WEEK TWO – SUMMARY & KEY TAKEAWAYS
While initially predicted to deliver a warmed-over reaffirmation of last year’s pledges, the 27th Conference of the Parties of the UNFCCC (United Nations Framework Convention on Climate Change) – COP27 – was ultimately hailed in some quarters as securing “the most important climate advance” since the 2015 Paris Agreement 1 in the shape of a pooled ‘loss and damage’ fund.
As we noted in our first COP 27 article, the topic of loss and damage financing came to dominate talks in Sharm el Sheikh, despite being a last-minute addition to the conference agenda. In this second article we explore this deal in greater detail, alongside other key takeaways.
Loss and Damage – The Cost of Liability
After intense negotiations that extended the conference by two additional days, agreement was reached to launch the loss and damage fund to help the hardest hit (predominantly developing) countries to recover from – rather just prepare for – the impacts of climate change. Clearly, though, many key details are still to be resolved.
- Much of the finer operational detail will be put forward at COP 28 by a ‘transitional committee’ to be set up by national governments. The first meeting of this group is expected to take place in March 2023.
- Amongst other aspects, it is specifically worth noting that this new fund will address future disasters. It is currently deemed unlikely that it will retrospectively review damages or backdate the reparations that have been discussed for the last 30 years.
- It is yet to be agreed precisely who should pay into the new fund, as accepting liability for contributing to these climate events is a long-contended and highly divisive issue.
The G7 summit and COP27 ran concurrently this year, and both attempted to tackle the issue of climate reparations. Before the COP27 agreement was reached, a separate ‘Global Shield’ was promised by the G7 countries with the aim of providing funding to countries suffering climate disasters. Despite a pledged 170 million pounds from Germany and 40 million pounds from donors such as Denmark and Ireland, this initiative was greeted with some scepticism. To set this in a broader context, only minimal progress was made in delivering on the previous 2009 promise2 by developed countries to mobilise $100 billion a year in climate finance for developing countries by 2020.
The Abiding Appeal of Fossil Fuels
While the loss and damage commitment has made waves, progress on decarbonisation was widely acknowledged to have only created ripples. In the current geopolitical and economic climate, governments’ appetite for an aggressive green agenda has dissipated and the lure of fossil fuels has proved hard to ignore. There were some notable pledges nonetheless:
- India announced its plan for long-term decarbonisation, aiming for a phased transition to cleaner fuels and slashing household consumption to achieve net zero emissions by 2070.
- France and Spain among others joined the other 212 signatories to the Zero Emission Vehicles Declaration (ZEVD) who have pledged to halt sales of gasoline-powered vehicles by 2035.
The precise strategy for the transition towards net zero remains shrouded in uncertainty, however. The clear Paris commitment to limit the global rise in temperatures to 1.5°C appeared diluted. Instead, the closing Conference agreement 3 coined a new phrase – references to “low emission and renewable energy” seemed to denote a tangible shift towards softening the harder red lines of the existing strategy by including ‘cleaner’ fossil fuels, such as gas, in longer term transition plans.
COP26 President Alok Sharma was blunt in summarising his concerns: “Emissions peaking before 2025, as the science tells us is necessary. Not in this text. Clear follow-through on the phase down of coal. Not in this text."
Democracy and Climate
Brazil returned to the international climate scene with a bang, with President elect Luiz Inácio Lula da Silva recommitting to ending Amazonian deforestation by 2030 – underlining the power of the vote in the fight against climate change. In a similar vein, the Democrat’s retention of the US Senate should prove a fillip for President Biden’s carbon cutting commitments 4
- As noted, Lula used COP27 to emphatically announce that Brazil is back in the sustainability game, setting out promises on environmental law enforcement and the creation of green jobs in a clear shift from the anti-environment policies of outgoing President Bolsonaro.
- Furthermore, Brazil, Democratic Republic of Congo and Indonesia – the world’s three largest rainforest nations – formally launched a trilateral alliance for forest preservation. They announced plans to work on “a new sustainable funding mechanism” for the preservation of biodiversity.
- In an additional boost widely welcomed by the international community, Germany and Norway agreed to restart the Amazon Fund – created to raise donations “for non-reimbursable investments in efforts to prevent, monitor and combat deforestation, as well as to promote the preservation and sustainable use in the Brazilian Amazon” – which had been shut down under the Bolsonaro administration.
Implications for Financial Services
The past year has seen a new focus on the role of banks as prime movers in driving the green agenda globally. At COP27, that focus was less obvious, but some key points of note should be flagged.
- It is expected that – as the newly agreed ‘loss and damage’ fund and its transitional committee move ahead and discussions on liability reach fruition – governments will be keen to minimise their share of the bill. This will serve as further motivation to drive forward net zero emissions plans, which governments have to date relied heavily on the banking sector to facilitate with the support of GFANZ (Glasgow Financial Alliance for Net Zero).
- However, within these green transition plans, a longer-term tolerance for ‘low emissions’ energy sources will have real impact on approaches to climate financing and to firms’ transition risk strategies, with this new language signalling the more attitude to gas.
- Banks will continue to be necessary facilitators of the public-private-partnerships to advance local and global initiatives addressing climate change, whether as conduit or funding provider. An estimated 50% of the funding for The Indonesia Just Energy Transition Partnership (JETP) is expected to come from the private sector, with seven global banks participating: Bank of America, Citigroup, Deutsche Bank, HSBC, Standard Chartered, Macquarie and MUFG.
- Financial service providers, from banks to asset managers and insurance providers, are likely to see more and more clients ready to invest in ESG-compliant products.As capital flows increase, greater investment will be needed in ESG initiatives both local and global.
- The updates to the Climate Resilient Debt Clauses (CRDCs), announced by UK Treasury Minister James Cartlidge in week one of COP27, directly affect financial services firms given their implications for private sector lending. The direct naming (and implicit shaming) of private banks puts pressure on them to adopt these clauses, and should be monitored closely in the coming months.