COP28: Green washout or khaki progress?

Investors praise private sector announcements and discussions on transition plans and nature, but credibility concerns remain over fossil fuels.

Close to 100,000 people have flocked to Dubai for COP28 this year, making it by some reports the largest COP ever, despite concerns around the UAE’s environmental and human rights record.

The opening week, which included Finance Day, saw a swathe of announcements and “cautious optimism” among attendees, according to Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change.

However, the first week has not been without controversy.

On Sunday, The Guardian revealed that the president of COP28, Sultan Al Jaber, had claimed during an event in November that there was “no science” indicating that a phase-out of fossil fuels is needed to restrict global warming to 1.5C.

Will Martindale, co-founder and managing director of consultancy Canbury Insights, told Responsible Investor this was a low point in contrast with other positive developments. “Those facing extreme weather events are unlikely to have confidence in the [COP] process,” he said.

Martina Macpherson, head of ESG products at financial services group SIX, agreed that the controversy “overshadowed” other “exciting” announcements.

Philippe Zaouati, CEO of asset manager Mirova, was more sanguine. “The philosophy behind each COP is dependent on the places where these conferences are organised,” he said. “In Dubai, clearly we knew that the focus would not be the phasing out of fossil fuels, because it couldn’t be.

“But it was an opportunity for people to move forward on other topics, such as nature and biodiversity, because we know we won’t move forward on fossil fuel discussions – it’s a kind of bargaining.”

“In Dubai, clearly we knew that the focus would not be the phasing out of fossil fuels, because it couldn’t be”
Philippe Zaouati, Mirova

The main event of COP is the global stocktake, an assessment of how countries are performing against the Paris Agreement and how to ensure they hit climate targets. The initial assessment – that the world is off-track – has already been published, and countries have now gathered in the UAE to negotiate on how this should be remedied.  

Laura Hillis, director of climate and environment at the Church of England Pensions Board, noted that the current version of the text includes an important acknowledgement of the role institutional investors play, as well as language around governments strengthening policy guidance, incentives, and regulation to create enabling conditions for sustainable finance.

“Text to this effect in the final document would be a major signal to global markets, because mobilising capital to low carbon and transition is going to require significant reform of the financial architecture which underpins the financial sector,” she told RI.

“This would be an important signal that governments are wanting to take those critical steps which would really change the game in terms of mobilising climate finance from institutional investors.”

Key announcements

Observers welcomed a series of announcements over the opening weekend and on Monday at Finance Day.

The first-day agreement of country funding for the Loss and Damage Fund was seen by investors as a good start. Martindale said it reflects “careful diplomacy and a tentative step forward in addressing the effects of climate change in vulnerable countries”, while MacPherson flagged it as one of the key developments to come out of COP.

The launch of the Taskforce on Net Zero Policy, which brings together international regulators and experts to produce research and work with governments to overcome global policy barriers to net zero, was also positively received.

Martina Macpherson
Macpherson: Agreement of country funding for the Loss and Damage Fund is one of the key developments to come out of COP, says the head of ESG products at SIX

Julie Segal, senior programme manager for climate finance at Environmental Defence, described it as a “gamechanger”. “It will ramp up new regulations around the world to align finance with climate action, and ensure that private sector climate transition plans are credible,” she said.

“While the global climate stocktaking exercise is showing that we are off track from keeping warming below 1.5C, more countries than ever are recognising fossil fuels as the leading impediment to a safe planet.”

A number of investors and observers welcomed commitments by 117 governments to the Global Decarbonisation Accelerator, which has a key commitment of tripling renewables capacity by 2030.

Hillis said this could be “transformative” for the world’s energy system, while CDP CEO Sherry Madera said it would send a strong and much-needed signal to the private sector.

Other well-received announcements concerned blended finance and carbon markets.

Eva Cairns, head of sustainability insights and climate strategy at Abrdn, told RI that a partnership on carbon credit integrity between the VCMI, ICVCM, GHG Protocol and SBTi, as well as one between six verification providers, would be useful for addressing the credibility challenge.

Reina Berlien, head of ESG at Brandywine Global Investment Management, said she was “glad” there were more conversations around carbon markets.

She also welcomed central bank climate network NGFS’s presentation of a blended finance handbook. She said the topic “still seems very theoretical”, so having discussions at COP will help address some of the issues raised by institutional investors.

Transition plans and nature

Key themes emerging in COP discussions include, unsurprisingly, transition plans and how to ensure their credibility, as well as the need to engage with actors in hard-to-abate sectors.

Huw van Steenis, vice-chair and partner at Oliver Wyman, said there has also been “a recognition of more complex green-to-brown, khaki if you will, transition plans recognising the complexity of transition”.

As expected, nature has also been firmly on the agenda in Dubai.

Notably, GFANZ announced plans to embed nature into its net-zero emissions transition plan framework. RI also revealed that a group of MDBs will publish a set of principles for “nature-positive finance tracking” during COP.

Sarah Nelson, KPMG’s global head of nature and biodiversity, said the way in which CEOs and CSOs of businesses are discussing the importance of nature is “starkly different to before”.

“The investment space in nature is being spoken about a lot, including specific announcements on sovereign debt,” she said, highlighting a session on biodiversity credits in the UK pavilion.

“There has also been a recognition of more complex green-to-brown, khaki if you will, transition plans recognsing the complexity of transition”
Huw van Steenis, Oliver Wyman

Discussions have also been held on whether there is a need to create a new asset class for nature and biodiversity and how institutions can better integrate nature and biodiversity into existing strategies, she added.

Food and agriculture have also been in focus. “We have long recognised the contribution that agriculture and food production have made towards global emissions and that it is critical to address this in order to achieve our global goals,” said Oshni Arachchi, head of active ownership at Danske Bank Asset Management.

“Recognising the complexity of the value chain and that a number of interventions that are required at each stage have of course also sought to prioritise this, but progress has not been where we need it to be.”  

Lofty claims

However, there was inevitably investor scepticism around some of the COP developments.

Hillis of the Church of England Pensions Board noted that “despite a lot of lofty claims from the COP28 Presidency about what they could deliver on oil and gas”, the Oil and Gas Decarbonisation Charter (OGCD) announced over the weekend was “largely a repackaging of existing voluntary commitments and included no commitments to address scope 3 emissions”.

“It is exactly this lack of leadership and mixed signals from the oil and gas sector that led the Church of England Pensions Board to divest from remaining holdings earlier in 2023,” she added.

Cairns also took issue with the OGCD over the lack of action on Scope 3 emissions related to the use of fossil fuels and “the lack of discussion on the need to phase out fossil fuels”.

“All the extremely positive announcements, commitments of capital and declarations do not make up for the fact that a phase out of fossil fuels needs to be addressed and discussed,” she added.

Climate finance and macro concerns

SIX’s Macpherson noted that negotiations are currently underway to establish a new “New Collective Quantified Goal” on climate finance from 2025, expected to be finalised in the next year. This will supersede the goal agreed in at the 2009 climate talks in Copenhagen to mobilise $100 billion annually for climate action in developing countries.

At the heart of these discussions are efforts to ensure the goal takes into account the needs and priorities of developing countries. Macpherson said it should “rectify past mistakes in setting the new goal and establishing a framework for monitoring its progress”.

However, while wealthy nations are advocating for including loans and private investments in the goal, poorer countries want funds that will not increase their debt burden.

“It remains to be seen if this leaves room for green (private) debt primary and perhaps secondary markets solutions to address climate change mitigation and adaptation action,” Macpherson said.

For Oliver Wyman’s van Steenis, the macro environment remained a background concern that could hamper the ability for financial institutions to deliver against global targets.

“Clearly many ESG portfolios have struggled this year as energy security, affordability and interest rates take their toll on some overly simplistic portfolios,” he said.

“My biggest concern is the sharpest rise in interest rates in 45 years has clearly caught some green infrastructure projects offside.”

He also stressed the importance of green subsidies and a supportive policy environment.