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COP27: What should businesses look out for?

By Grace Melville
2nd November 2022

COP27_EGYPT_logo_event

What will COP27 mean for business? It’s been a tumultuous build up to the climate conference and as a business it can be challenging to cut through the noise and understand which issues will be most material for you and your net zero journey. 

First things first: What is COP?

The COP27 event is a global United Nations summit about climate change and how countries are planning to tackle it. This year’s COP is hosted by a different government, last year COP26 was hosted in Glasgow, Scotland by the UK. 

This year will mark 30 years since the UNFCCC was adopted and seven years since the Paris Agreement was agreed at COP21. With the strapline, ‘Together for implementation,’ COP27 is billed as an ‘African COP’ in reference to its location as well as the expectation that African countries’ exposure to some of the most severe impacts of climate change will be front and centre of the discussions.

The stage for COP27

As we head towards the start of COP27 on November 6th in Sharm el-Sheikh Egypt, the world has been transformed. Global socio-economic factors, such as the war in Ukraine, has triggered high inflation, rising interest rates, energy and food insecurity and greater inequality across the globe.

These pressing short term issues have led some governments and sectors to fall back on fossil fuel projects, including coal, to try and replace Russian oil and gas. Similarly businesses have become more focused on reacting to short term pressures. According to a recent KPMG survey this has resulted in U.S. CEOs de-prioritising ESG initiatives.

Against this backdrop the Egyptian-led COP presidency will look to rally the country signatories to the Paris Agreement to redouble efforts to now take meaningful action on decarbonisation, reach Net-Zero by 2050 in order to keep warming to below 1.5C.

One of the outcomes of COP26, which failed to secure sufficient targets for 2030 that align with 1.5C, was that countries have to come back in 2022 with more ambitious targets, and report yearly on their commitments. This was a key element of the ‘Glasgow Pact’ so a big test for Egypt will be whether or not countries come prepared to renew their targets and make them more ambitious.

While countries can lead with policy and regulation it is business and finance that must make the changes in operations, products and investments to decarbonise the global economy on the ground.

We believe that the short term geo-political headwinds and pressures of today are best faced with a long-term mindset that places sustainability at the heart of business strategy.

Below we have outlined the key issues for businesses and financial institutions to keep across at COP27 to help them meet this goal.

1.  Accelerated energy transition

While one short term reaction to the global energy shock has been to re-invest in coal, the longer term view is that renewables are the route to energy affordability and security, as well as the urgent decarbonisation required to limit global warming. The International Energy Agency’s (IEA) latest World Energy Outlook predicts that the energy crisis will produce ‘sustained gains’ for global renewable energy investment which will surpass $2 trillion annually by 2030 and in turn this will drive faster progress in energy efficiency, and electrification e.g. EV adoption.

Watch out for: Look out for announcements from Governments and international financial institutions on further support for renewables growth, particularly in the developing world. There will likely be further pressure for countries to introduce tougher energy efficiency regulations for business and domestic buildings, which brings both risk and opportunity for companies.

2. Nature and Biodiversity

The UN, national Governments, regulators and NGOs are increasingly focused on the crucial role the natural environment plays in achieving the low-carbon global economy. Nature is both a store for carbon dioxide and a provider of natural services like water, materials, pollination and flood defences, all required for humanity to survive and thrive. These natural resources are under huge pressure and being destroyed by over-use. This will be a big issue at COP 27 as the UN also prepares the ground for its Biodiversity Conference (COP 15) in December that will seek to agree a new set of goals for nature over the next decade.

Watch out for: Expect further calls for corporate disclosure on natural resource consumption to be elevated to the same status as carbon and climate risk disclosure. The Task Force For Nature Related Financial Disclosure (TNFD) is creating the framework for corporates to disclose nature-related risk and opportunity and allow financial institutions to consider these risks in investment decisions. Another important new initiative under development is the  Science-based Targets for Nature (SBTFN) that will define a pathway for businesses to contribute to a full recovery in nature by 2050.

3. From voluntary standards to mandatory disclosure

Efforts to have companies and financial institutions disclose carbon and climate risk data have been ongoing for over 20 years since the Carbon Disclosure Project (now CDP) pioneered the space at the turn of the century. Many other voluntary standards have been developed since e.g. SASB, TCFD, but many believe it is now time for these voluntary standards to become a regulatory requirement for listed and large private companies.

Watch out for: At COP26 in 2021 the IFRS Foundation announced the creation of the International Sustainability Standards Board (ISSB) to harmonise a range of existing sustainability accounting standards and establish a global standard. Further news is anticipated from ISSB at the end of this year following the new standards going out to consultation in the summer, and COP could see some of this trailed.

For European listed companies watch out for any news on the Corporate Sustainability Reporting Directive (CSRD) which is being finalised after consultations earlier this year. Similarly, for U.S. listed companies the Securities and Exchange Commission (SEC) announced in March proposals to significantly enhance climate-related disclosures in regulatory filings. While these processes take time, and the SEC in particular may face legal challenges that will push back implementation to 2023, the direction of travel is clear.

4. Risk and resilience

The past year has seen extreme weather events in Pakistan, Germany, China, Africa and the U.S. dominate the news and be attributed to climate change. These dramatic events, combined with the ongoing increase in temperatures and ocean levels around the globe, demonstrate the need for companies to plan for climate change risk. Through frameworks like the Taskforce on Climate Related Financial Disclosure (TCFD) companies with good risk management processes are scenario planning for the physical and other risks that would occur in different warming scenarios. Building up the resilience of global supply chains is a related topic that all companies have to face and there is increased focus from Governments, regulators, NGOs and data providers in this area.

Watch out for: As an African host nation Egypt is expected to keep up the pressure on the developed world countries, which are responsible for the majority of historical emissions, to pay for developing world companies to adapt to the impacts of climate change. Specifically,  developed world countries are being asked to honour a pledge made in 2009 to deliver $100BLN of annual adaptation finance to the developing world from 2023 onwards.

Where adaptation cannot prevent the negative impact of climate change there will be calls for developed nations to provide compensation for this loss and damage. This is a highly contentious topic and is likely to cause friction between the host and developing countries, and the developed country group.

5. Greenwash and transition planning

This COP has been framed as ‘the implementation COP’ where ambitions turn to meaningful action.  In the run-up to COP26 large numbers of corporates committed to net zero with the effect that nearly 70% of the global economy had committed to achieve net-zero by 2050, according to the Science Based Targets Initiative (SBTi).

However, there is scepticism that these targets are backed by detailed, time bound and properly funded plans to transform how companies do business. This has led to accusations of greenwashing, the practice of making a company, service or product appear more sustainable than they actually are.

While the introduction of mandatory disclosure rules (see point 3 above) can help transparency around how companies have performed in the past, it is their transition plans that provide the evidence that there is credible plan to decarbonise fully in the decades ahead.

Watch out for: Look out for more countries following the UK Government’s lead and stating, as the UK did in 2021, that large companies must provide transition plans as part of regulatory reporting. The ingredients for a credible transition plan will also be under discussion with the likes of the Glasgow Financial Alliance for Net Zero (GFANZ) and CDP providing their guidance on what credible plans should contain. There will also be discussion on how greenwash can be called out following the UK Advertising Standards Authority’s (ASA) recent fines levelled at  a number of UK companies for misleading advertising, and the Financial Conduct Authority’s (FCA) proposals on rules for sustainable investment product labelling.

 

Contact us

Carbon Intelligence partners with businesses and financial institutions to define goals, create a business case, map out a pragmatic, cost-effective plan and manage a multi year programme to achieve those goals. Get in touch with our team today.

 

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