SustainaWeekly - Limited progress at COP27

Economist:

COP27 made limited progress on the key issues on the agenda. The end communique did not include a pledge to shift away from fossil fuels. The agreement to set up a Loss and Damage Fund was an important step, but there were no specific funding commitments, and it is only a part of the external funding needed. Meanwhile, the step up in emission pledges was modest.

Strategist:

We show that ESG ratings have a modest positive correlation with credit ratings in the case of MSCI ESG ratings, but not of those from Sustainalytics. We argue that screening companies for better ESG prepositions could add a new dimension for credit assessments and ultimately act as an important tool for bond investors to identify companies that have a better credit quality.

ESG Bonds:

There has been a special focus on the debt sustainability of developing countries at COP 27. The IMF and other international organizations have sounded the alert on rising debt distress in those countries. Other climate financing alternatives are then needed to alleviate this so-called ‘debt trap’. The Global Sustainable debt market could also benefit from this trend.

Limited progress at COP27

• COP27 made limited progress on the key issues on the agenda

• The end communique did not include a pledge to shift away from fossil fuels

• Agreement to set up a Loss and Damage Fund, but no details or commitments

• Recognition on need for mitigation finance for developing countries, but no more money

• Modest step up in emission pledges, but key is any case the implementation

With COP27 concluding over the weekend, we take a look at what progress has been made. We assess the overall agreement, climate finance for developing countries and the outlook for global warming following the summit. Our judgement on all three areas is that limited progress has been made.

Commitment to 1.5 °C reaffirmed but no pledge on fossil fuels

The COP27 climate summit concluded in the early hours of Sunday. The conclusion was delayed as reaching agreement across various issues proved very difficult and ultimately the result was a watered-down final agreement. The parties reiterated ‘that the impacts of climate change will be much lower at the temperature increase of 1.5°C compared with 2°C’ and resolved ‘to pursue further efforts to limit the temperature increase to 1.5°C’. In addition, it was recognised that ‘limiting global warming to 1.5°C required rapid, deep and sustained reductions in global greenhouse gas emissions of 43 per cent by 2030 relative to the 2019 level’ and that this required ‘accelerated action in this critical decade’. However, more concrete commitments to make the resolve credible were lacking.

Frans Timmermans, Executive Vice President of the European Commission with responsibility for climate policy, expressed disappointment that more was not achieved, stressing ‘we have all fallen short’. Alok Sharma, the President of COP26 outlined the areas that were noticeably absent: ‘peaking emissions by 2025 is not in this text. Follow-through on the phasedown of coal is not in this text. The phasedown of all fossil fuels is not in this text’. One can argue whether such pledges mean much given that it is actions that matter (as discussed further below). However, it does raise questions about the degree of resolve.

Principle of funding for Loss and Damage

In what was the main step forward following COP27, it was agreed that a fund (and broader funding arrangements) would be set up to provide assistance to poor countries that suffered from climate disasters. The parties recognised ‘the growing gravity, scope and frequency in all regions of loss and damage associated with the adverse effects of climate change, resulting in devastating economic and non-economic losses, including forced displacement and impacts on cultural heritage, human mobility and the lives and livelihoods of local communities’. Against this background, there was an ‘urgent and immediate need for new, additional, predictable and adequate financial resources to assist developing countries that are particularly vulnerable to the adverse effects of climate change’.

The agreement to set up a fund has been hailed as a ‘historic step’ because of the underlying (albeit not explicitly stated) principle that wealthier countries that have contributed most to climate change, should support poorer countries that suffer most from it. However, there are no details or concrete commitments at this stage. Without being too cynical, we note that the main concrete action at this stage is to set up a committee, which will work out ‘the operationalization of the new funding

arrangements for responding to loss and damage and the fund’. In particular the committee will (a) establish institutional arrangements, modalities, structure, governance and terms of reference for the fund (b) define the elements of the new funding arrangements (c) identify and expand sources of funding and (d) ensure coordination and complementarity with existing funding arrangements.

WTF?

One of the most used acronyms at COP this year was apparently ‘WTF’, which of course stands for ‘where is the finance’. The COP27 agreement recognises ‘the growing gap’ between the needs of developing countries and the financial assistance available for adaption and mitigation and loss and damage. Although the agreement to set up arrangements for Loss and Damage funding is an important step, we note that an actual commitment to substantial funds is missing. The issue of who pays and how much remains unresolved. One of the key issues is that a number of developed countries think that large emitters such as China should be contributing to such a fund, even though it is currently classed officially as being on the other side of the ledger. Meanwhile, Loss and Damage is only a part of the external funding needed to battle climate change, but the funding needs are far broader and greater. The external financing needs of developing and emerging economies outside of China are estimated to total USD 1 trillion per annum by 2030 (see our note here). This covers what is needed to transform the energy system, investing in adaptation and resilience and natural capital as well as for coping with the loss and damage from climate change. Furthermore, large number of developing countries are in risk of debt distress, as set out in another note in this publication.

Trajectory for global warming little changed from COP26

On the basis of the latest information, the outlook for global warming under different assumptions has not changed significantly at COP27 compared to COP26. This reflects that there have been limited updates of country’s emission reduction plans (Nationally Determined Contributions, NDCs) in the run up to or during the climate summit. In addition, of the newly submitted NDCs, only a few have stepped up ambition, and the very largest emitters have not in any case submitted new plans. According to Climate Action Tracker, global warming is heading for 2.7°C based on current policies, but can be as low as 1.8°C if all pledges and targets (including those under discussion) are fully implemented, which are broadly in line with the organisation’s estimates post COP26. These are similar outcomes estimated by the IEA and the UN (see here for more). The IEA estimates that on the basis on announced pledges, global warming is heading for 1.7°C, which is slightly better than the 1.8°C it estimated following COP26, thanks to new pledges, notably Indonesia’s.

Implementation gap much more important than pledges gap

In any case, the gap between global warming on the basis of pledges and the 1.5°C scenario is smaller than the gap between pledges and policies. This points to the urgent need to implement the policies and actions necessary to meet the pledges and targets that have been committed to in recent climate summits.