COP27 – what to expect? Three hot topics for a critical climate summit

Key takeaways

• Keeping the global temperature rise to 1.5°C is looking increasingly hard, but could be the highest profile metric by which COP27 will be judged
• Funding climate adaptation and compensating poorer nations for loss and damage will be a key focus. More innovative ideas, like Germany’s global shield against climate risks, will be needed
• The energy crisis, government policies and technological advancements are accelerating the shift to renewables. Moves towards more realistic carbon pricing and greater standardisation and regulation of carbon offsets would be welcome
• We focus on the companies providing solutions to the sustainability transition and those leading their peers in decarbonising. This helps us mitigate portfolio risk and seek sources of potential outperformance.

The annual UN Climate Conference, COP27, will take place in Sharm El Sheikh, Egypt, from 6-18 November. It will voice an urgent need to implement stronger emission reduction plans, and shine a greater spotlight on the needs of the developing world. Below we outline three key areas of focus.

1. Cutting emissions and keeping 1.5°C alive

The last Conference of the Parties (COP26) in Glasgow made solid progress in some areas of climate action after years of stalling, with new pledges to phase out coal power, limit deforestation and methane emissions. Crucially, the Glasgow Climate Pact kept the ambition of limiting global warming to 1.5°C alive – at least on paper – as many countries set out new or updated emissions targets, and committed to revisit and strengthen them by September 2022.

Success here will determine whether we avoid catastrophic warming that alters life on earth. Yet just 12% of countries (23 of 197) met the September 2022 deadline with revised climate plans. Many current pledges lack detailed implementation steps and annual reduction targets, which will become more crucial as the 2030 deadline to halve emissions draws nearer. A UN assessment published end-October concluded there is “no credible pathway” to keep the global temperature rise to 1.5°C. Current policies point to a 2.8°C rise by this century’s close, with 2.4-2.6°C if all pledges to date were to be implemented in full. A 1.1°C rise has already occurred, notes the Intergovernmental Panel on Climate Change.

There has been some progress this year: Australia’s new government is back at the climate table, and India has set more challenging emissions targets. The compounding forces driving the sustainability transition – changing consumer behaviour, investor pressure, regulation, and new technologies – are bringing fresh scrutiny and solutions. The independent Science-based targets initiative (SBTi), for example, has become the gold standard for corporate net-zero targets, successfully channelling media and investor attention to drive change. COP27 will now shine the media spotlight on countries’ plans, to act as a similar catalyst. Progress here will be a key metric by which the summit will be judged.

2. Spotlight on the developing world

As evidence of the climate emergency mounts, discussions at COP27 could be particularly heated. This year has seen devastating droughts in Kenya, a third of Pakistan flooded, the hottest European summer in 500 years, and a group of island nations asking for a new home when theirs sink underwater. Climate demonstrations have risen. With a new African presidency, this COP’s focus will be on a ‘just’ transition. G20 nations account for 80% of global emissions, but the largest damage often falls on the poorest nations. A 2009 pledge of USD 100 billion a year by rich nations to help them deal with the climate crisis has not materialised. Existing funding has been criticised for focussing not on grants, but on loans with few concessions from market rates, and to middle-income rather than the poorest nations.

Amid the food and energy crisis, there will be a new urgency to talks around increasing funding, finding new financing models and compensating developing nations for ‘loss and damage’ incurred to date. Global taxes on carbon, air travel, shipping, or financial transactions have been proposed by vulnerable nations to address the impact of floods and wildfires, and develop early warning schemes. UN Secretary General António Guterres has called for windfall taxes on energy firms. The idea of a form of ‘climate reparations’ is still in its comparative infancy, but Denmark, Scotland, and Belgium’s Wallonia region have all pledged small, but symbolically important funds to help impacted communities. The EU is also working on a package of funding proposals to help victims of climate disasters.

Meanwhile, Germany has proposed a ‘global shield against climate risks’ to be discussed at COP27. This would fund better social security and disaster reserves by drawing heavily on insurance and reinsurance solutions, where Germany has substantial corporate expertise. More creative ideas such as these, which draw on both public and private finance streams, will be needed.