COP29 changes S&P's ratings approach: Focus on sustainable finance

Following the UN Framework Convention on Climate Change Conference (COP29) in Azerbaijan, S&P Global Ratings presented an updated rating approach, Report informs referring to the ratings agency.

The changes aim to account for current market trends and ensure transparency in evaluating new mechanisms, such as debt-for-nature swaps and payment deferral provisions for countries most vulnerable to natural disasters.

These instruments will help free up fiscal space for vulnerable countries with limited financial resources and significant debt burdens.

The S&P report notes significant growth in sustainable debt obligations in emerging markets, including in local currencies. However, low-income countries continue to face difficulties accessing climate financing that wouldn't increase their debt burden.

Even small or temporary debt relief could allow vulnerable states to direct more funds toward building economic resilience and climate change adaptation, analysts note.

One of COP29's key outcomes was an agreement on a collective goal of $300 billion in annual climate financing from public and private sources. This tripling of the previous target, according to S&P, will be an important step toward creating functional global carbon markets.

Despite the significance of this goal, the agency emphasizes that implementation will depend on individual countries' commitments and capabilities, as well as the mobilization of private investments and support from multilateral credit institutions.

Key Challenges for Sustainable Development

The report emphasizes that the failure to meet the growing climate financing needs of developing countries could intensify long-term economic and social risks.

Developing countries, which are disproportionately exposed to climate threats, risk becoming major emission sources if their economic growth and poverty reduction efforts are not based on low-carbon technologies. This indicates they need significant investments to transition to low-carbon technologies and increase resilience. Failure to meet these needs could intensify long-term economic and social risks both locally and globally. After COP29, countries are expected to review their Nationally Determined Contributions (NDCs) and climate adaptation plans.

These steps will be directed at medium and long-term goals, especially for countries vulnerable to physical climate risks. According to S&P, more ambitious financial targets could encourage countries to develop more ambitious plans, which will significantly impact key economic sectors, especially in developing countries. S&P identifies several factors hindering the effective implementation of climate goals.

These include insufficient institutional support (due to continued geopolitical uncertainty and changing national strategies), lack of standardized blended finance mechanisms, and insufficient risk mitigation tools to attract private capital. According to the agency's sustainable finance specialists, addressing these barriers will be an important step toward achieving sustainable development goals and net-zero emissions.

They believe that COP29 was an important milestone in advancing climate initiatives, but implementing the set goals requires significant efforts and coordination between countries and the private sector.

S&P's updated approach to debt instrument assessment confirms that sustainable finance is becoming a key factor in the global economy.