Finding opportunities for the middle market after COP29

By almost all accounts, the 29th Conference of the Parties (COP29) was seen as a mixed bag, erring on the side of disappointing. The 11-22nd November saw almost 67,000 people gather in Baku, Azerbaijan, for what was dubbed as the first ever “Finance COP”. Climate-related finance and carbon markets were hot on the lips of officials and attendees, but whilst promising progress was made in both of these areas, the absence of progress in the pledges made at COP28 were sorely felt.

With high-ranking officials from around the world seeking to make strides in the push for sustainability, what has (and has not) been agreed inevitably trickles down into the markets. So, what happened at the conference, and what does it mean for middle-market businesses?

What happened at COP29?

Going into COP29, those who had been following its arrival knew that it was going to be heavily focused on climate finance across the board. The main event being the implementation of The New Collective Quantified Goal (NCQG), a key element introduced by the Paris Agreement (COP21, 2015) designed to set a new financial development target post-2025. Fortunately, this was progressed as many had hoped, along with developments on finalising the rulebook for carbon markets. However, the overall sentiments expressed of the conference were marred with disappointments and controversies that led to backlash and geopolitical tensions that could have a knock-on effect on trade.

Key successes of COP29

As previously mentioned, there were two main developments from COP29, the first was the agreement of the NCQG for climate finance. Parties from wealthier nations agreed to a significant increase in climate finance for developing nations. The previous goal of $100 billion has been tripled to $300 billion by 2035, in addition to efforts in mobilising $1.3 trillion a year from both private and public funding by 2035.

The funds are to be provided through various means, such as loans and grants, aiming to help the receiving nations in bolstering their renewable energy infrastructure, mitigating climate-related impacts, and helping with the aftermath of climate-related damages (loss and damage).

Additionally, negotiators completed what is essentially the rulebook for carbon markets under Article 6 of the Paris Agreement. The agreements included mechanisms for integrity, safety, and transparency. This paves the way for a global system for trading carbon credits, hopefully incentivising emissions reductions.

Key disappointments of COP29

The unfortunate truth is that COP29 has been noted more for the areas it lacked in, rather than its areas of progress. It is understandable, especially considering the primary areas of progress (the NCQG and carbon markets) are foundations, not specific actions. Parties have been unable to meet previous financial targets, so many feel doubt that pledging towards the NCQG will actually manifest in action, especially with much of the $1.3 trillion goal being funded from the private sector. Additionally, the carbon markets architecture, whilst promising, is yet to be properly trialled in the global arena.

The call for an increased $300 billion in climate finance by 2035 and the push for a global carbon market are steps in the right direction on paper. However, as said by Paola Piña, ESG Advisory Lead Partner at RSM Chile, “These global commitments may conflict with local priorities, especially in regions like Latin America where meeting social and economic development needs requires certain considerations and remains urgent.” While the NCQG’s framework aims to stimulate scalable innovation through private and public funding, its success depends on equitable distribution. Without careful tailoring to local requirements, these measures could stall in areas where resources are already stretched.

With 2024’s COP being heavily focused on the financial side of sustainability, there was not much room left for discussion around the fossil fuel transition. COP29 was an opportunity to discuss the implementation of the tripling renewables scheme and emissions reduction targets set at COP28 but conversation around this seemingly stalled, leaving many disappointed with the lack of action in that area.

What do COP29’s outcomes mean for the middle market?

Regardless of COP29’s perception, the potential outcomes for the middle market are significant, especially regarding the NCQG and carbon markets framework. So, let’s take a closer look at the opportunities that have been unlocked for the middle market.

The New Collective Quantified Goal

The most crucial aspect of the NCQG in terms of its relevance to the middle market is that it asks the private sector, in addition to the public sector, to scale up funds to the $1.3 trillion goal. Officially bringing the private sector into the global push for climate finance could make targets more obtainable, potentially even surpassing them – globally, costs from climate-related events have reached up to nearly $1.5 trillion, and is only expected to get worse if things continue as they are.

Opening this funding push to the private sector brings with it plenty of opportunity. According to RSM US’ Co-Leader of Sustainability Service Solutions, Anthony DeCandido, “The potential here for scalable innovation is exciting. The NCQG’s inclusion of private funding incentivises businesses to develop scalable solutions across many different areas. Think renewable energy, carbon capture, sustainable agriculture. With many of the projects that will fall under this scheme focusing on developing nations, businesses can bring new, innovative products and services to help new markets across the globe.”

The NCQG also has the potential for businesses to engage with new climate-aligned financial tools, encouraging the creation and use of instruments such as sustainability-linked bonds and loans. As DeCandido adds, “Engaging with these instruments can provide the private sector with profitable investment opportunities whilst addressing their ESG goals.”

With more help to push for sustainability, the global market benefits. According to a report from the Independent High Level Expert Group at the London School of Economics, the avoided costs of climate-related damage paired with the benefits of climate action could amount to around 15-18% of global GDP in 2030.

The NCQG gives businesses the unique opportunity to foster global financial partnerships and engage with new markets whilst providing towards a better, sustainable, and hopefully more financially stable future.

Carbon markets

According to Piña, “The finalisation of Article 6 of the Paris Agreement at COP29 is a big step forward in the future of carbon markets after years of complex negotiations.” To briefly summarise, Article 6 includes the framework with which countries can cooperate to achieve their climate goals, including the trade of carbon credits or working together on projects to reduce emissions, for example. As Deborah Fischer, Sustainability Partner for RSM in Belgium observes, “Carbon finance also enables middle-market businesses to obtain financing for their climate transition projects, where they can develop new and greener products and generate new business opportunity.”

Carbon markets work on a cap-and-trade system, where one credit is usually equal to one metric tonne or the equivalent of other greenhouse gases. After governmentally mandated emissions caps are set, companies can buy or sell their credits depending on if they need more or not. Credits can also be generated through carbon offset projects which can, in turn, be used or traded as needed. This essentially means that organisations need to pay a fee for their level of emissions above the cap, but also allows them to profit from reducing emissions whilst incentivising projects that reduce pollution.

“The finalisation of Article 6 means that a whole new market is unlocked for organisations to generate revenue streams in; a market that, in theory, becomes increasingly profitable the more sustainable and green-focused a company is,” says Piña. Some reports have stated that as Article 6 comes into play across the globe, the cost of nationally determined contributions to climate pledges is expected to decrease by up to $250 billion annually.

According to Deborah Fischer, Sustainability Partner for RSM in Belgium, “Following the creation of the new carbon market mechanisms during COP 29, middle-market businesses will be able to trade credits on this UN carbon market, as well as countries. This market for buying and selling carbon credits with the UN’s stamp of approval, is likely to be a more appealing place for businesses to transact than existing voluntary carbon markets.” She continues, “Middle market businesses that progress quickly on their carbon reduction trajectory will then be able to sell carbon credits and generate new revenue.”

The new rules set at COP29 have stricter standards for carbon credits, aiming to create a fairer, more transparent, and trustworthy market. Businesses can be more confident in the quality of the credits they purchase, which is crucial for maintaining their reputation and meeting regulatory requirements.

The takeaway

Whilst COP29 is likely to go down in history on the side of disappointment, the potential outcomes for what actually was progressed is exciting. The NCQG and finalisation of carbon markets under Article 6 signals a new era for climate-related finance and, if these gambits pay off, could be huge steps towards a greener future. However, that is certainly a big if. Even with these frameworks now put in place, whether they become properly utilised and operational is still yet to be seen.