This year: Areas of focus and results
The key word for the 27th Conference of the Parties (COP) was expected to be “implementation.” Yet, investors were watching to see if the Paris Agreement and COP26 commitments would be kept alive.
Hosted in Egypt, this year's meeting was also referred to as ‘Africa’s COP’, with an increased focus on climate adaptation and compensating the world’s least developed countries (LDCs) for climate damages.
All in all, the meeting concluded without major breakthroughs on fossil fuel phase outs, but with positive forward steps on other critical topics. While the formal governmental negotiations were largely underwhelming, the private sector stepped up further, reaffirming our view that the green transition will continue to progress.
1.5ºC still on the table, although less likely.
The COP26 agreement was the first one to formally commit to limiting global median temperatures from rising by more than 1.5ºC (2.7ºF), which would require a reduction in emissions every year by 2050. This year’s agreement reaffirms the commitment to 1.5ºC, but country pledges tell a different story.
According to the Climate Action Tracker, current policies around the world point to 2.7ºC warming, while renewed pledges and targets as of COP27 would lead to a 2ºC scenario. What’s important to remember is that this is a projection, and one that keeps changing. Just a handful of years ago the world was on track for a 4–5ºC warming; that warming scenario would have led to a devastating climate future in the second half of this century.
Thus, although this year’s pledges are still not sufficiently ambitious to meet the Paris Agreement, the path of change continues to be directionally correct, creating opportunity for the green transition. The final agreement mentioned renewable and ‘low-carbon’ energy, likely referring to natural gas and other forms of transitional energy sources underlining a pragmatic approach to climate dynamics.
“Loss and damage” and adaptation.
For the first time, the topic of compensating vulnerable countries for climate damage not only made it onto the formal COP agenda, but also was a notable part of the final agreement. Countries resolved to set up a common loss and damage fund. However, the devil will be in the implementation details, with questions already emerging on whether meaningful new funding will be channeled vs. existing funding sources from developed to developing nations being diverted to this objective.
Adaptation financing was also in focus. The Sharm el-Sheikh Adaptation Agenda was announced, and at least USD 230mn of new adaptation focused financing was pledged during COP27. Adaptation financing is likely to become increasingly investable for private investors, as extreme weather events intensify, leading to demand for solutions. See our report Sustainable Investing Perspectives: Resilience, SI fixed income, and proxy season wrap (August 2022) for more detail.
Large players back at the negotiation table.
China and the US restarted informal discussions on climate, indicating a thaw in relations since hitting a low point in August. While no concrete announcements have been expressed yet, a possible return to ‘coopetition’ on climate would be supportive over the longer term of a diversified investment approach to solutions tied to the Clean Air and Carbon Reduction theme.
India, the world’s third largest CO2 emitter and second largest consumer of coal, released its implementation plan, pledging a phase down of coal. Its strategy focuses on expanding green hydrogen production, expansion of bbiofuels, and driving electrification and energy efficiency.
Brazil’s President elect Lula pledged that Brazil would focus on protecting the Amazon rainforest, which has reached a new high in deforestation according to the Brazil National Institute for Space Research.
Finally, outside the COP27 meeting, a breakthrough achievement was the establishment of the Just Energy Transition Partnership (JETP) between Indonesia, the private sector, and DM countries including the US, European Union, Japan, and Canada. JETP will mobilize USD 80bn over three to five years to support Indonesia’s energy transition, including achieving a penetration of renewables of 30% by 2030.
Read the original report, Sustainability focus continues amid headwinds, 6 December 2022.
Main Contributors: Amantia Muhedini and Jacky Lin
This content is a product of the Chief Investment Office (CIO).
