5 min read 18 Nov 22
Summary: With COP27 drawing to a close, Fabiana Fedeli, CIO Equities, Multi-Asset and Sustainability comments on key developments to date in the drive to tackle climate change, and the markers of success coming out of the conference in converting commitments into action.
As the Conference of Parties (COP) convenes in Sharm El Sheikh this year for the annual UN Climate Change Conference, the markers of success will be the degree to which commitments can be converted into action. Moving the dial requires political will, ambitious policymakers, workable implementation strategies and collaborative financing mechanisms.
The global energy crisis has increased the complexity of the challenge in addressing climate change. Although I wouldn’t anticipate any back-pedalling on longer-term commitments, such as phasing out coal, the current backdrop could potentially limit more emphatic country-level commitments on targets over the short term.
A key focus of this year’s COP is on establishing a framework for compensating less developed countries for climate-related ‘loss and damage’ due to the historic build-up of emissions, with agreement needed on a mechanism or facility through which funding can be implemented. The Sharm El Sheikh Guidebook for Just Financing, unveiled at COP27, offers a framework aimed at accelerating flows of climate finance, in particular towards developing economies.
The inability of developed nations to deliver on their 2009 climate finance commitment of $100 billion per annum by 2020 (now expected to be achieved by 2023, given the current strain on public finances), has eroded trust between developed and developing nations. However, noting that this commitment represents only a fraction of the global funding required to tackle climate change, focus now needs to be on rebuilding momentum and providing scalable solutions to address the collective shortfalls.
A recent article from McKinsey & Co estimates that the cumulative capital spending required on physical assets (technology, infrastructure and natural resources) for the net-zero transition would need to change from an annual average of US$5.7 trillion today to US$9.2 trillion through 2050. While the exact figures are anyone’s best guess, the expected scale is staggering.
Through legislation, governments have started to claim the leadership position that we have all been advocating for. The US Inflation Reduction Act (IRA) has set a global standard for incentivising emissions reductions by providing long-term subsidy visibility for wind, solar, bio-fuels, hydrogen, and carbon capture and storage. This provides much-needed visibility for developers of established technology (wind and solar) and will also carry new technologies (green and blue hydrogen, carbon capture) through the loss-making roll-out phase. The IRA bill is pivotal in providing a strong framework to encourage private sector investment.
While it would appear more challenging for the UK and Europe to act as decisively in this area, given the greater reliance on higher carbon-content fossil fuels over the shorter term due to the current challenges in securing energy sources, the clear need to improve energy security and diversify sources of supply adds a new medium-term urgency to the development of the renewables industry. In fact, the RePowerEU legislation, which was established as recently as May this year, is designed to support the development of low-carbon technologies, to quicken the path to energy self-sufficiency while maintaining decarbonisation commitments. In addition, initiatives such as the EU Innovation Fund, which provides grants for the development and scaling up of innovative low-carbon technologies – enabled through the reinvestment of proceeds from the Emissions Trading System (ETS) – and the NER 300 programme, which focuses on funding for safe Carbon Capture and Storage (CCS), are helping to direct funding into clean technologies.
While we may not see additional near-term commitments on emissions reductions coming out of COP27, due to the current energy crisis, we are likely to see more ambitious longer-term projects. For example, the recent agreement between the EU, US, UK, Japan, Canada, Norway and Singapore to develop an international market for fossil energy that minimises flaring, methane and CO₂ emissions across the value chain. As always, execution is what will matter in the end and will ensure that commitments do not turn into empty promises.
From a broader finance perspective, commitments from coalitions such as GFANZ (the Global Financial Alliance for Net Zero, which includes asset owners and asset managers) will continue to come under increased scrutiny, with members called to comment on progress achieved in aligning investments with the goals of the Paris Agreement. In helping to direct finance into sustainable solutions, greater collaboration between the public and private sectors will help to unlock opportunities for investment.
Active asset managers, for their part, have been evolving their capabilities to meet the growing needs of investors. In aligning portfolios with Net Zero, firms have been directing resources and employing technologies to better understand carbon exposures, while also engaging with investee companies to encourage target setting. Growing calls within the industry for increased transparency and consistency of data, and greater alignment of taxonomies, will go some way to directing efforts where they are most needed.
Certainly financial institutions have a role to play, but coordinated and cooperative action across sectors, including governmental and non-governmental actors, is also required to translate commitments into action.
Reaching our climate goals while allowing for a just transition is a difficult, but not insurmountable, challenge. It is, however, our collective responsibility and requires collaborative solutions. As formal negotiations intensify this week, pragmatism, determination and accountability will be the key drivers of success.
 Source: Climate Finance and the USD 100 Billion Goal - OECD
 Source: COP27: Financing the transition to net zero | McKinsey & Company
 Source: Funding for climate action (europa.eu)
 Source: Joe Biden’s flying visit to COP27 disappoints developing nations | Financial Times (ft.com)
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