Prior to the COP27 climate negotiations in Egypt, we set out our expectations on what the meeting might achieve. As we anticipated, there was intense focus in Sharm El-Sheikh on the impact of the changing climate, after another year of weather extremes. As also expected, the backdrop of rising costs and energy security provided the political headwinds to spur some progress.
Here we set out our views on what COP27 achieved, what may come next, and what opportunities and challenges this presents to investors.
The backdrop of this year’s extreme weather painted a bleak picture of the reality of climate impacts – with the flooding in Pakistan, that caused over USD 30 billion in damages, as just one example.
After much negotiation, the most celebrated outcome of COP27 was the establishment of a loss and damage fund for vulnerable nations. Dubbed a ‘breakthrough’ by the UN Climate Change secretariat the fund marks the outcome of over a decade long dialogue on how to address the impacts to those most vulnerable to the climate crisis.
But exactly where the money will come from remains an open question. The text mentions a “wide variety of sources” including “innovative sources”. To answer these questions a committee on operationalising the new fund was established at COP27. The group will report the outcomes to COP28 in Dubai next year. We will likely see continued clashes about which countries are eligible for help, who will pay, what ‘innovative sources’ will be drawn upon, and how much money will go into the fund.
In parallel, there were discussions on finance for adaptation – the costs of mitigating against physical risk. Pre-conference expectations were that the adaptation agenda would take center stage. However, despite some new pledges, including eight countries committing just over USD 100 million, the tangible outcomes for the adaptation agenda were scarce.
Countries agreed to establish a framework for adaptation, based on the pledge made in Glasgow to (at least) double adaptation finance to USD 40 billion by 2025. However, a shift in language saw the emphasis removed from the funding to negotiators agreeing to produce a report for COP28 on the progress towards adaptation. As noted by UNEP, the adaptation finance gap remains vast.
As we stated ahead of the conference, we were particularly interested in the role the private sector may play in mobilizing adaptation finance. On this, the European Bank for Reconstruction and Development (EBRD) launched the EBRD Climate Adaptation Action Plan which aims to build adaptation into project and policy design, as well as mobilize private finance for adaptation projects. Released before the conference, IIGCC’s Climate Resilience Investment Framework sets out a baseline for institutional investors to consider adaptation and how to build climate resilient portfolios.
Outcome: A historic agreement to establish a loss and damage fund marked real progress at COP27. However, there was little advancement on adaptation. The hard battles on both the adaptation and loss and damage agendas are still to come. We will continue to watch as this evolves ahead of COP28.
Only a handful of updated national climate pledges were unveiled in Sharm El-Sheik. Turkey committed to net zero by 2053, with an interim goal of a 41% emissions cut by 2030. Mexico now aims to cut emissions 30% by 2030, up from its previous target of 22%. The new pledges do not put us on track to close the 1.5C emissions gap. The COP27 text “requests” nations that have not yet reviewed their plans to “revisit and strengthen” their 2030 climate targets “as necessary to align with the Paris Agreement” by the end of 2023.
To achieve the 1.5C target, emissions need to decrease globally by 50% within 2030, yet global emissions from fossil fuels reached record highs this year, according to a new report published during COP27.
Inside (and outside) the negotiations the narrative battle for the totemic 1.5C target raged. According to the UK’s COP envoy Alok Sharma the 1.5C target was “on life support”, while others, such as leading scientist Bill McGuire and The Economist, pronounced it “dead”. The harsh reality of a 2C vs 1.5C world was also highlighted. For example, the Maldives’ climate minister Amnitah Shauna stated that 2C could lead to “the death” of her nation. Scientists and experts stressed that even though 1.5C may now be unattainable, it does not mean giving up, as every fraction of a degree matters in protecting against the worst impacts of the climate crisis.
Outcome: New pledges fell far short of closing the emissions gap. There was an increased focus on the feasibility of the 1.5C target and shifting the rationale to “every degree of warming matters”.
The fundamental role of ‘non-state actors’ (such as companies, banks and cities) in achieving the Paris goals was spotlighted in Sharm El-Sheikh, particularly given the lack of progress at the governmental level. An inaugural report from the UN’s high-level expert group on non-state entities presented a set of guidelines on how to create net-zero strategies that are not rife with false claims, ambiguity and ‘greenwashing’. Five principles are outlined in the review: these include aligning commitments with actions and investments; the need for ‘radical’ transparency in sharing plans and progress; as well as net-zero credibility having to be established through third-party accountability.
We welcome the focus on accountability and implementation, which mirrors the shift in corporate engagement, where investors are looking not only for targets but also for credible transition strategies. We have also set out in our recent article how we are operationalising our own net zero commitment for our assets under management, and the importance of transparency on methodology given the diversity of approaches within the investment industry.
Outcome: Whilst private sector involvement at COP27 was less prominent than in Glasgow, the lack of progress at government level shines a spotlight on the importance of non-state actors turning pledges into reality – and there will clearly be more scrutiny on those who fail to match promises with action.
After the completion of the Article 6 “rulebook” at COP26 in Glasgow, COP27 faced decisions on the machinery and implementation of carbon markets. The authorization of the first bilateral “internationally transferred mitigation outcome” under Article 6.2 was announced at COP27; Switzerland has installed efficient lighting and cleaner stoves in Ghana and the mitigation outcomes will count towards its own national carbon targets. However, some of the most contentious issues on Article 6 were deferred to COP28, like how to treat emissions “removals”, whether to allow credits for “emissions avoidance” and when credits could be “revoked”.
Eyebrows were raised by some on the outcomes of Article 6.4 negotiations, which addresses the open carbon markets used by corporates and others for their own offsetting. In particular there was a fear that double-counting (where emissions credits are counted by both the issuer and the buyer of the credit) could allow for corporate greenwashing. The new text also fails to mandate that the details of carbon trades done by corporates and governments should be published and made transparent.
Outcome: Less momentum on carbon markets than expected, with major decisions deferred to COP28.
The COP26 meeting in Glasgow was always going to be a hard act to follow, and COP27 faced some difficult economic and political obstacles. We believe that the establishment of a loss and damage fund, even with so much detail yet to be resolved, was a significant and positive outcome – and an important signal of the increased attention that will be devoted to physical climate risk, as the inevitable happens and more extremes of weather are felt globally.
Apart from the predictable failure to close the gap to 1.5 degrees, an area of disappointment was the lack of progress in attempts to bring nature loss deeper into the agenda. We hope that the upcoming COP15 Montreal Biodiversity Conference may be an opportunity to draw these links.
From an investor point of view, we also believe that the emphasis on credible action by non-state actors is significant and likely to form a major theme of the year ahead. We have seen too many ‘net zero’ targets that lack teeth; efforts to cut through greenwash and set out standards are both welcome and necessary.
In Dubai next year, much will depend (as always) on the geopolitical context. More wrangling over who will pay for the commitments on loss & damage and climate finance is inevitable. But with global emissions continuing to rise, and the prospect of limiting the global temperature rise to 1.5 degrees rapidly diminishing, it is essential that COP28 avoids distraction from its core purpose: keeping up the pressure on governments to take more ambitious actions to close the climate gap.
