risks and opportunities, precisely given the sovereign asset class being one of the biggest asset classes and the Bank for International Settlements came up with about US$80 trillion in size at the end of last year.
It's quite a big one, but yet one of the least developed asset classes, and that's why we have gotten together with other investors to develop such a framework.
I think in terms of the framework, that was sort of the first one where we sort of got together with other assets managers.
We always have this understanding that it's actually much more helpful if we work together.
When we started the EST journey …
Bell
… EST meaning ethical, sustainable and thematic investment …
Gollmeier
… equity investors obviously had considered ESG factors for a long time, but the fixed income sector as a whole didn't join that journey until 2015 post the Paris Agreement signing. Later on —
you know, initially, you had obviously investment grades, corporates join that journey because they could leverage off the equity space metrics more easily.
But then the sovereign side, people always said, well, they're risk-free asset class.
But then as we've learnt, emerging or developed countries are not immune to credit risk or spread widening or default risk as we've seen even on the European debt crisis.
And so, ESG was finally considered to take priced risks into account, and that's precisely how we are using it as well.
And I think that's where that sovereign side collaboration also started its journey initially, that if we educate and join forces, we're going to be more successful in standardizing processes and frameworks going forward.
Bell
The kind of work these researchers are doing is incredibly important as it makes information available and usable for investors and businesses — different institutions that can issue bonds toward sustainability-related projects.
Gollmeier
We can assess the 1.5°C alignment of NDCs in the 2030 targets, and that helps us as an investor in our pre- and post-due diligence in terms of how credible, how ambitious are those targets actually.
And at the same time, investors are generally, I would say, quite open to a mix of existing and new financial instruments as long as they are credible and with KPIs and are underpinning this transition for the issuer.
We also need clearly budget clarity and also sovereigns to be open to speak to investors, so have the sovereign engagement part, because if they don't do that, investors will be feeling — they have to be second guessing what information will be. And uncertainty there, obviously by design, will lead to higher funding costs or re-requesting to get paid for that risk we’re taking of the unknown as well as it might be uninvestable and new financial product in the first place.
So, that's why I think it's quite important to have data disclosed well, which is comparable as well as then having it in terms of we can engage and follow up with questions. And that should help on the engagement side — having it can be mutually beneficial if we as investors feel like we’re receiving the information we want from the issuer and therefore can price bond risks accordingly.
Equally, the issuer will hear what investors are looking for and get the funding they need at hopefully a lower cost of capital as well.
I think going forward then what be also useful within NDCs would be those sectorial policies, not just on a qualitative basis, but also giving more quantitative targets with that as well would be helpful and how they're planning to achieve those, as well as risk mitigation mechanisms, putting in place how are countries addressing physical and transition risks with the financial risks as well.
Bell
Claudia says there are many examples of financial products that can allow sovereigns to attract more green capital.
Gollmeier
More recently, then we have more other innovative financial products come to the market, such as transition bonds, you could think of, in Asia, the GX bonds in Japan, or the sustainability-linked bonds, which we've had on the sovereign space initially coming from Chile and Uruguay, and then at the end of last year, Thailand and just in tune, we had Slovenia come to the market.
These bonds are now not use of proceeds where they fund specifically underlying projects or assets. Instead, there's a structure now which is aligned with the country's Nationally Determined Contributions, their transition strategy.
Bell
Even though businesses should be on the path of engaging on the NDCs, Pablo Carvajal explains that one of the barriers to successful implementation is rooted in the nature of how NDCs are designed.
Carvajal
Unfortunately, NDCs have a long way to go being documents that consider a broader set of stakeholders when they're being designed.
And in the previous experience, before EY, I was working at the International Renewable Energy Agency and was part of the energy planning team, and we were helping many countries design their NDCs with energy scenarios, because you have to have scenarios to understand what targets you're setting.
What we discovered in that experience is that countries are still keeping the development of NDCs as a government document, because it has very, very strong political implications.
Whatever you say there, you tend to think that that is binding as per the Paris Agreement. So, it is a document that is governed in a centralized manner.
I'm helping banks study how they transition their portfolios in terms of lending and investments.
And some global banks that we work with have global coverage, and the only interaction I would say that they consider with NDCs is that the NDC is a proxy of transition risk for stress testing and climate scenario analysis.
So, a good NDC or NDC that is quite mature, it's an indication for investors and for lenders to say, well, this country may be more ambitious than other in terms of financing renewable energy or other technologies.
So, those are NDC users, but they're not actively participating in NDC development.
They're more users of the NDC to assess risk at a global scale or a country scale.
Bell
But Joanna from the UNFCCC is hopeful that with more time, more businesses will be involved in NDC creation and implementation.
She shared with us an inspiring example of one of her recent missions.
MacGregor
I absolutely think that it's a power for good and it's a necessary power for good.
We travel quite a lot in these roles, and so we're sitting with governments each and every week.
The variety across governments and their business sectors is significant, but what we tend to find time and time again is that businesses push their governments.
They want the signal; they want to know how they are going to succeed and sometimes succeed above others in their region or others on their continent, others globally.
And we see from the creation of the NDC, we were in Nigeria for example, and we had a sit down between the policy team that is creating the NDC, the government officials that are going to be signing it off and business sector.
And it was the business sector that was saying to everybody else, we want a stronger target.
We want a stronger target because we know we can deliver a stronger target.
And that means that then you partner with us, and we do more business, and we are more successful.
And I think that we see that, that was in Nigeria. In India, we see, you know, they are really a solar superpower now.
I think it was reported the other day that their Paris pledge of getting to 50% non-fossil fuel power generation by 2030, they've met it five years early; they've done it already. And a lot of that was done by national investment and businesses internally, the private sector turning up, seeing the opportunity, and going, yeah, we're going with this.
And I think that what we're seeing then is that these emerging economies and places where investors may have been nervous about going into previously, the opportunity is so evident.
And in the emerging economies, they are now sharing that kind of intel of how they're doing it with each other.
And even when you get down to the most vulnerable countries, you'll find that they're banding together sometimes, because smaller economies know that if they want to attract big renewables or adaptation projects, they have to get together at scale that will attract that investment.
So, all of this is happening.
The business sector is moving on this, and I think that perhaps more of the stories need to be told about that, so that when the NDC is created, hopefully there has been conversation, consultation with business and private sector before it is created, but certainly after it is created.
And in the UK, for example, the NDC has already been submitted.
What's the next step for businesses?
And there are so many opportunities there for them, engaging with their political counterparts, pushing on their representatives to ask the questions in parliament or elsewhere.
Now that we've got the plan, how are we delivering it and what partnerships are going to be on the table to do that because that's where the money is.
Bell
Joanna reiterates that the NDCs are a vital tool for both governments and business.
MacGregor
NDCs will be the thing that protects jobs, health care, infrastructure, investments and ultimately, prevent far greater inequalities that can lead to devastating outcomes.
No matter whether we're speaking about natural disasters to be avoided and the human or economic toll of that, this is an incredible opportunity for sectors across the economy and businesses writ large.
There is money to be made, huge amounts of investments happening, and that is just going to increase and increase and increase.
Bell
Antonina is also hopeful and suggests businesses should nevertheless pursue the 1.5°C goal even though the world might not be on track.
Scheer
We should hold on to 1.5°C as much as we can. The reason it got into the Paris Agreement was through the amazing efforts and advocacy, especially of Small Island developing states, who for them this is existential and we have to keep trying.
It was never likely; it was always a sliver that we needed to fight toward
That's kind of the view that I take personally.
And so at any given moment, giving up on 1.5°C is not really the way to go.
And I actually feel very strongly about this from a benchmarking perspective, because at an individual company level, you can actually still work toward a 1.5°C benchmark pathway for your sector.
Even if the world is way off track and the world will not stay under 1.5°C, it's still a measure of climate leadership, which is what investors have said they want to see.
And a measure of transition risk, that company who is well ahead of the pack and is 1.5°C-aligned, even if the world isn't, they're managing their risk.
They're building opportunities to thrive in a world that will be decarbonized.
I think it's inevitable that we're going to be in a low-carbon world.
Bell
So, there we have it.
Not only should businesses be engaging proactively right now, there's an opportunity to do this on an ongoing basis because those NDCs are going to be updated and continue to give a real forward look of what that road map to decarbonization looks like.
And maybe this is going to be even more competitive in terms of attracting business and attracting capital to those businesses and countries who are decarbonizing at scale and pace.
This could be, of course, the mechanism by which we don't just get the environmental outcomes that we need; we get the economic opportunity that we want.
So, thanks everybody for listening. This has been EY Sustainability Matters podcast.
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