3 key takeaways for investors post COP27

At COP27, from 6 - 18 November 2022, more than 35,000 delegates came together in Sharm El Sheikh, Egypt, to take collective action against climate change. Set against the challenging geopolitical background, delegates had to balance the demands of the energy transition, energy independence and cost of living. Overall the sentiment was that the progress to “phase down” fossil fuels has been insufficient to limit global temperature rise to 1.5⁰C. Nonetheless, having been dubbed the “implementation COP”, the focus was on how to finance, implement and achieve countries commitments.

Our three main takeaways are:

1. Commitments remain well-off track to achieving 1.5°C but key emitting countries updated their pledges.
2. Real progress on funding a “just energy transition” was made, including a breakthrough agreement on a new “Loss and Damage” fund for vulnerable countries.
3. Progress on climate adaptation was made, with governments agreeing to advance the Global Goal of Adaptation. 

See what this means for you as a potential investor.

1. Commitments remain well-off track to achieving 1.5°C but key emitting countries updated their pledges.

Last year at COP26 in Glasgow, countries agreed to focus on limiting global warming to 1.5°C above pre-industrial levels. Their commitments to cut greenhouse gas emissions were too weak to achieve this but they agreed to return this year to strengthen them. While 24 countries did, 170 did not¹. Policies currently in place point to a 2.8°C temperature rise by the end of the century, with implementation of current pledges only reducing this to a 2.4°C – 2.6°C temperature rise.²

On the bright side, in the run up and during COP27 we saw key emitting countries update their commitments: 

• Indonesia (1.5% of global carbon emissions³), top coal exporter in the world, brought forward its net zero emissions target to 2060.
• Brazil’s (1.3% of global carbon emissions³) President-elect Lula da Silva pledged to reverse Bolsonaro’s plans to increase its greenhouse gas emissions. 
• Australia (1.2% of global carbon emissions³) passed a Climate Change Bill to deliver a 43% reduction in greenhouse gas emissions from 2005 levels by 2030, and net zero by 2050.
• Whilst the United States (14.02% of global carbon emissions³) did not increase its commitment, it signed the Inflation Reduction Act to reduce carbon emissions by 40% compared to 2005 levels by 2030.

Investment thought: Despite the challenged macro environment, countries maintained their ambitions to reduce greenhouse gas emissions. The disappointing decision not to broadly raise targets highlights the fact that the world continues to rely on fossil fuels for 83% of energy consumption and even the most ambitious transition plans will still require hydrocarbon use over the short term.⁴ We therefore expect to see a simultaneous boom in both traditional and clean energy over the coming years.

2. Real progress on funding a “just energy transition” was made, including a breakthrough agreement on a new “Loss and Damage” fund for vulnerable countries.

COP27 seized the opportunity to advance environmental justice and change the rhetoric of the debate to “who must pay, for what”.

Sunday morning, after two weeks of negotiations and previous decades of debates, governments agreed to establish a new dedicated fund to assist developing countries in responding to loss and damage. To put simply, compensation or reparations for climate related damages caused by extreme weather events. The materiality of the fund remains in progress, no sums of money were committed, and decisions on how the fund will work have been left to next year’s COP28.

A new Just Energy Transition Partnership (JETP) funding deal was also announced, where the US and other developed countries will work with Indonesia to mobilise USD $20 billion over the next 3 to 5 years to accelerate the transition from coal toward a cleaner energy future. The partnership model was based on South Africa’s USD $8.5 billion JETP which was first announced at COP26 and further developed into a five-year investment plan this year.⁷

Investment thought: Agreement for a "Loss and Damage" Fund and new JETP partnerships mark significant positive developments for environmental justice. While the terms of "Loss and Damage" are yet to be decided, the JETP partnerships will be mobilised through public and private partnership and the IEA has stated that it will act as a positive tailwind to scale up renewable power, such as solar, wind, hydro, geothermal and bioenergy.⁸

3. Progress on climate adaptation was made, with governments agreeing to advance the Global Goal of Adaptation. 

2022 has been another year on record for extreme weather events: deadly heatwaves occurred in India and Pakistan, temperatures reached 40°C above normal in parts of Antarctica⁹, and severe flooding impacted South Africa, Brazil, Bangladesh and Pakistan.

As the number of people impacted by climate change increases, countries are being forced to prioritise investing in adaptation. The Standing Committee on Finance (SCF) report highlights that while mitigation constitutes the largest share of climate specific financial support, the share of adaptation finance continues to increase and grew at the fastest rate.¹⁰

The Global Goal of Adaptation was established under the Paris Agreement with the aim to build adaptive capacity, strengthen resilience and reduce vulnerability. COP27 saw positive progress towards the goal - new pledges totalling more than USD $230 million were made to the Adaptation Fund, the Sharm el-Sheikh Adaptation Agenda to enhance resilience of vulnerable populations was launched, and the SCF was requested to report on doubling adaptation finance for consideration at COP28 next year.¹¹

One area of particular focus was Food Security. While food systems account for a third of greenhouse gas emissions, they only account for 3% of climate finance.¹² Recognising the importance of this, a whole day was dedicated to “Adaptation and Agriculture”. 13 countries have now endorsed the Agriculture Breakthrough which aims to make climate-resilient, sustainable agriculture the most widely adopted option by 2030. Additionally, a USD $8 billion R&D fund, led by the US and the UAE, was announced to reduce the environmental impact of farming.¹³

Investment thought: Earlier this year when launching the IPCC 2022 report, UN Secretary-General António Guterres said “as climate impacts worsen – and they will – scaling up investments will be essential for survival. Adaptation and mitigation must be pursued with equal force and urgency.” COP27 showed the increased attention countries are now paying to adaptation. Going forward we anticipate seeing increased investments in enhancing water efficiencies, adapting the built environment, and reinventing food and agriculture. In particular, we expect innovations in alternative food supplies, vertical farming and micro irrigation to create robust opportunities for investors.

Piecing it all together

While progress to limit global temperature rise to 1.5⁰C was weaker than anticipated, there is hope that COP27 provided the first of many. The first COP to be hosted in Africa, agree on a new "Loss and Damage" fund and dedicate a day to “Adaptation and Agriculture”. We believe that this urgency for action and momentum to transition provides investors with secular growing opportunities to mitigate and adapt to climate change, as well as the need to account for climate-related risks.

Private sector investments are vital to achieving countries’ transition ambitions and the financial services sector plays an important role in firstly managing the sector’s current impact on emissions and secondly exploring how the sector can fund the transition to Net Zero. The commitment to these objectives will support financial flows into Sustainable Investment Assets, as evidenced by a Morningstar report released during COP27, the number of climate-themed funds continues to grow as investors seek more options to leverage opportunities.¹⁴ J.P. Morgan Private Bank offer clients a range of investment opportunities that are aligned to “Reduce, Remove, Retrofit” and achieve a just, clean energy transition:

Contact your J.P. Morgan team to learn more about the wide spectrum of climate-related investment opportunities and their potential to align with your financial and sustainable goals.

¹ World Resources Institute, Where Do We Stand on COP26 Climate Promise? A Progress Report, 13^th October 2022

² UN Environment Programme, Emissions Gap Report 2022, 27^th October 2022

³ worldometers, CO2 Emissions by Country.  

⁴ Michael Cembalest, 2022 Annual Energy Paper, 2022

⁵ ClimateWatch, Historical GHG Emissions

⁶ TheEconomist, ‘How Pakistan emerged as a climate champion’, November 2022

⁷ GOV.UK, “Indonesia Just Energy Transition Partnership Launched at G20”, November 2022

⁸ IEA, “IEA welcomes Indonesia’s Just Energy Transition Partnership as key step forward for international cooperation on energy and climate”, November 2022

⁹ Guardian, Extremes of 40C above normal: what’s causing ‘extraordinary’ heating in polar regions?, March 2022

¹⁰ UNFCCC, Standing Committee on Finance, 2022 

¹¹ UNFCC, COP27 Reaches Breakthrough Agreement on New “Loss and Damage” Fund for Vulnerable Countries, 20 November 2022.

¹² Global Alliance for the Future of Food, “Untapped Opportunities: Climate Financing for Food Systems Transformation”, 2022

¹³ Bloomberg, “Green Farming Gets $8 Billion Boost at UN Climate Summit”, November 2022.

¹⁴ Morningstar, “As COP27 Focuses on Financing Climate Transition, Options for Climate Fund Investors Widen”, November 2022