ESG Essentials: COP28 outcomes and outlook

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The next edition of Essentials will land in January 2024 after a break for the holidays. On behalf of the entire ESG team, we hope you have a peaceful break and a happy new year.

COP28 agreement takes direct action on fossil fuels

For the first time in COP’s history, the global stocktake text directly addressed fossil fuels, calling for a “transition away” from their use within the next decade. While not quite the “phase out” that many were hoping for, this represents a significant step towards the transition. 

Many in the UAE, the EU, and the United States celebrated the passage of this agreement. Countries pledged to triple renewable-energy capacity and double the rate of efficiency improvements in energy systems, which will help the world halt warming “well below” 2 degrees. Some argued that Dubai’s COP might sit alongside Paris and Kyoto as one of the most consequential climate agreements in history

However, the deal was not without its critics. During COP, small island states argued the agreement on climate change is flawed, lacking strong timelines for peaking emissions and addressing loopholes for fossil fuels. The agreement included significant language on transitional fuels (i.e natural gas) and carbon capture, that support the use of fossil fuels (albeit ones much less polluting than coal or oil) well into the future. 

Many agreed that COP28 will have a major impact on climate finance, with the German climate envoy quoted in the New York Times saying “Every investor should understand now that the future investments that are profitable and long-term are renewable energy — and investing in fossil fuels is a stranded asset.”

COP28 largely omits key climate finance provisions in final deal

COP28 concluded with an agreement that calls on nations to move away from fossil fuels. Despite this monumental progress, much work remains – especially on climate finance.  

While progress was made on Loss and Damage, the agreement neglects specific commitments to help finance poorer nations’ energy transitions. Ishaq Salako, Nigeria’s environmental minister, said “Asking Nigeria […] to phase out fossil fuels is like asking us to stop breathing without life support.”

Many developing countries find it difficult to secure private funding for renewable energy without guarantees from foreign countries that derisk such investments. Without greater commitments of climate finance from richer countries, it is difficult to see how many nations could feasibly change course. One recent estimate argues that transitioning to greener fuel sources like wind and solar will require trillions of dollars in investment each year. Currently, the international community is struggling to fulfil existing promises of $100bn annually.   

Much of COP28’s successes will depend on governments overhauling their domestic policy in line with the agreements they made in Dubai. While the agreement represents a statement of purpose, it is not legally binding. Investors will now have to wait and see the lengths the international community will go to fulfil their commitments. 

The financial world reacts to COP28 with new pledges to boycott fossil fuels

In the wake of COP28 two new banks, Crédit Agricole and the European Bank for Reconstruction and Development, have pledged to restrict the financing of new fossil fuel projects or stop it entirely. They were later joined by ING, who announced similar plans on Wednesday. They join other banks such as HSBC and Societe Generale, who have also moved to stop funding the growth of fossil fuels. 

These moves represent a significant shift away from fossil fuels in (largely) European banks, as some senior policymakers and financial decision-makers have increasingly concluded investments in fossil fuels may become stranded assets under upcoming climate regulations. 

These moves have not deterred large oil and gas companies, who announced major expansions in extraction while COP28 was ongoing.  Ironically, even as he was bringing an agreement to transition away from fossil fuels, the oil and gas company that COP president Sultan Al Jaber runs, ADNOC, announced that it would invest $150bn in fossil fuels over the next decade

However, if momentum against oil and gas grows in the financial world, it will likely have a noticeable impact on the sector’s growth. This would likely require a similar movement in North American banks, which tend to be among the most prolific funders of fossil fuels.

Price of Carbon in EU ETS falls after COP28, indicating a lack of investor confidence

Surprisingly, the price of Carbon credits in the EU Emissions Trading Scheme (ETS) rapidly decreased during COP28, likely reflecting a lack of confidence among investors in the agreement’s effectiveness.  

The Financial Times quoted Yan Qin, Lead Carbon analyst at the London Stock Exchange Group, who called the terms in the agreement “weak” – especially the non-binding language calling on countries to “contribute” to the transition with very little sense of timeline.

These figures indicate that policymakers will have to do more to convince investors that they are serious about reducing emissions throughout their economies – perhaps by increasing penalties on high emitters.

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