Just over a year ago, COP26 was taking center stage. There was buzz about this annual United Nations Conference of Parties focused specifically on climate change, with genuine excitement about progress and buy-in. Our overview of the conference along with our brief recap conveyed the positive momentum.
Although more than 45,000 participants traveled to Sharm el-Sheikh, Egypt, the momentum appeared to slow as we approached COP27, particularly given the backdrop of the global energy crisis and the conflict between Russia and Ukraine continuing to unfold. The politicization of Environmental, Social, and Governance (ESG) investing in the United States caused some backlash that seemed to put a damper on ESG, at least for the moment. Negotiations went well past the deadline, but as COP27 wrapped up, there was agreement on the final text.
Key Takeaways from COP27:
- Acknowledgment of richer, high-emitting nations being responsible for “loss and damage” in the developing world due to climate change was seen as a breakthrough. The establishment of a new Loss and Damage Fund is a first step in addressing this issue, but many are skeptical of the actual implementation and funding mechanisms.
- Serious concern was expressed that the goal of developed countries to jointly mobilize the US$100 billion per year by 2020 to address the needs of developing countries, as agreed upon in 2009 at COP15 in Copenhagen and confirmed at subsequent COPs, has not yet been met. Developed countries were urged to meet the goal, and multilateral development banks and international financial institutions were called to increase their climate investment.
- Much of the conversation in Sharm el-Sheikh revolved around adaptation to a warming planet. Governments agreed to move forward on the Global Goal on Adaptation, established by the 2015 Paris Agreement. This aims to provide a system for tracking and assessing countries’ progress on adaptation actions and funding through the global stocktake, the first of which is currently in progress. New pledges, totaling more than US$230 million, were made to the Adaptation Fund at COP27. These pledges will help many more vulnerable communities adapt to climate change through concrete adaptation solutions.
- Proposals to phase out all fossil fuels were unsuccessful and there was no formal commitment to cut emissions, exacerbating the uncertainty around the ability to implement the goal to stay under the 1.5 degree Celsius global temperature rise.
- The US and China resumed conversations related to climate action. This was a significant step forward but talks are expected to be slow-moving.
The annual COP climate summits help to set the stage for how the world will deal with the impacts of climate change. The potential for new legislation tied to agreements made between the nations can then impact government spending, regulation, incentive programs, and how companies operate. While progress may seem slow, we are seeing momentum in many areas. There is continued commitment to the Paris Agreement, there is growing support for the Global Methane Pledge aimed at cutting methane emissions, and there are continued technological advances to address climate change. Ultimately, these changes take time, but we continue to monitor the potential downstream impacts that could influence individual issuer credit assessments and look ahead to the potential focus issues that will be discussed at COP28 in the United Arab Emirates next year.
