COP31 and the $4 trillion question: How to finance sustainable development

I'm Lindsay Hall and I'm Esther Wielden. Welcome to All Things Sustainable, a podcast from S&P Global. As your hosts, we'll dive into all the sustainability topics that are reshaping the business world. Join us every Friday for in-depth analysis and interviews with leaders from around the globe. Together, we'll break down big sustainability headlines and cut through the jargon. COP31 cakes off in Untalia, Turkey this Monday, November 9th and runs through November 20th. As a quick aside, the Republic of Turkey officially started encouraging use of the name "Turkia" in international context in 2021 to better represent the country's culture and identity, and the United Nations recognized the "Turkia" name in 2022. As many of our listeners will know, the UN has three sister conventions, each designed to address a separate but intertwined challenge, desertification, biodiversity loss, and climate change. What the UN describes as existential challenges to humanity. COP31 is the UN's annual climate-focused conference of the parties to the United Nations Framework Convention on Climate Change, also known as the UNF-Triple C. What's on Zekit COP this year? Well, a lot, in fact. At a high level, COP31 will follow three main tracks. COP31 focuses on a mission targets in implementation, and we'll hear how countries are delivering on their nationally determined contributions or NDCs. Those are countries planned to reduce national emissions and adapt to the impacts of climate change under the Paris Agreement. A second track will focus on climate finance, and specifically, delivering the new collective quantified finance goal that was set at COP29 and 2024. This goal, and the acronym here, is NCQG, calls for directing at least $1.3 trillion of climate finance annually to developing countries from all public and private sources by 2035. A third track at COP31 is all about adaptation and resilience. Parties will focus on strengthening the resilience of vulnerable countries and communities against climate risks. Now, the headline priority for the COP31 presidency is driving implementation through cooperation and collective action. And Torquia has identified several priority areas. These include electrification with a goal to increase the global electrification rate to 35% by 2035. They include zero waste and methane reduction with a goal to reduce the increase in waste generation by 50% by 2035. They also include resilient cities and buildings target, with a goal to reduce energy intensity in the building sector by at least a quarter by 2035. There's also green industrialization. There, the goal is to increase the use of circular materials in the manufacturing and production sectors to at least 15% by 2035. Now an estimated 100,000 people will participate in COP31. The event will convene heads of states, scientists, civil society, youth and business leaders from around the world. And in the last few years, we've seen a robust private sector presence at these gatherings. Many companies including S&P Global participate in COP's. And this speaks to a central question I hear. What is the role of the private sector and what role does the public sector play in addressing big societal challenges? This is a topic we're going to explore with today's guest, Dr. Mahmoud Mohadin. Mahmoud is UN's special envoy on financing sustainable development. His career as an economist and finance leader includes time as executive director at the International Monetary Fund or IMF. He was Senior Vice President at the World Bank Group and he was Egypt's first Minister of Investment. He also served as the UN Climate Change High Level Champion for COP27, the Climate Change Conference in his home country of Egypt that took place in 2022. We'll hear today about what to expect from the upcoming COP31. Mahmoud tells me what needs to change to get more private sector capital flowing to developing markets. He mentions the term OECD and that's the organization for economic cooperation and development. First up though, we'll hear how the world is progressing toward the sustainable development goals or SDGs to throw one more acronym at you. World leaders convened in 2015 to adopt the UN's 2030 Agenda for Sustainable Development and its 17 related sustainable development goals. These SDGs act as a roadmap for achieving a better, more sustainable future for everyone and they cover global challenges related to poverty, inequality, climate change, environmental degradation, peace and justice all by 2030. As we head into 2027, that 2030 deadline is just a few years away and I asked Mahmoud in his capacity as UN Special Envoy on Financing Sustainable Development, what's your outlook for delivering on this agenda, especially amid the geopolitical fragmentation and fiscal constraints that have characterized 2026? Here's what he had to say. Well, as a person concerned with finance and implementation, I always use the evidence and unfortunately, based on the numbers, we are only 36% on target to achieve the targets of the SDGs and that means that we need to do a lot in terms of acceleration and acceleration means finance, technology and incentives. I see countries including big countries like China and India very much on target to achieve some of the critical goals. China can give hope to other countries of smaller population but it's all about acceleration now. I know that there are two teams working in the UN and beyond. One is talking about acceleration, what can we do more on the finance, on investment, on alignment of budgets, in dealing with issues related to debt which is taking through the service, the chunk of the money and instead of putting it in human capital infrastructure or putting it in debt service so there could be opportunities through debt swaps and others. Many people are working now in the wonder that could really be obtained from investing in technology and science to accelerate the implementation and others are working on regulations. Meanwhile, people with more practical and pragmatic minds, I hope that I'm one of them as well, that would say, well, we'll do what we should be doing before 2030 but there is life after 2030. So post 2030 there is going to be some work in finishing the unfinished business and we need to do more localization or regionalization for the second phase after 2030 and we need to be more ambitious, not just in putting ambitious goals on targets but it's all about means of implementation. I hear a lot of numbers thrown around about the need for development finance. Can you just put some numbers around it for our listeners? Yeah, when we started the process back in 2015, the gap was around 2.5 trillion dollars for developing economies and emerging markets to fulfill the goals and the targets. This is 2.5 trillion per year and that needs to be mobilized from all sources including official development assistance, private finance and the contributions from budgets. The latest estimate of the gap is 4 trillion dollars and the majority of the gap is related to the infrastructure sectors from energy to airports, airports, road networks, transport systems, water and energy of course is part of the broader definition of infrastructure. So this is the widening gap. Some people would tell you that 4 trillion dollars to achieve all of these ambitious targets to improve the quality of life and standards of living of the people around the world is not really big if you're related to how much assets under management are available today. The 4 trillion is just a tiny fraction of what is available of capital around the world. What capital is not necessarily flowing to those areas of priorities? Capital now, as you can see, is flowing to the AI ecosystem which is important but it's not everything. AI alone will not solve the needs for health services or education or dealing with job opportunities. So what is being required is much more balanced approach in order to provide the necessary funding for all of these necessary investments either in human capital or infrastructure or investment resilience and the climate action. And that's 4 trillion dollars now per year. Yes. For developing economies and emerging markets, assuming that the advanced economies will take care of themselves. Okay. And let me ask, what is the expected breakdown of public versus private capital that would ideally fulfill that need? Let me give you an example from a recent report, especially, as I mentioned, the infrastructure is responsible for the majority of the funds required for the SDGs because education would require infrastructure and education facilities, schools, universities and they require energy and they require roads as well to lead to this school, the same for hospitals. The OECD and the African Union, in the case of the African continent, give us a very interesting update that we require something like one hundred dollars. and $70 billion of investments per year in the African continent alone. Currently, we have roughly 65 to 70 billion. So this is basically half of what is being required. And currently, of the figure they share with us, 48% of infrastructure finance is coming from external sources. 41% is coming from the budgets of the state. And 11% from the private sector, only 11%. In an ideal world, if we have good public private partnerships in place in terms of framework and ecosystem, the private sector would should really be doing the right thing by giving its contributors a decent yield for whatever they are investing. They should really be much more than 11%. So we would really require lots of reforms for countries, for the private sector, to have a better share. Some people put a Ruru thumb to be arranging between 40% to 70% of private sector finance for infrastructure. What kind of reforms would help drive towards that higher percentage? Well, just yesterday I wrote an article about investing in Africa with a focus on infrastructure. First is entry rules and exit rules. You wouldn't really go into a country that has complications when it comes to registering your enterprise. If it has complications in the exit rules as well, if you are already done what you will need to be doing, and you need to exit either to repatriate the profits or to end the business to go somewhere else. So the entry and exit rules need really to be more simplified. There are some countries that have been doing fantastic job in this front in Asia. Countries like Vietnam or Singapore or Thailand. And some African countries, I would say, countries like South Africa, or recently could devour, be name, Morocco, and to have a rate extent Egypt as well in these rules. But it's not just about that. Rule of law, protection of property rights. You need to have a pipeline of bankable or rather investable projects, because top private equity firms will not just go and mobilize the resources and their experts from one transaction. Unless it's a very big transaction, but a pipeline of investable projects would be much more appreciated than just one small or big transaction. Markmoot said trust, certainty, and predictability are also key to driving private sector investment. So as much as the authorities, governments, and regulatory agencies, can really make matters easier to make sure that their standards of operations are the kinds of standards that you are familiar with when it comes to investments around the world. Predictability of the tax systems and the tax policies, predictability of the regulators like central banks, or the financial regulatory authorities. This would be very much appreciated. In addition to that, the depth of the market, not just the financial markets, but the markets at large. And that's why it has been very much the case that I'm working more now in Africa and the Middle East that have been very much encouraging countries for regional or sub-regional kind of collaboration. Because some countries can offer opportunities with decent size for capital to be injected. Some smaller countries, if you are after a big energy project or a big infrastructure project, some sorts of aggregation will be appreciated. Size matter in infrastructure. - Okay. You're reminding me of something I heard a lot at Climate Week in New York just a few weeks ago, which is a lot of people were talking about the need for policy durability was the term. - Yes, exactly. You don't need the on and off or the surprises. I wasn't the climate week and I listened to someone saying, "Well, we don't need any surprises. Even happy surprises, we don't need them. Just make matters predictable for us to do the proper risk management." - And you mentioned that you're focusing on Africa and the Middle East. In your work as UN Special Envoy on Financing the 2030 Agenda, talk to me about what is your geographic focus? - Yeah, well, in my work, my function is global, but of course, given that we cater more for the developing economies and emerging markets that gets me more into Africa, into Asia, and the Latin American countries. Now I see more and more tendencies for regionalization, given the tension that we see around the world in all of these kind of global tensions between the incumbent powers and the emerging powers. So many countries in the global south are seeing opportunities through regional collaboration. - Okay, your role includes sharing the G-Fans, the Global Financial Alliance for Net Zero, Africa Advisory Board. - This is the Glasgow Finance Alliance for Net Zero that was launched in the UK in COP26, and it was led then by Mark Carney and the Marishapiro and Mike Bloomberg. Of course, Mark Carney is now the prime minister of his home country, Canada. Marishapiro is doing the work at the global level and there are groups in Latin America, Caribbean, Asia, and Africa and I'm responsible for the G-Fans Africa as chair of the Board of Advisors to the G-Fans. - So what do you see in that role as some of the barriers to mobilizing institutional capital in African markets? - Actually, we have three priorities and the three priorities would answer your question different ways, one is playing a catalytic role towards building pipeline of bankable investable projects. They capital it there, but what we need is basically these kind of projects aggregated in a way to attract the asset owners, asset managers and investors to invest. The second one that we're doing is the capacity building at large, this for governments and the private sector and the third that we are doing more now in the carbon credit markets. One of the things that we are doing is basically about the cost of capital and while countries, including the US, OECD countries, still manage to get decent finance with adequate cost because of perception issues and matters related to old legacies. Many countries in Africa and the developing economies are being dealt with based on perception and there is an important report that is getting regular updates from the international financial institutions, that's called the GEMS report. This is the database for credit, default and recovery either sovereigns or private sector and it's telling us that the default cases are much better than being perceived, actually less than 4% and the recovery, even the cases of default are close to 75%. But when it comes to the terms and conditions of lending to developing economies, it's dominated primarily with the perception. So I think here there is a role for us not just to read reports and to celebrate that the reality or the actual risk is much better than the perceived risk but how to bridge the gap between the reality and the perception. And here it needs investments in the capacities of sovereigns, of ministries of finance, of line ministries to demonstrate their cases better, we require better communication as well with the rating agencies and better communication with market participants. - Many of these challenges we've been hearing about will be on the agenda when COP kicks off next week. I asked Maup Mood about his own experience at climate COP gatherings, including his role as UN Climate Change High-Level Champion for COP27 in Charmel Shake Egypt a few years back. Here's what he said. - My engagement started when I was at the World Bank because part of my work was on the sustainability at large and the supporting the teams responsible for the COP. But I was much more involved since COP26 that took place in Glasgow and the UK. And since then for the last five years I've been attending all of these COP's either on the preparatory work or in the summits themselves, but with a focus on finance investment and it. - And during your COP27 leadership, I understand that you advocated for viewing climate change through an African lens, through an African perspective, and putting adaptation resilience on equal footing with mitigation. - First of all, heading into 2027, what trends are you seeing in adaptation and then also mitigation? - Yeah, I'm very proud of course you can discount that with the national bias to my own home country Egypt in Charmel Shake. I think there are things that have been developed nicely that I like to reflect on because lots of the importance for the past but of the relevance to the current COP that is going to be hosted in Antalya in Turkey and the next COP in Addis next year. The first one that we manage, I think, to do a better job in linking climate action to development action. And there was unnecessary kind of dichotomy, a false dichotomy between what we do in climate and what is impactful for the development agenda. If we're serious about the work and climate is basic about three things. Mitigation. which is basically about investment in energy renewables and the decarbonization, which has a great deal of matters to do with access to energy, which is SDG seven, one of the sustainable development goals. The second one, which had been outlined for the first time with clarity in Sharma Sheikh in COP27, is basically about spelling out what adaptation means. Because the specialists didn't really do a good job in explaining what they mean by that, assuming that everybody know what they are talking about when it comes to investment and adaptation are easily. But when you explain it, that this is better job in investment in water management, in agricultural system, in food systems, in the protection of shores and coastal areas, in dealing with deforestation, in dealing with the protection of cities and townships from the desertification. So you start to get some more attention to the matter rather than talking about the matter in a very generic abstract way. So I think the Sharma Sheikh adaptation agenda has since then being a good platform to bring finance from the government sector, which had so far had the majority of finance and the good interest by the private sector now in resilience adaptation solutions. And the third one, based on the Paris Agreement, is dealing with the loss and damage, which is the third front in our war against planet. So the first front line is mitigation, the second is adaptation and the third is the loss and damage. - Okay, so what do we more about the loss and damage, which audience understand about how you're thinking about that? - Yeah, so the assumption here, by science, if we're doing a good job in the mitigation to protect the environment and the global system and to keep the temperature below 1.5 degrees, you will be in need for less in the investment in adaptation resilience. But we know that we are failing in that function of dealing with the warming because the emissions are higher than the thresholds. And we are in a world that is definitely heading for more than 1.5 degrees. This means that we need to invest more in the adaptation and in resilience. If we're not investing adequately in adaptation resilience, you get losses and you get damages. It's like what we saw recently in Pakistan when almost 40% of the land of the country was covered by water, with losses and damages to agriculture, food production, homes and the habitat. So this is basically what we mean about the loss and damage. That needs compensation and support, especially the low income and developing country that cannot deal with these kind of big losses. The fund had been established, it was established in Egypt, in Shah Masha'i, it was operationalized in Dubai, in COP28. But so far, despite the many pledges and the commitments, we are not seeing the flows of funds to the institution as being promised. What we need is to have more work, to convince countries to inject more funds, and to do more with institution investors, including insurance, to support this fund. So the money would come from both voluntary commitments from governments and also from the private sector. Yes. Thank you for clarifying. I'd like to look ahead to COP31. What key questions do you have heading into this event? These cops are very much interesting in terms of the way that they conduct the agenda for the meetings. So each chair has the responsibility as a president for two years. The first year normally is more important than the second, but the overlap with the successes as chair. What we see here is, basically, for each chair, they would say that we are going to be continuing on our agenda of whatever left from the previous agenda. That the second thing that there will be some particular topics that each chair or a president of COP would introduce as areas of emphasis. Of course, there is an element of continuity. This is COP31. This means that we are building on promises and implementation or lack of implementation of the promises for the previous 30 cops. But this cop in particular people lead it differently, but my very personal view, there are three areas here that could make this cop different. One, the emphasis on waste management and zero waste. And admire really what the Turks in particular have been doing in this area. Because it's a very big industry and it's impacting everybody from the farmers to the industrials to those who are living in their homes, suffering perhaps from lack of quality of waste collection. And there are many aspects of the work here in terms of the green economy, in terms as well of the waste to energy opportunities. So I'm very happy with this kind of emphasis on the work and the kind of ecosystem that is being built under the leadership of Turkey. The second one is about electrification and new sources for energy and the investments in innovation, batteries, greening the grids. The third, which happens as we speak, is access to finance. And this is the pre-cop that's taken place in the Pacific Islands. 'Cause you can always have all of these ambitious goals on targets, but again, without adequate finance to get stuck. - That pre-cop gathering that Mahmoud just mentioned to place October 5th through 8th. Fiji, Tuvalu, and Australia partnered to deliver the official pre-cop ministerial meeting and the leaders event, which conveyed global climate decision-makers in a Pacific ahead of COP31. Access to finance was on the agenda at this event. Strengthening financial access and support for developing countries will also be a focus at COP31. Here's what Mahmoud had to say. - So there is a great deal of emphasis on the commitments of the advanced economies and what we are doing on that front. But I would say here that climate, as in development finance, suffer from three things. Insufficiency, because of the widening gap. Insufficiency, because it takes really long, long time until you get the money to the projects from the sources of finance. And third is the cost and the unfairness of finance, because we are still very much suffering from the fact that funding is there, but is very much concentrated in advanced economies and China. And we are still very much relying on debt instruments rather than public-private partnerships and equity finance. - What is the solution to this sort of reliance on debt that you're seeing? - We need to do a better job in the pipeline of investable rather than bankable projects. I can see today that many countries in the global south are much more attractive to private sector finance than others. What did they do? Basically, they did a better job in improving their business environment. They did a better job in the pipeline of investable projects. They did a better job in the capacity building. They did a better job in having a toolkit and primarily with the multilater development banks in order to encourage the private sector through the risking tools, taking care of the first loss, providing some sort of insurance and guarantees. - Okay, and did I hear you correctly, did you say investable rather than bankable projects? - Yeah, investable means that it's not just going to be, that is going to be more on the attraction of the foreign direct investment rather than borrowing abroad. - Got it. Well, thank you for sharing your expertise with me and our global podcast audience. - No, thank you so much. - Today we heard about progress toward the U.N.'s 2030 Agenda for Sustainable Development and the 17 Sustainable Development Goals. The latest estimate is that $4 trillion needs to be mobilized annually to address the sustainable development goals in emerging markets and developing economies with much of that gap related to infrastructure. Mahmoud explained the barriers to getting more private sector investment flowing to address that gap. And he told us how conversations are unfolding about investment in climate mitigation, adaptation, and loss of damage. This will be on the agenda at COP31 and at next year's COP32 in Addis Ababa, Ethiopia. At the end of our interview, I asked Mahmoud what will make this COP31 gathering a success? And he said, "I'm always interested in what will happen the Monday after." He said, "You have all these conferences, declarations, promises. But what are we actually going to see happening differently?" Well, that's the topic we'll be watching closely on this podcast to see how COP31 outcomes unfold. You can also follow along by subscribing to our free weekly newsletter, the S&P Global Sustainability Weekly, and we'll include a link to that in our show notes. You can also find information about S&P Global's events at COP31 in those show notes. Thanks for tuning in to this episode of All Things Sustainable. If you like what you heard, please subscribe, share, and leave us a review wherever you get your podcasts. And a special thanks to our agency partner, the 199. See you next time. (upbeat music)