COP27: A temperature check on progress

by Stephanie Maier – Global Head of Sustainable and Impact Investment

COP26 marked a turning point in global efforts to tackle climate change, with commitments to end deforestation, cut methane and, under the Glasgow Financial Alliance for Net Zero (GFANZ) initiative, align private sector finance worth USD 130 trillion (or 40% of the world’s financial assets) with the goal limited global warming to 1.5 °C.¹

Yet one year later, as COP27 begins in the Egyptian city of Sharm El-Sheikh, greenhouse gas emissions are still increasing and we continue to witness extreme weather across the globe. We have seen devastating floods, from Pakistan to Nigeria, and dangerous heatwaves, with countries such as Kuwait and Iran experiencing record highs of 50°C. Even if all national emissions reduction targets made at COP26 are achieved, we will still be on track for around 2.4°C of warming, according to Climate Action Tracker.²

The geopolitical landscape has also changed dramatically in the year since COP26, with the war in Ukraine, soaring inflation and cost of living crises continuing to dominate governments’ agendas. Indeed the unity we saw across the finance sector on the climate issue has begun to show cracks, with talk of banks pulling out of their net zero alliances and some US Republican states ‘blacklisting’ asset managers over ESG considerations.

Yet the urgency with which net zero targets need to be met has not abated. This COP will not only be a temperature check on policy progress, but it will also redefine the vast opportunities the economy stands to gain from accelerated climate action.

Short term climate pain for long-term gain

The war in Ukraine and ensuing energy security crisis has further driven momentum around the need to shift away from fossil fuels, as world leaders consider how to sever their dependence on Russia. In the short term this has sparked a return to old emission-boosting habits, such as some countries increasing their use of coal-fired power plants.

However, accelerating the transition to a low-carbon energy sector is the primary way out of the energy security and affordability crisis. President of the European Commission Ursula von der Leyen reaffirmed the commitment to REPowerEU in her September State of the Union Address and announced the creation of a new European Hydrogen Bank to help support the hydrogen market, bridge the investment gap and connect future supply and demand. As a reminder, one target of REPowerEU was to double the 2030 target to produce ten million tons of renewable hydrogen in the European Union each year. Transitioning the energy system under an accelerated timeline is a significant undertaking and will require continued and, importantly, co-ordinated policy measures to implement.

Increased funding to tackle key issues such as adaptation and loss and damage, especially in the developing world, will also be a priority at COP27. This is particularly pertinent given the African setting of the conference, with the country calling for industrialised nations to increase finance flows to more vulnerable parts of the world. At COP27 investors can look out for more planned support from governments to help mobilise investment and transition the developing world to a low carbon economy. Using tools such as blended finance vehicles, where the public sector de-risks investments financiers would have otherwise shied away from, could unleash more than USD 23 trillion in opportunities in emerging markets by 2030.³

America’s climate comeback

The Inflation Reduction Act, passed in August, has to date been underestimated. Arguably, it is the single most significant climate legislation passed in the US. Under the act, USD 370 billion of funding is set aside for climate action and to help spur the clean energy transition in the US.⁴ The new policy aims to reduce greenhouse gas emissions by 40% compared to 2005 levels. The biggest share of the funding will go towards tax credits, which have the potential to transform the pricing of renewable energy generation. These incentives are expected to lower the cost of renewable energy, with solar power reducing by half and onshore wind by nearly two thirds. In turn, renewable energy in the US is estimated to increase from around 40% of all electricity in 2020 to 65-80% by 2030.⁵

There are enormous opportunities from the Inflation Reduction Act, with billions of dollars set aside ready to invest into multiple sectors, from energy to electric vehicles. As the US market dominates many of these sectors – it accounts for 20% of global new car sales, for example – it is predicted that these effects will be felt across the global economy. The act also provides significant support for additional clean innovation and development of the types of technologies that we know we will need in the net zero transformation. To date, we have not received the levels of funding needed to bring costs down significantly and to ultimately lead to wide adoption. Not only will this piece of legislation have great impact given that the US is the world’s largest economy and second largest emitter, but it will also set important context for the climate agenda at COP27 and impetus for other countries to draw up similar packages.

Seizing the moment

What remains clear is that there is vast opportunity for sustainable finance. In light of recent geopolitical and economic turmoil, COP27 is a vital checkpoint for the private sector to maintain momentum on climate commitments and the opportunities the transition presents. The hope is that the conference underscores and supports this shift away from an overreliance on finite resources and the transition to a lower carbon economy. Egypt’s conference will be key in mobilising capital and helping to transform government and private sector plans into action.