COP 27: Modest hopes for a climate meeting convened in an energy crisis

• Egypt meeting should prompt calls for greater, faster, and more collaborative climate action, and a renewed urgency to limit warming to +1.5°C.
• Economic conditions may prompt a pushback on efforts to drive a cash transfer from developed markets to emerging
• There may be a greater focus on adaptation efforts, in addition to mitigation efforts, in a reflection of difficult progress and IPCC warnings

The latest meeting of the Conference of the Parties (COP) on climate change will take place against a deeply difficult backdrop. COP27 kicks off on 6 November at a time when questions of energy security and affordability are bumping up against the push for carbon emissions reductions. This may dilute the potential outcomes, but investors may still see some interesting adjustments to the path we take towards net zero.

Discussions in Sharm El Sheikh, Egypt will not only be shaped by the ripples from war in Ukraine. The implications of the contentious conclusion of last year’s COP26 meeting in Glasgow, still linger as do recent severe weather events and the stark warnings seen in two reports released by the Intergovernmental Panel on Climate Change (IPCC) in 2022.¹

In general, we expect COP27 to be a venue for limited changes in commitments. Global cooperation appears more of a challenge than it did only a year ago. Importantly, economic fragility worldwide may hamper progress towards a mooted large-scale transfer of financing from richer nations to emerging markets to help drive climate action in the developing world.

Progress on objectives?

One element that surely must be addressed is the discrepancy, and indeed the tension, between the Paris Agreement objectives for global warming,² the current pathway based on nationally determined contributions (NDC) commitments (at +2.5°C or more³ ), and the +1.5°C-only position promoted by various NGOs and initiatives such as the Net Zero Asset Managers Initiative (NZAMI) of which AXA IM is a member. In short, something has to give.

In the media, a common refrain has been to “keep 1.5 alive”. It is an acknowledgment that, globally, we are not doing enough – that climate action must accelerate – and it reflects those IPCC warnings that time is running short. Hence, COP27 attendees will hear calls for updated and more stringent emission reduction targets and will have to consider these alongside a growing awareness of the human and social challenges, as well as the sustained financial and technological hurdles in play.

As part of this dynamic, we could see new commitments around updates to emissions targets. Some have already done this, including Australia⁴ and the United Arab Emirates,⁵ but there could potentially be surprising announcements (be they positive or negative, as we found with India in Glasgow).

There should also be some comment on the current discrepancy between commitments and actions – after all, global emissions continue to increase and coal consumption was at a record high in 2021. And there will be pressure to establish interim decarbonisation targets between the 2030 date seen in NDCs and the 2050 deadline for those who have made net zero commitments. We would welcome this as it would mirror the behaviour we encourage from corporates in our engagement activity.

Emerging issues

As mentioned, we think the lack of financial transfers from the developed world to the emerging will be a widespread sore point, especially with COP27 being held in Africa. At the COP15 meeting in Copenhagen in 2009, the wealthiest nations made a pledge to send $100bn annually to the poorest by 2020. This has not happened. Estimates suggest there has been an at least $20bn shortfall, while NGOs such as Oxfam have criticised the way loans have formed such a large part of the package.⁶ Emerging market countries have a very valid claim that they have not originated the problem of climate change but suffer the most from it. If we refer back to recent IPCC reports, it is clear that things will get worse climate-wise, and it is likely that poor countries will bear the brunt of this.

With this expected escalation of climate impacts in mind, we would not be surprised if climate change adaptation (in addition to still-critical mitigation and prevention) became a more urgent theme among delegates.⁷ It will be vital to protect people from the effects that are already set in motion, for instance transforming cities so that they remain liveable despite a warmer climate – which brings us to a final point.

We think COP27 will be an opportunity for the potential social impacts to be carefully reviewed. The ultimate goal would be to create a truly ‘Just Transition’ that takes full account of the communities and individuals on the frontline of the climate crisis, and of those all around the world who may be negatively affected as we move towards a new energy era.

COP27 will not be able to entirely escape the tricky context in which it takes place, but as pretty much every COP meeting has shown, there remain opportunities at each staging post to make incremental progress towards global climate goals. We will watch closely and communicate to investors where we see potential implications for portfolios.

There is also an argument that war in Ukraine and the energy crisis should offer not only a disruption, but also a motivation. The International Energy Agency, in the just released World Energy Outlook 2022, talks about a “historic and definitive turning point towards a cleaner, more affordable and more secure energy system”.⁹ At a time when energy security and low-cost power are political imperatives, it is no secret that over the longer term these pressures could encourage our progress towards global climate goals.