By Marie Lassegnore, CFA, Head of Sustainable Investments, La Française AM
Adopted at the closing of COP26, the Glasgow Climate Pact urges parties to “revisit and strengthen the 2030 targets in their nationally determined contributions, as necessary to align with the Paris Agreement temperature goal by the end of 2022”. Approaching COP27, in a very tense geopolitical context punctuated by food shortages, an energy crisis, unbridled inflation and soaring recession probability, multilateral cooperation could be challenging. Where do we actually stand and what can we expect from COP27?
Despite 2022’s challenging environment, we have seen more ambitious pledges from Australia (a revised emissions-reduction target, increasing from 27% to 43% by 2030 versus 2005 levels), India (a stepped-up emissions-reduction objective from 34% to 45% by 2030 vs 2005 levels and Net Zero by 2070) and the United States with the “Inflation Reduction Act”, the largest investment in climate and energy in American history ( a 50% emissions reduction target by 2030 vs 2005 levels and Net Zero by 2050).
Out of the wave of sectoral decarbonization initiatives announced at COP26, some have made progress:
- the Industrial Deep Decarbonization Initiative (IDDI) whose members now account for 11% and 5% of global steel and cement consumption respectively.
- the Global Methane Pledge which aimed to reduce 2020 methane emissions by 30% by 2030 has evolved into the Global Methane Pledge Energy Pathway which can now boast $59 million in dedicated funding and in-kind assistance for the implementation of the key objectives: to capture the maximum potential of cost-effective methane mitigation in the Oil and Gas sector and eliminate routine flaring as soon as possible, no later than 2030.
After the chaotic management of the 2022 energy crisis across Europe, the elephant in the room is the feasibility and credibility of the Global Coal to Clean Power Transition Statement under which developed countries had pledged to eliminate coal power by the year 2030 and developing nations by 2040.
What would constitute a positive outcome for COP27? Progress on meeting the $100 billion a year target on climate finance is paramount, as well as the definition of a new post-2025 target. In 2020 and according to figures announced at the COP26, but $83 billion were mobilized for Climate Finance; 98% from public funding and only 2% from the private sector, leaving ample room for growth. The Glasgow Financial Alliance for Net Zero (GFANZ) was created with just that aim, to close the climate finance funding gap. It mobilized more than 450 parties, representing over $130 trillion in assets under management at launch in 2021. While we have seen many more commitments since then, the ESG bashing movement in US republican states in recent months has started raising concerns around the positioning of banks with regards to climate change mitigation. There is fear in the market that the alliance could be fractured if US banks were to pull out, on the basis that Net Zero commitments pose liability risks that could be considered too high today.
This huge divide in the market is pushing financial actors in opposite directions and is counterproductive in mobilizing climate finance. Indeed, this is distracting the financial industry while we have a practical, more short-term challenge to address: how to ramp up spending on a pressing long-term issue, while acknowledging the weight of the looming economic recession. This question will not be answered the same way by corporates and governments
In times of economic contraction, corporates react by shrinking capital expenditure plans, freezing new hires (perhaps even letting off employees), maintaining operations undisrupted and maximizing efficiency. However, CEOs have a mandate which extends beyond the recession cycle and must bring a vision of long-term sustainable viability, which cannot be envisaged today without taking into consideration social and environmental externalities. From our experience at looking at investment opportunities in our climate change mitigation approaches, great leadership and efficient corporate governance is reflected in an executive teams’ ability to see beyond short-term turmoil while continuing to invest in what the business will need when brighter days are here, i.e., retaining talent, business reorganization, product mix shifts, etc.
On the other hand, governments of major economies are expected to provide support in difficult times: to design and pass new policies that can turn gloom into an opportunity. Moreover, governments cannot overlook what a short-term view would discard; social sustainability and meeting the basic social needs of citizens. With the mounting pressure on agriculture caused by extreme weather events, adaptation needs are front and center on the social agenda and could therefore gather more financial commitments. Adaptation finance as well as loss & damage provisions (for more vulnerable countries) are high on the list of priorities for this year’s COP.
2022 marked the second most damaging and expensive hurricane in the US. Hurricane Ian caused estimated damages amounting to more than $100 billion. Flooding in Pakistan and Australia, unseen levels of drought (among the worst in 500 years), heatwaves and wildfires in the northern hemisphere are climate catastrophes which are now expected to become 15 to 30 times more frequent. The direct implications are not only construction related but include food security, i.e., a drop in crop yields (30% drop in rice harvest in northern Italy last summer) and consequently in feedstock. Longer term effects are also to be expected on biodiversity and ecosystems which will have even greater repercussions.
COP27 will convene against a very gloomy economic and geopolitical backdrop. While expectations may be low, positive surprises should not be excluded. We can only hope and advocate for our leaders to look beyond the looming recession and geopolitical tensions with Russia and promote more ambitious climate plans to protect our world.
The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.