For Institutional Investors in the US

COP27 – 10 key takeaways for investors

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.

Adrienn Sarandi

Adrienn Sarandi

Head of ESG Strategy & Development


Nov 28, 2022
13 minute read

Key takeaways:

  • The lack of any genuine progress on concrete policies to further the climate agenda was brought into sharp focus. The talks eventually produced a breakthrough agreement on setting up a dedicated UN fund for ‘Loss & Damage’, and progress on reforming the international finance system to aid mitigation and adaptation.
  • Clean ‘tech-celeration’ is driving momentum. So many start-ups, corporates, non-governmental organisations, data and artificial intelligence specialists, scientists, food and agri businesses and other contributors were offering innovative solutions to most of our sustainability challenges.
  • Net zero is very much a matter of politics, economics and competing national interests. Whilst the low carbon transition is incredibly complex, 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 lives, livelihoods, ability to feed ourselves and pretty much every area of our lives.

How did you find the first week of COP27 and how did it compare to COP26?

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.

Was meaningful progress made?

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.

What were your key takeaways from the sessions you attended in the first week?

For me there were 10 main takeaways:

  1. For almost three decades poor countries in the Global South (regions within Latin America, Asia, Africa, and Oceania) have been asking richer countries responsible for most of the cumulative emissions in the atmosphere to help them pay for costs caused by climate change. Countries in the Global South have little means to protect themselves so the agreement to address financing for Loss & Damage is truly momentous in COP history, as it has been informally on the agenda for over three decades. No funds have been committed as yet, but it was great to see meaningful progress made.
  2. A new item that received much attention was reforming multilateral development banks (MDBs such as the IMF and World Bank) to allow their balance sheets to help fight climate change. This would ensure that the capital deployed is truly catalytic and able to leverage private finance more effectively, potentially unlocking around US$1trn to channel funding to where it is most needed. MDBs need to de-risk investments via innovative structures to entice private capital to come in. The use of blended finance featured heavily at COP27 as the need for finance to be scaled up is huge and without the private sector it will just not happen.
  3. Whilst net zero pledges have increased in number significantly in 2021, so have emissions. We are still on track for a 2.4-2.9°C world, and without global collaboration and policies such as carbon pricing, redirecting subsidies, and helping developing countries to decarbonise, the feeling was that we are heading for a world where climate disasters will be the norm.
  4. Disappointingly hardly any country announced higher ambitions for their NDCs. However, I was encouraged by progress on methane, with over 150 countries now committed to cut methane emissions by more than 30% by the end of the decade.
  5. As we are massively behind on mitigation, we have to start investing more into adaptation, and fast. But there was recognition that mitigation and adaptation are not ‘either/ or’ issues, we need to move on both. More mitigation today means less adaptation tomorrow. Without helping developing nations to mitigate and adopt to climate change there will be no net zero. These countries need trillions of dollars in funding to transition.
  6. Whilst geopolitics is a constraint in the short term, it could be an accelerator in the medium to long term with the clear recognition that abundant cheap clean energy will solve the energy trilemma of reliability, affordability and sustainability. It was pleasing to hear President Biden state: “Russia’s brutal attack against Ukraine is exacerbating food shortages, and energy spikes and costs, increasing volatility in those energy markets, driving up global inflation. Against this backdrop, it’s more urgent than ever that we double down on our climate commitments. Russia’s war only enhances the urgency of the need to transition the world off its dependence on fossil fuels.”
  7. Politics remains the hardest part of solving the climate crisis though. We have the technology, the money, the world’s attention, but the political will is still missing. Discussions with attendees highlighted that while the planet is on the ballot in every country, voters need to vote with their feet.
  8. Net zero will be expensive, but all the amazing clean technology as well as the myriad of start-ups I saw gave me more confidence that the clean ‘tech-celeration’ will drive momentum and accelerate the transition to a low carbon and circular economy. Nevertheless, there will be no silver bullet. No single technology will save us, and we need to progress with all solutions as well as significantly reduce emissions this decade.
  9. I agree with the International Energy Agency’s (IEA’s) call for peak fossil fuels by 2030 and in my view the US$125-275trn long-term opportunity is intact despite the challenging backdrop. COP27 strengthened my view that investors should prepare for the biggest capital reallocation of their lifetime.
  10. Food security featured heavily at this COP, more so than ever before. This is not surprising as many developing countries are suffering famine and hunger directly as a result of climate change and the Russia-Ukraine conflict has exacerbated the food crisis. Solutions include eliminating food waste and shifting to a more plant-based diet, which would increase the amount of available food. Technological innovation in alternative proteins and indoor farming as well as automation and robotics can ensure food self-sufficiency for regions reliant on imports. Financing vehicles such as blended finance and hedging facilities can help facilitate investment in infrastructure. And government is needed for targeted policy and regulation and providing humanitarian aid and sustained investment in global agriculture.

What will it take to deliver net zero by 2050?

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.

What developments do you think will move the dial in the future?

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.

On a personal level, what were the highlights of the trip for you?

I had three highlights in no particular order:

  • At the start of the investment COP, a rapper came on stage to sing a climate-themed rap song. He went down a storm and it really energised the room.
  • At the weekend, I attended a fascinating session on ocean health taught by a marine biologist in Dahab, a coastal town, followed by a clean-up dive.
  • I also met numerous young people with incredible ideas that need financing in clean tech, food and agriculture, voluntary carbon markets, blockchain and biodiversity protection. It was humbling to listen to the passion and dedication of these innovators to flight climate change and make the planet more liveable for us and generations to come.

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.

 

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.

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.