Subscribe
Sign up for timely perspectives delivered to your inbox.
Adrienn Sarandi, Head of ESG Strategy & Development, attended the first week of the COP27 climate talks in Egypt. Here she highlights 10 takeaways and her thoughts around the key issues that were front of mind for those on the ground at the conference.
There were definitely meaningful differences. In 2021, COP26 delivered more ambitious greenhouse gas (GHG) reduction targets and pledges to accelerate efforts on coal, methane, deforestation and adaptation, but without credible implementation measures. This year, against the backdrop of the war in Ukraine, rocketing inflation, food and energy shortages and continued deglobalisation, no one really expected landmark announcements.
The focus of COP27 was always going to be technical and focused on implementation. However, it got off to a rocky start and remained chaotic throughout; and frankly I didn’t have high expectations in the first week for any landmark agreements. The energy and optimism that surrounded COP26 was almost totally missing at COP27 amidst the challenging economic and political backdrop.
Who turned up and who stayed away was also revealing. Saudi Arabia and the United Arab Emirates, two large oil exporters, had large and prominent teams, while 636 fossil fuel lobbyists also attended – 100 more than at COP26. Meanwhile, key leaders from China, India and Russia, and the big banks that paraded into Glasgow last year, all stayed away. More positively, the newly elected Brazilian president-elect Lula da Silva got a rock star reception and caused waves as he vowed to fight illegal destruction of the Amazon rainforest, a common occurrence under the previous president.
The lack of any genuine progress on concrete policies to further the climate agenda was brought into focus by Egypt and much of the developed world. These include the huge gap in green investments required, and the tighter access to and much higher cost of capital in emerging and developing countries compared to their developed peers. The general mood I picked up was serious frustration in the first week, but continued determination to make progress.
Despite the recent global challenges that have pushed the climate agenda to the backburner, yes, some progress was ultimately made. The talks ran over again into Sunday morning (as happened last year), but eventually produced a breakthrough agreement on setting up a new dedicated UN fund for ‘Loss & Damage’ (L&D), the details of which will be agreed by COP28 next November. There was also progress on reforming the international finance system to aid mitigation and adaptation.
Whilst headway was made on adaption and L&D, there was little progress on increasing ambitions on mitigation. Hardly any nationally determined contributions (NDCs) were updated to align with 1.5°C this time around and out of almost 200 nations only 24 came with a marginally increased ambition. Furthermore, efforts to follow through on COP26 commitments to phase down fossil fuels and phase out coal were missing. The final text also permitted a transition to “low-emission” sources, which could legitimise the use of natural gas for longer. At the same time, the financial sector continued to stress that to hit 1.5°C and deliver net zero on time, policymakers must create the right incentives and implement policies that support decarbonisation via subsides and putting a price on pollution.
Net zero is very much a matter of politics, economics and competing national interests. Yet, whilst we are far from being on track for net zero, the energy crisis brought it home to everyone that the energy transition is now also a matter of national security, and climate change is no longer just an environmental issue. It is threatening our lives, livelihoods, ability to feed ourselves and pretty much every area of our lives.
Hence, I’m more optimistic that the necessary climate policies will be ramped up to align climate goals with industrial and national security goals, which will hopefully accelerate renewable capacity building and deployment as well as enable investors to allocate capital to finance the transition through the right incentives.
For me there were 10 main takeaways:
Money, money, money! Finance is the make or break of climate change mitigation. While we are far from delivering the net zero transition on time, we must increase adaptation finance to cope with already locked-in extreme weather events, food and water shortages, land loss and other disasters coming our way, and ensure we can help the most vulnerable. This will be expensive and the longer we wait, the higher costs go.
So how can we direct capital in a way that can achieve ambitious climate objectives despite population growth or abandoning GDP growth, and all this in a growth-focused, increasingly populated and polarised world with competing political and economic objectives? Welcome to what has been called the US$150 trillion challenge to reach net zero!1
Mobilising climate finance has always been a challenge. The public sector, including governments and development finance institutions, have played an important role but have been unable to unlock private sector capital at scale. John Kerry, US Special Presidential Envoy for Climate, highlighted the challenge on day three saying “No government has enough money to pay for the transition, private markets need to come in”. He is right of course. Ultimately, private actors need to provide the majority of the trillions needed in investment every year to get the world to net zero by 2050. However, the policies to incentivise and unlock that private capital are still not forthcoming.
‘Business’ was at Sharm in the thousands, big and small. Indeed, it was the most well-attended COP by businesses. But the disconnect between the public and private sector on the ground was symptomatic of the ongoing circular argument that the public sector looks to the private sector for finance, and the private sector looks to government for the right policies and incentives.
If governments want to mobilise finance fast, the most potent policy levers are to redirect subsidies to green energy, develop carbon markets (both compliance and voluntary) and lay out the rules and mechanisms needed. Without the right incentives we won’t be able to transition away from fossil fuels sufficiently quickly because the incentives will always be there to emit more unless it is no longer economically viable. This does not mean turning off the lights on fossil fuels today, but governments need to lead the transition to renewables and let carbon prices do their work.
The big questions at this COP centred on how to unlock institutional investor money in areas in which pension funds and insurance money have little risk appetite to go. Blended finance, more labelled debt, new adaptation bonds, private equity and debt, philanthropy and family office investments should all be in motion.
It was discussed at length why asset managers are reluctant to venture into developing markets to invest in projects such as clean and enabling infrastructure. The liquidity, ticket size, credit risk, transparency and data are things few clients are comfortable with. Yet, the African participants argued that the perceived risk and the reality is very different in African projects. Blended finance and development finance institutions need to come in and de-risk investments to increase private sector investment in developing economies. Green banks are also using innovative financing to accelerate the transition to clean energy.
Data featured heavily in all of the sessions, and many investors cited continued data challenges that are holding back progress. I met some great data providers with interesting biodiversity and alternative data offerings, as well as those offering tools that aim to measure the credibility and progress of companies transitioning to net zero. Many start-ups are using blockchain and a lot of initiatives are zooming in on traceability along the supply chains. As the availability and depth of these datasets mature, the more insights and investment implications they should unlock.
With a lack of public policies and real progress on corporate net zero commitments it’s easy to be pessimistic. Yet I still walked away with much more optimism than when I arrived after meeting so many start-ups, corporates, non-governmental organisations, data and artificial intelligence specialists, rating agencies and investors with innovative solutions to most of our sustainability problems. It struck me how much innovation is happening on the ground in smaller companies, and we have to find a way to finance these start-ups.
The progress made by larger companies is also encouraging. As at June 2022, more than one-third of the world’s largest publicly traded companies now have net zero targets, a significant increase over the previous two years. 2 While the majority of these targets don’t yet meet minimum reporting standards, the direction is clear. Companies that are lagging on climate action, or worse, greenwashing, are increasingly being called out by investors, the media and the public. Companies can no longer make unsubstantiated emissions claims and need to evidence how they are adapting their business model and strategy as climate risks intensify.
As investors, we need to finance those companies that are showing genuine leadership on climate change as they are more likely (all else equal) to be more resilient to systemic climate risks.
I had three highlights in no particular order:
Myself, attending COP27 with my colleague, Kimberley Pavier, Sustainability Analyst in the Global Technology Leaders Team. Photo credit: Janus Henderson Investors.
1 The $150 trillion bet against net-zero is losing | Feature | GRC World Forums.
2 Net Zero Stocktake 2022 | Net Zero Tracker.
Adaptation refers to measures to enable countries and vulnerable communities to adapt to climate change.
Blended finance is the strategic use of development finance for the mobilisation of additional finance towards sustainable development in developing countries.
Carbon pricing is an instrument that captures the external costs of greenhouse gas (GHG) emissions – the costs of emissions that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise – and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.
Credit risk is the possibility that a borrower might fail to repay a loan or meet their contractual obligations, leading to a loss for the lender.
GDP (Gross Domestic Product) is the value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). It is usually expressed as a percentage comparison to a previous time period, and is a broad measure of a country’s overall economic activity.
Greenwashing is a term used to describe the act or practice of making a product, policy or activity appear more environmentally friendly than it actually is.
Loss and Damage (L&D) is categorised as either economic or non-economic. Economic loss and damage are negative impacts to which a monetary value can be assigned, eg the costs of rebuilding infrastructure that has been damaged due to a flood, or lost revenue from crops destroyed by drought. Non-economic loss and damage are negative impacts where it is difficult to assign a monetary value, eg loss of biodiversity.
Mitigation refers to efforts to reduce or prevent emission of greenhouse gases.
Nationally Determined Contributions (NDCs) are where countries set targets for mitigating the greenhouse gas emissions that cause climate change and for adapting to climate impacts. The plans define how to reach the targets, and elaborate systems to monitor and verify progress so it stays on track
Net zero refers to greenhouse gas production being balanced by its removal from the atmosphere.
Ticket size is the amount invested – or potentially to be invested in a company.
IMPORTANT INFORMATION
Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than, the broader market.