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The 27th United Nations Climate Change Conference, more commonly referred to as COP27, is set to begin on Nov. 6 in Sharm El Sheikh, Egypt. Almost 200 countries will come together and attempt to negotiate a coordinated response to our changing climate. The conference will also be attended by industry and other global stakeholders who have previously used the event to launch climate-related initiatives.
 

The results of COP26

COP26 ended with 196 countries agreeing to “revisit and strengthen” their 2030 targets by the end of 2022 to align with the Paris Agreement. This was a diplomatic stalemate whereby everyone agreed on something that needed to be done but too few agreed on a definitive course of action. As COP26 president Alok Sharma noted at the time, adequate progress was made at the 2021 conference to keep the target of limiting global warming to 1.5c “alive”, yet its “pulse is weak”. In other words, resuscitation was postponed to COP27.¹

What progress was made including industry announcements, such as the International Financial Reporting Standards Foundation (IFRS) creating the International Sustainability Standards Board², and broad agreements to phase down unabated coal, phase out fossil fuel subsidies, meet national climate targets, and provide funding to developing nations? It is this last issue that looks to be the sticking point ahead of COP27. 

The setting for the annual meeting is foretelling. While the physical impacts of climate change are being felt globally, the responsibility for causing anthropogenic global warming can be placed on the Global North—that is, the world's most affluent countries. Historically, the Global North has produced around half of all greenhouse gas (GHG) emissions since the industrial revolution.³ Currently, the lifestyles of developed nations produce a carbon footprint 100 times greater than that of the world's poorer nations combined (the Global South).⁴ In other words, not only has the Global South contributed fewer emissions to causing global warming but the impacts are compounded by their poor economies and structural inefficiencies, which hinder rebuilding.⁵ In the run-up to COP27, there has been a focus on loss and damage—that is, the concept that industrialized countries should pay developing nations for the negative impacts of climate change.⁶ Thus far, the U.S. and European Union (EU) have cautiously agreed to discuss the topic.

The year since COP26 has been marked by worsening climate disasters alongside economic and political upheaval. Russia’s invasion of Ukraine resulted in humanitarian and energy crises—the latter led key countries to pull back from phasing down on fossil fuels (i.e., Germany). Looming fears of a global recession, increasing inflation, and soaring prices are also distracting governments from setting meaningful climate policies.

As a result of the upheaval, the national commitments set at COP27 are expected to be lackluster and the industry response slow compared to previous years. However, the global climate challenge and devastating catastrophes will continue to pressure governments and industries to make a concerted response.
 

Outlook ahead of COP27

While governments have been focused on these political crises, natural disasters have devastated ecosystems and caused widespread economic harm. Flooding in Pakistan left one-third of the country underwater and displaced close to 8 million people.⁷ The economic cost is expected to be in the billions (USD) and recovery timelines extend years ahead.⁸ Meanwhile, in the U.S., Hurricane Ian has destabilized Florida’s insurance and real estate markets for years to come while costing upwards of USD$75 billion in physical damage.⁹

At COP27, governments will need to look beyond the backdrop of global unrest and work together to take climate action. There are many areas that decision-makers need to discuss, but to us, three key challenges stand out as vital to keeping the pulse of climate action steady:

1. Address loss and damage:
   A key sticking point running up to COP27. Developed nations argue that existing mechanisms to fund the severe impacts of climate change in developing communities are better placed to provide support than establishing a new fund. However, the Group of 77, led by China (representing most developing nations) has insisted funding measures for loss and damage be a center point of the agenda.¹⁰
2. Revisit and strengthen:
   The hallmark to-be-determined agreement from COP26 whereby countries agreed to “revisit and strengthen” their 2030 GHG emissions-reduction targets. In light of global turmoil, predictions are high that COP27 will also end with many to-be-determined statements, as so far, only 23 countries¹¹ have updated their nationally determined contributions (NDCs) to lowering global emissions. We believe that in order to make sufficient progress, countries need to halt the dangerous trend of lapsing on climate commitments and strengthen climate policies and investments.
3. ACT on existing pledges:
   Over the last few COP meetings, a plethora of pledges has been announced covering everything from methane emissions to deforestation to increasing financing to scaling local climate adaptation efforts.¹² In our opinion, countries need to stop making campaign promises and decisively act on these pledges, as they represent important solutions to climate change issues beyond curbing our global GHG emissions.
    

Next – Looking to 2023 and beyond

The challenges facing COP members this year are numerous. The impacts of climate change will continue to cause real and pressing issues. We believe that progress needs to be made in order to address the increasingly precedented climate disasters happening worldwide.

Let’s be clear: Everyone has a part to play, from countries to investors. And while industry plays an important role in shifting society to a low-carbon economy, we see the responsibility as first and foremost a policy issue that needs to be steered by a globally agreed response and led by government action.

While much remains unclear, Russell Investments continues to assess climate risks (both physical and transitional) as we integrate ESG issues into our investment process.

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