Investor reflections on ‘subdued’ COP27
Investors have welcomed progress on energy security and biodiversity at COP27, despite the subdued mood among participants.
The COP27 climate summit in Sharm El Sheikh had the highest turnout of participants in the history of UN climate conferences and concluded with a historic decision to establish a loss and damage fund for developing countries.
However, Huw van Steenis, vice-chair of management consultancy Oliver Wyman, summed up the mood by suggesting that investors had left Egypt “subdued” compared to COP26 in Glasgow, which had brought finance centre stage with the creation of the Glasgow Financial Alliance for Net Zero (GFANZ).
Writing an article for the World Economic Forum (WEF), van Steenis said that COP27 had a very different feel. “This year the story was more about implementation, with a few new initiatives being announced.”
James Peel, Titan Asset Management’s ESG portfolio manager, told Net Zero Investor that quite a few members of GFANZ were absent from COP27. He noted that this could be due to the recent criticism faced by the alliance, which subsequently made green-hushing evident in Egypt.
He said: “Last year in Glasgow, the birth of GFANZ was loudly cheered by the bosses of big banks from around the world. Many of these bosses, especially those from the US, were notably absent in Egypt. GFANZ is in a bit of hot water due to antitrust concerns and several big banks from the US have been struggling recently to assuage critics from both the left and the right.
“It seems that the best strategy for some for now is to hunker down and facilitate as much progress as possible without attracting too much attention.”
Green-hushing was also noticed by van Steenis in his WEF article, pointing out that the “finance and business [sector] were far quieter this year about targets and progress”.
He detailed that this may reflect “the complexity of the trade-offs firms are trying to navigate, in building out data sets, as well as the ongoing distrust between finance and society”.
However, Eoin Murray, Federated Hermes’ head of investment, told Net Zero Investor that this was not necessarily “fair to say”, as voluntary climate and nature disclosures are already on the rise. In addition, the consensus at COP was that “it is expected that many countries will implement a framework for mandatory compliance and disclosure in the next several years”.
It seems that the best strategy for some for now is to hunker down and facilitate as much progress as possible without attracting too much attention.
‘Desperate’ mood among investors
Vivienne Maclachlan, investment manager ThomasLloyd Group’s chief finance officer, noted that the mood among investors at COP27 was “more chaotic” and “more desperate” in terms of financing the transition compared to COP26.
But she reflected that the conference was largely positive, as 12 months on from Glasgow, investors had “refined their thinking” on where their money should be focused to make a real-world impact.
She told Net Zero Investor that an example of this at COP27 was the expansion of the Just Energy Transition Partnership (JETP) to Indonesia. The model was first pioneered last year to accelerate the decarbonisation of South Africa’s economy.
“Looking at Indonesia, you're looking at a much larger market, but more fragmented, which is actually a good thing because when you're rolling out such a significant funding plan it will impact not only the people lending money, not only the communities but also the workers as well in those communities,” Maclachlan added.
Energy security
Unsurprisingly, energy security was a big theme at COP27, as investors and companies tried to work out what the war in Ukraine and the energy crisis meant for net-zero investments.
Many investors welcomed the progress made in accelerating renewable energy at the conference. Maclachlan hailed the focus on decarbonisation in Egypt and the recognition in the COP27 text “to accelerate clean and just transitions to renewable energy”.
Peel added that a “meaningful” development discussed at the conference was the US Inflation Reduction Act. The new legislation is a significant investment in transitioning to a clean energy economy and accelerating action across the US to tackle and confront the climate crisis.
However, he said: “The final [COP27] cover text was injected with a healthy dose of last-minute realpolitik. The reference to ‘low-emissions energy’ was a nod to a renewed appreciation for energy security in addition to energy sustainability.
“It looks a little like a loophole designed to allow things like fossil gas a greater role in the decarbonisation of the global economy and is surely a product of the gaggle of lobbyists present in Egypt representing the fossil fuels industry.”
A financial and political architecture is now emerging to allow investors to participate more explicitly in the opportunities provided by nature.
Success in biodiversity and ecosystem loss
According to Murray, COP27 also saw the challenge of biodiversity and ecosystem loss being recognised on an equal footing with the issue of climate change.
“The two still remain in somewhat separate silos in many investors’ minds, but it is increasingly clear that they are inextricably linked and that a joint approach, in terms of engagement and capital allocation, is the way forward,” he said.
Murray also highlighted that COP27 drew light on incentivising the correct valuation and the financing of biodiversity at a huge scale. This addressed the big issue for investors that roughly half of economic activity is highly dependent or dependent on nature.
“On the back of this, a financial and political architecture is now emerging to allow investors to participate more explicitly in the opportunities provided by nature,” he added.
