COP28: Expect Disappointment and You'll Never Be Disappointed

by Sarah Peasey, Head of Europe ESG Investing

Four things to look out for amid the pessimism at this year’s climate-change gathering.

Today’s CIO Weekly Perspectives comes from guest contributor Sarah Peasey.

We are nearing the end of a year that is set to be the warmest on record, and which included the first-ever day with a recorded global average surface temperature 2°C above preindustrial levels, a crucial threshold. There would have been low expectations ahead of the 28th?UN Climate Change Conference of the Parties to the Paris Agreement (COP28) even if it weren’t being held in the United Arab Emirates, in the heart of fossil-fuel country.

This year’s gathering stands out as the first of the five-yearly “Global Stocktakes” scheduled as part of the Paris Agreement. We think it makes sense to go into it with a sober view of past failings and future challenges, but also to recognize progress if and when it is achieved.

Recognizing the Challenges

In March of this year, The Intergovernmental Panel on Climate Change (IPCC) estimated that anthropogenic carbon emissions need to decline by 45% by 2030, from their levels in 2010, to keep global climate change below 1.5°C.1 They are still rising. Some influential groups, such as the central banks’ and supervisors’ Network for Greening the Financial System (NGFS), have already indicated that the 1.5°C scenario is looking less likely “given the reduced likelihood of a successful uncoordinated transition”.2

The International Energy Agency (IEA) now sees sufficient momentum behind clean energy solutions to forecast a peak in fossil-fuel consumption within this decade. But it also notes that demand is still more than 30% higher than it needs to be in 2030 to align with the IEA’s Net-Zero Emissions Scenario.3

Halving that consumption in seven years seems like a tall order, especially with so many of the sectors essential for replacing fossil fuels facing real challenges. Materials and interest costs have been rising for offshore wind manufacturers, for example. Unmodernized electricity grids are emerging as significant limiting factors, as is slow progress in the development of sustainable aviation fuels and alternatives to lithium-ion batteries.

The Politics of Climate Change

That’s just the science and technology. Throw politics into the mix and things look even gloomier.

Global inflation, the associated cost-of-living crunch and high levels of government debt?have catapulted climate change into mainstream politics as a divisive issue.

For example, far-right parties across Europe have sought to boost their polling and votes by adding resistance to climate-change measures to their usual list of policy stances. Polls suggest that many voters who support net-zero measures in an abstract sense drop that support when asked to assume that they will bring additional personal costs. The European Commission had planned to present an enhanced emission reduction goal at COP28, but dropped it in response to opposition from some member states, including Poland, Hungary and Italy.

As such, there is little expectation for enhancements to Nationally Determined Contributions (NDCs). Politicians are temporarily off the hook because NDC updates are not incentivized by the Global Stocktake (which doesn’t assess individual countries’ progress but the aggregate effect of action so far), and because the deadline for submitting the next round of NDCs is in 2025. We think that, in turn, reduces the likelihood of any agreement on language relating to phasing out fossil fuels.

The Threat of Protectionism

That’s not to say there is no progress at all. This may be a year of record temperatures and emissions, but it has also seen record green capital expenditure. The 31 IEA members are spending some $25 billion of public money on energy research and development alone.

Last year, the U.S. planted a firm flag with its Inflation Reduction Act (IRA), which could close two-thirds of the gap between the country’s current policy and its 2030 climate target. The European Union (EU) has its Net Zero Industry Act and Critical Raw Materials Act, and is rolling out its Carbon Border Adjustment Mechanism, the world’s first system of tariffs on carbon emissions embedded into carbon-intensive goods imported into the region, such as steel, cement and other goods.

It is notable, however, that a lot of this is also conceptualized as a security-conscious play for the materials, growth and jobs associated with the low-carbon transition. Much has been driven by worries about China’s success in solar panels, batteries and electric cars, for example. This can have positive short-term effects but is ultimately a zero-sum game?that can slow the development and scaling of critical technologies. Intra-EU wrangling has already led to a lack of clarity on subsidies and on how to define “critical net-zero technologies” relative to the U.S. IRA, which is likely to hamper the bloc’s progress.

Protectionist competition between the three big blocs is likely to reproduce those problems at the global level, in our view: balancing decarbonization, energy security and affordability will continue to test international climate diplomacy.

Financing a “Just Transition”

If it is politically difficult to justify the spend to tackle climate change domestically, imagine how difficult it is to share the monetary responsibility required to tackle it globally.

This is reflected in the growing frustration among developing nations about the slow progress of the Just Energy Transition Partnerships (JETPs), a financing mechanism first established at COP26 that is supposed to help channel climate-change mitigation financing from wealthy to less-wealthy countries.

Financing climate mitigation poses one challenge, but the widening adaptation funding gap arguably poses an even greater one as the physical manifestations of climate change start to take hold. The UN Environment Programme’s 2023 Adaptation Gap Report notes that, despite COP26 pledges made to double adaptation finance support to around $40bn per year by 2025, international public climate-finance flows to developing countries actually declined to $21bn in 2021, which is at least 10 times less than the estimated annual financing needed for the rest of this decade.4

The establishment of a “loss and damage” fund at COP27 was marked as one of the few key successes from last year’s meeting. Since then, the principles of the fund have been agreed by the UN Framework Convention on Climate Change Transitional Committee on Loss and Damage, with a proposed launch in 2024.5 Developing countries have made a major compromise by agreeing that the World Bank host the fund only temporarily.

Even so, the fund is still lacking in clear responsibilities for developed nations, as well as concrete targets for how much money will be disbursed. Getting this capital moving will require education: the mitigation story seems better understood than the adaptation story, and COP28 offers a fantastic platform to educate and innovate to help close this growing adaptation gap.

Four Signs of Progress to Look For

That brings us what we might look for as signs of progress at this year’s meetings, given the pessimistic backdrop. We identify four things.

First, efforts to unlock private finance flows to developing economies. Sharing public money may be fraught, but we see an opportunity to reform global financial architecture and bring together stakeholders from the private investment community, particularly by mobilizing the significant latent financing capacity of multilateral development banks to unlock private capital flows.

Second, improvements to global cooperation and diplomacy. The findings from the first Global Stocktake could reveal common ground and opportunities for collective action, including some de-escalation of current protectionist policies. In our view, getting to net zero will only be achievable through a multi-stakeholder-led coalition bringing together national governments, industry and society.

Third, an acknowledgement that the oil & gas industry is not only the problem, but part of the solution. The global energy system and economy currently rely on oil and gas. We believe it is essential that world leaders seek to exploit the sector’s attributes, such as its ability to manage and execute projects, its well-funded position and its experience in integrating new technologies—not just to extend exploration, but to decarbonize the current energy system.

Finally, greater acknowledgment of the intersection of climate with other global challenges. We cannot solve the biodiversity crisis without limiting climate change, and vice versa. Improving supply-chain transparency generates a clearer view not only of emissions, but of human and labor rights. COP28 can help to educate on these intersections, break down the current silos and spur governments and regulators to support corporate disclosure of financially material risks, such as those established by the International Sustainability Standards Board (ISSB).

If we see some movement on any of these four priorities, we may avoid disappointment at COP28 after all.