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COP27 – Mitigation, emissions reduction and blended finance

Thibaud Clisson takes a look at what came out of the recent COP27 climate conference and highlights the initiatives he thinks investors should be keeping an eye on. These include deals to encourage greater use of renewable energy in emerging markets, ways to reduce methane emissions and a new approach to addressing the lack of funding for climate action.  

COP27 agreed to establish a ‘loss and damage’ fund[1] to help those developing countries that are most vulnerable to natural disasters mitigate the long-running adverse effects of climate change. These countries have been calling for climate-related financial aid since the 1992 Rio Earth Summit.

According to a report by 55 vulnerable countries, their combined climate-linked losses over the past 20 years are estimated at USD 525 billion. That is 20% of their collective GDP.

Without funding from the North, the global South, where these vulnerable countries exist, will likely struggle to raise the money needed to overcome growing climate impacts such as flooding and droughts given their current debt loads and limited financial resources.

By contrast, financial aid could boost geopolitical stability as well as economic stability in the affected countries. Mitigating the dire effects of climate change could help contain its disruptive impact and, for example, limit mass migration from flood plains.

While the agreement on the fund is encouraging, itis yet to be determined what should count as climate change-related loss and damage. It could include damage to property and infrastructure. It could also extend to cultural assets and natural ecosystems that are hard to value. There’s the question of which countries will pay into the fund and which countries should receive support.

Further support for the vulnerable

However, 27 new pledges worth more than USD 230 million were made towards the Adaptation Fund, a separate fund that helps vulnerable communities in developing countries adapt to climate change. COP27 also saw the launch of the Sharm El-Sheikh Adaptation Agenda, which details 30   actions to be taken by 2030 to improve the climate resilience of such communities.

Despite this progress, the Sharm El-Sheikh implementation plan expressed ‘serious concern’ about the goal of developed countries to mobilise USD 100 billion in aid for climate-stricken developing countries per year. This has still not been met.

Renewables in developing countries

Indonesia signed a USD 20 billion agreement with developed countries and major international lenders to help it transition away from fossil fuels and towards renewable energy sources. The Just Energy Transition Partnership (JETP) deal is an important step for the country as it is the world’s third-largest coal producer.

The US, Canada, Japan, the EU, Denmark, France, Germany, Italy, Norway and the UK will together provide USD 10 billion, with financial institutions providing the other USD 10 billion. As part of the deal, Indonesia has pledged to ensure greenhouse gas emissions by its power sector start falling by 2030 and has brought forward its goal of making the sector emission-free by 2050.  

JETP deals not only aim to reduce power sector emissions. They also help support economic growth, create new skilled jobs, reduce pollution, and contribute to a resilient, prosperous future.

South Africa, another developing country with high coal production, was the first nation to sign a JETP deal. India, the Philippines, Vietnam and Senegal will be watching how these deals progress as they are considering signing similar agreements.

There was progress on countries cooperating on reaching their climate targets under the Paris Agreement. Its rules allow one country to pay for another’s emissions reduction and count it towards its own net-zero goal.

Switzerland and Ghana agreed that Switzerland will support the training of thousands of Ghana’s rice farmers in sustainable agricultural practices. This should help reduce methane emissions.

Emission reductions

It should be noted that the UN said that credible net-zero targets must significantly cut greenhouse gas emissions by 2030 rather than delaying action until 2050. Industries, regions and cities should provide clarity on net-zero pledges and reduce the amount of low-quality offsetting.

Just ahead of COP27, there was news of a major step towards establishing a comprehensive baseline on a climate-related disclosures standard for capital markets. It was announced that the non-profit CDP organisation will integrate the Sustainability Standard Board’s (ISSB) IFRS S2 standard into its environmental disclosure platform. This could result in “rapid accelerated early adoption of ISSB climate data disclosure across the global economy”, according to CDP and the ISSB.

Disappointingly, there was no broad push to reduce emissions more quickly despite commitments announced during the conference, most notably, the EU’s shift from a 55% reduction target to 57%.  

Emerging countries are key to accelerating global emissions reductions by 2030. Over 60% of emissions come from these countries, which have yet to align their medium-term objectives with the long-term goal of carbon neutrality that many developed countries are targeting by 2050.

According to the US and the EU, over 150 countries have now signed up to the Global Methane Pledge. That is around 50 more than when the initiative was announced at COP26. Top methane emitters China and India have not yet signed up to the pledge and nor has Russia.

Cutting methane emissions is central to efforts to limit global warming to 1.5C. Methane emissions are the second-biggest contributor to human-caused climate change after carbon dioxide. According to the National Oceanic and Atmospheric Administration, they surged by a record amount in 2021.

Tackling these emissions requires rethinking approaches to agricultural cultivation and livestock production, which are major sources of the gas. That includes adopting new technology, plant-rich diets and alternative sources of protein. Mitigation can also involve dealing with emissions from sources such as the oil and gas sector, landfills, and abandoned coal mines.

The US is planning to significantly tighten regulations targeting oil and gas drilling. It will require drillers to fix all leaks, reduce emissions from gas flaring and to create a ‘super-emitter response programme’ to swiftly detect and respond to major leaks. The US Environmental Protection Agency says the revision would cut methane from the oil and gas sector by 87% from 2005 levels.

To help address the methane issue, the UN Environmental Programme (UNEP) announced at the conference that it is launching the Methane Alert and Response System (MARS). The high-tech satellite-based system will alert governments, companies and operators worldwide about large methane sources so that they can take rapid mitigation action.

Blended finance for sustainability

The Sharm el-Sheikh Implementation Plan estimates a global transition to a low-carbon economy would need investments totalling at least USD 4-6 trillion per year. According to the UN, such a transition will require central banks, commercial banks, institutional investors and governments to act rapidly to address the lack of funding.

Blended finance – a mix of public and philanthropy-backed finance alongside private capital – could be one way. Using public and philanthropic funds can help to de-risk early-stage ventures, encouraging private capital to invest and help drive forward mitigation and adaptation solutions.

With this in mind, the Indonesian G20 presidency has launched the Global Blended Finance (GBF) Alliance, which includes partners such as GFANZ[2], the UN Sustainable Development Solutions Network and the Rockefeller Foundation.

Other recent initiatives included the US launching the Climate Finance+ fund supporting sustainable bond issuance in Indonesia, Mozambique, Zambia and a few other developing countries.

The European Investment Bank presented a framework that supports environmental investments across the world, with advisory tools that will support delivery of environmental benefits.

India plans to issue up to USD 2 billion of green bonds for green infrastructure financing in the first quarter of 2023. Separately, the Reserve Bank of India provided an overview of climate-related risks and its strategy for handling new financial risks from climate change.

References

[1] Also read It’s key that COP27 takes steps toward a just transition (bnpparibas-am.com)  

[2] BNP Paribas Asset Management is a member of the Glasgow Financial Alliance for net Zero

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Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
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