What happened at COP28 and why does it matter to the average investor?

by Kris Nelson, CFA & Jihan Diolosa, Russell Investments

When stakeholders convened at COP28, the 28th Conference of the Parties, from Nov. 30 to Dec. 12, it was with an unwavering acknowledgment of the real threat posed by climate change. There are no more illusions. Nations understand climate change, and it’s cost; the challenge is facilitating collective action to build a sustainable future.

Yet, how do we get to net zero as a global community? By setting incremental, time-stamped goals. The most highly vetted paths suggest we must reduce global emissions by 45% by 2030, pursue market actions such as halting sales of new internal combustion engine passenger cars by 2035, and phase out all unabated coal and oil power plants by 2040.

By 2045, today’s investments will have taken root and spread as new energy technologies. Indeed, transitioning toward a net zero world calls for a complete and collective transformation of how we produce, consume, travel…and invest.1  Investors need to become climate-aware, managing both the risks and opportunities climate change presents. To prevent the worst climate impacts and achieve net zero, we believe sustainable investing should be an objective on par with financial security.

Ensuring this transformation was and is the aim of the United Nations Framework Convention on Climate Change and its annual COP. COP28 attracted nearly 100,000 participants and ended after two weeks of debate and compromise, with a first-ever agreement to “transition away” from fossil fuels. This wording represents a breakthrough—after 30 years of COP meetings, countries have finally agreed in writing that to avoid the harmful impacts of climate change and worst-case outcomes for the planet, it is necessary to reduce our reliance on high-emitting fossil fuels.

While the deal stopped short of calling for a “phase out” of oil, coal, and gas, it does codify the direction our energy-driven economy must go. Equally important to investors, the agreement named some of the zero- and low-emission technologies needed to support the transition such as renewables, nuclear, and carbon capture and storage. This signposting will support the flow of capital toward necessary solutions.

As with every COP, the headline is never the story  

While the pinnacle outcome of COP28 will certainly be the inclusion of language which weans the world off burning fossil fuels, the climate conference delivered several other notable gains and losses, including the following:

1. Negotiations didn’t fall apart…but didn’t fully deliver

  • This might seem an obvious conclusion, but a successful agreement wasn’t always foregone. In a world increasingly divided, combined with the geopolitical turmoil of the wars in Ukraine and Israel, pessimism was high. Up until the last minute, Saudi Arabia attempted to boycott any language which referenced fossil fuels, while smaller countries on the front-lines of climate change (Samoa and Barbados to name a few) wanted stronger language and harder commitments.
  • COP28 President, Sultan Al Jaber, faced criticism and controversy at every turn as the leader of both a climate change conference and of the UAE’s state-run oil Company. Yet, despite calls for his dismissal, he led the summit to a historic agreement.

2. Renewables take center stage. Maybe 

  • The final agreement calls for countries to triple their renewable energy capacity by 2030. This combined with the language to “transition away from fossil fuels in energy systems, in a just, orderly and equitable manner” seems to signal that the time of big oil, gas, and coal is waning.
  • However, the agreement provides a door for fossil fuel producers to remain relevant as it explicitly acknowledges that carbon capture and storage (CCS) technologies have the capability to reduce fossil fuel impacts. This is true, but it’s also important to note these technologies are far from commercially viable, and likely to be effective only in targeted deployments for the foreseeable future.

3. Loss and Damage faced a net loss 

  • Last year’s COP27 created the financing mechanism, the Loss and Damage Fund, through which rich nations will help hard-impacted poorer nations adapt to climate change. While COP28 started off strong by finally agreeing to the architecture for the fund, the accord punted on actual contributions until COP29.
  • While many countries have made voluntary pledges to the fund—about $790 million has been raised—there is no formal agreement or even guidance about how much countries should contribute. Experts estimate that developing nations will need anywhere from $100 to $400 billion to address the costs of climate change. Sustained progress on financing will be critical to achieving climate action aims.

The 1.5C goal set by the Paris Agreement (COP15) stays in play – but barely. What’s next?  

 

Each COP agreement requires global consensus, which necessitates compromise, and means no one is completely happy with the deal. Phasing down fossil fuels is a huge step forward, but without a massive, coordinated effort, chances are slim2  that the world can still limit global warming to 1.5C degrees above the pre-industrial average. In analyzing the COP28 accord, climate scientists warn that, absent targets or dates for emissions cuts, and by relying too heavily on carbon capture and natural gas as a transition fuel, the current agreement is too weak to keep global heating below the 1.5C Paris limit.

When COP29 convenes next year these issues will again be front and center. It will be hosted by (yet another) oil-dependent country, Azerbaijan, and stakeholders are already wondering what role the oil & gas industry will play in the wake of COP29’s recognition that fossil fuel usage is a crucial factor in decarbonization. Meanwhile, member nations will be diligently working to translate the commitments made at COP28 into tangible policy actions and attempting to generate consensus ahead of the meeting. Companies and investors alike are also aligning their strategies to fit into a more climate-conscious world. The journey to consensus and effective solutions continues as we chart the course for a sustainable future.


 

https://www.iea.org/reports/net-zero-by-2050

2  https://www.un.org/en/climatechange/global-stocktake-reports-highlight-urgent-need-for-accelerated-action-to-reach-climate-goals

 

 

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