GUEST POST: A Discussion of the Outcomes of COP27
With COP27 wrapping up, we sat down with Lindsey Stewart to discuss his perspective on COP27 outcomes
With COP27 taking place between November 6th and 18th, we wanted to provide an update on the discussions around the conference and the outcomes upon its conclusion. We were lucky enough to be able to sit down with Lindsey Stewart, Director of Investment Stewardship at Morningstar, who has put out some great research recently on some of the topics discussed during COP27.
Introducing Lindsey Stewart
Lindsey is the Director of Investment Stewardship Research at Morningstar. He has worked as an investor engagement specialist in the UK, continental Europe, and North America at KPMG and Makinson Cowell. He also has gained extensive experience in the regulatory and standard-setting arena, most recently at the UK Financial Reporting Council. In 2021, he won a Finalist prize in the Professional Services Senior Leader category of the Black British Business Awards.
In Lindsey’s current role, his professional focus is environmental, social, and governance themes (ESG) and investment stewardship, but he also has deep expertise in financial and corporate reporting, stakeholder engagement, corporate investor relations, and investor perspectives on audit and assurance.
Setting the Stage
Source: Ahmad Gharabli | Afp | Getty Images
Before we dig into specifics, can you set the stage for us by telling us about the purpose of COP27 and any high-level observations you have about this year’s COP?
The Conference of Parties, known as COP, is the decision-making body responsible for monitoring and reviewing the implementation of the United Nations Framework Convention on Climate Change.
The COP conferences have been held ever since the Rio Earth Summit back in 1992. The UN organizes this climate change conference, the Conference of Parties to the agreement, roughly every year to flesh out exactly what is the path to decarbonization, to addressing the climate change issue.
The 21st Session of the COP, held in Paris in December 2015, was historic in its outcome – the Paris Agreement, which set the ambition of keeping global climate change well below 2 degrees Celsius. That language has evolved over the last couple of years to keep global climate change at 1.5 degrees Celsius. This threshold was particularly emphasized at COP 26 in Glasgow last year. Having completed that negotiation in Glasgow, COP27 in Egypt was seen as being the “implementation COP”, how we are going to get things done and keep 1.5 degrees alive.
Thematic Days
Going into COP 27, there was the expectation that COP27 would set an important context for asset managers' active ownership activities on water-related risks. How did this topic play out? Did the outcomes align with your expectations going in?
This year’s conference included a thematic day focused on water (November 14th). I believe it's the first time ever. There was not a lot in terms of strong commitments ahead of an upcoming UN water conference in 2023, but I think the links between climate and issues such as biodiversity and nature loss and how water risk plays into that were definitely a key feature of COP27. It was heartening to see that progress. I think quite a lot of how that implementation plays out is still yet to be decided.
COP 15, the Conference for the Convention on Biodiversity, starts in December. We're likely to see a bit more flesh put on the bones there.
Side Note: Lindsey wrote a very interesting piece on this topic, which can be found here.
And then I guess to that end on the topic of biodiversity, what kinds of topics underneath that are asset managers talking about? I think it's a pretty big umbrella topic, but are there certain themes that you're hearing about?
Asset managers think about biodiversity, as with so many of the environmental themes, in terms of what's material to companies. We’ve seen that consumer staples, mining, and energy sectors are very exposed to this theme, especially in those nature loss and biodiversity areas. Asset managers are asking for more information on that, where management teams think it’s material. Some of them are starting to support shareholder proposals in that area. But we’ve not seen a lot from them on voting intentions.
In parallel with the developments at COP27 - there's the Task Force on Nature-Related Financial Disclosures (TNFD) that's currently trying to develop a reporting framework around biodiversity and nature. There are also the existing SASB disclosures that feature guidance on that.
Depending on how those frameworks develop, we might start to see some much stronger baselines forming in terms of what's expected on policy formation, what companies are expected to report; and we might start to see managers starting to take voting decisions at shareholder meetings based on that. We'll see in their 2023 policy updates how that turns out.
As an expansion on this, we feel like there was an ongoing theme focused on adaptation and loss and damage, especially at the Energy Day rather than climate mitigation. What kind of message is that sending?
It's a bit of a mixed message, unfortunately. These climate summits have only ended in without an agreement one time and that was COP15 in Copenhagen back in 2009. I think it was considered such a fiasco that nobody seems to want to see that happen again. With COP26 last year and COP27 this year, we've seen delegates putting in overtime to reach some kind of meaningful agreement, even if perhaps it's nowhere near ideal.
Also, I think the President of COP26, Alok Sharma from the UK, wanted the COP27 agreement to mandate greenhouse gas emissions peaking sometime in 2025. We didn't see that in the final version of the text. What we did see were two key things. There was the loss and damage fund that they're planning to set up to compensate countries that are most affected by the negative impacts of climate change. And the commitment – on paper at least – to “keeping 1.5 degrees Celsius alive” in terms of limiting temperature rise.
Announcements at COP27
Source: Saul Loeb/AFP/Getty Images
It seemed as if the focus was primarily around helping people who have suffered climate impacts, but there wasn't a lot of conversation around emissions and fossil fuels. Why would you say that is?
Indeed, the focus was on the loss and damage fund to compensate those affected by climate change. I think there's been so much talk about it because it's pretty much brand new. I think the first time we saw language on that in the agreements was at COP18 in Doha, ten years ago. The idea has been doing the rounds for a while. It’s the first time that we've seen anything that looks like concrete action on actually setting up a loss and damage fund.
That being said, I think the fund is a bit of an empty bucket at the moment because there's it’s basically talking about implementing it. They're setting up a group of 24 countries to form a transitional committee on how the fund should work and most importantly who's on the hook for the cash. That group will then present its recommendations at COP28 in the United Arab Emirates next year to actually get the fund up and running. It’s more of a promise to set up a fund that some future point rather than setting one up now. That of course means more negotiations and more risk of delay or collapse. We’ll see how that goes, but that's what's taking the headlines because it's brand new.
As for fossil fuels, there's less focus on it because at least some of the countries at COP27 don't look like they've been particularly committed to the idea of peaking emissions in 2025, or drawing down the production of fossil fuels in the short term. There was no agreement on that, no agreement on coal phase-out, and there was quite a bit of vague language around committing to lowering emissions or renewable energy that might leave some room for a much larger continued role for fossil fuels than many had expected.
Were there any announcements at COP 27 that surprised you?
I didn't see anything particularly unexpected. I suppose it's not all that surprising that we haven't seen what are called the “high ambition” countries get their way. It was very much a compromise agreement, which is a little disappointing but not entirely surprising.
I think it does kind of put a lot of onus on COP28 next year to kind of really lay out exactly how certain things are going to be implemented, whether they can be an agreement on peak emissions, because time is running out before 2025. Whether there can also be an agreement on a phase-down of fossil fuels or elimination of thermal coal uses are also going to be important, but I think that not perhaps not enough was really decided and nailed down here in here at COP27.
They did recognize that limiting global warming to 1.5 degrees is going to require deep and sustained reductions in global gas emissions before the end of the decade. But perhaps not enough acknowledgment that the end of the decade can't mean 2029. Action is needed now.
Outcomes of COP 27
Were there any outcomes of COP27 that you think will greatly impact the capital markets going into next year?
Nothing concrete, but there's plenty of language in the document that says that a “full transformation" of the financial system and its structures and processes is needed, engaging governments, central banks, commercial banks, institutional investors, and other financial actors.” It also says that about $4 trillion a year of investment is needed in renewable energy, and then another $4 to $6 trillion in delivering funding to complete that transformation.
There's lots of high-ambition language in there but not a lot of detail around that. It's still to be seen how the financial sector is going to absorb and plan around that. And as for organizations like GFANZ, it's kind of up to them to start working out exactly how that's going to look on their side.
Are there any other things coming out of COP27 that you think are important to be aware of going into next year?
It’s hard to say. It's just so little that’s new was decided upon; apart from the loss and damage fund, I guess, which is more of an issue for governments to work out between them. It's hard to identify any immediate consequences for asset managers or the financial industry.
I think one thing to keep an eye on though is what's happening in the regulatory arena. Below that we've got plenty of consultations happening from the SEC in the US, from ESMA in the European Union, from the FCA where I'm sat in the UK, really trying to define what a sustainable investment looks like. How can you sell it to customers? What kind of words do you use?
Trying to get the sort of specificity that we've needed for quite some time that will drive things in the correct direction. I think that's going to be an important development going forward, along with the standard setting and the reporting frameworks that's also happening in parallel. We see organizations like the ISSB, the SEC is doing some of that, the European Commission, TNFD, and more.
Was there any topic you wish was addressed more or talked about more?
I think everything kind of got an appropriate hearing. There's a lot more focus on the things that are connected to climate – like nature and the Just Transition – than there was previously. I just think what is needed is for governments to reach an agreement on how they're going to get to a 1.5-degree goal, considering we're already at 1.2 degrees and that's 80% of the runway, as it were. And that there does need to be a bit more ambition for COP 28. Let's see what happens there.