Six reflections on COP28 and the current state of the ESG landscape

The world is running out of time to avert the worst effects of climate change. Can COP28 find answers?

1. A controversial COP

From billionaires flying in by private jet, to human rights activists thrown in jail, and even the spectacle of overflowing sewage outside summit venues, COPs rarely escape controversy. This year’s jamboree in Dubai is no exception.

The decision to host COP28 in the United Arab Emirates, one of the world’s largest oil producing countries, was always going to attract the ire of climate campaigners. The UAE is the world’s sixth-most carbon intensive country, with average CO2 emissions of 21.8 tonnes per capita in 2021 (compared with a global average of 4.7 tonnes).

The appointment of an oil company CEO, Sultan Ahmed Al Jaber, as COP’s president has fanned the flames of the controversy. Al Jaber leads Adnoc, the Abu Dhabi National Oil Company, alongside several other government and business roles.

Christiana Figueres, former head of the UN Framework Convention on Climate Change, described the UAE’s approach to chairing the summit as “very dangerous” in comments earlier this year. She warned that the country’s apparent intent to use COP28 to drum up support for carbon capture technology would provide an excuse to avoid phasing out fossil fuel production.

In fairness to the UAE, the country has set a target to reach net zero by 2050 and has been ramping up renewable energy production with a series of massive solar farms in the desert. These efforts, however, are unlikely to assuage concerns that COP28 will prove to be a gargantuan effort in greenwashing.

2. The world is likely to overshoot 1.5C

Average global temperatures in September were 1.82C above the pre-industrial benchmark, and 0.5C above the previous record temperature for that month – a figure that climate scientist Zeke Hausfather described as “absolutely gobsmackingly bananas”.

Temperature spikes over the course of a single month, or even a whole year, don’t necessarily mean that the Paris Agreement goal of keeping temperatures within 1.5C of pre-industrial levels is no longer achievable. But there is an abundance of evidence that the world is far off course in its efforts to reach the goal.

In fact, the reality that an overshoot is highly likely is making investor engagement with some companies more difficult. ExxonMobil cited the International Energy Agency’s assessment that the world is not on a net-zero emissions pathway to resist a shareholder proposal earlier this year calling for an audit of how a 2050 net-zero scenario would impact the retirement of its assets.

Eight years after the Paris Agreement, the boom times do not appear to have ended for the oil and gas industry. Many oil companies, including Exxon, have been enjoying bumper profits, buoyed by high prices in the wake of the Russian attack on Ukraine. Meanwhile, BP announced earlier this year that it was rolling back its 2030 emission reduction goals and increasing investment in new projects.

Nevertheless, investors are not abandoning their efforts to engage with corporates on ambitious emissions reduction plans.

3. The ESG backlash is not helping investor efforts to combat climate change

Very few, if any, financial institutions that have made net-zero commitments are openly abandoning their promises. But the right-wing backlash against ESG in the US is certainly making some investors nervous about nailing their colours to the net-zero mast.

One member of the investor community told Responsible Investor that they would “keep a very low profile” at COP28, in light of the fierce criticism of ESG coming from influential voices in the US.

While some anti-ESG rhetoric – such as the attacks on “woke capitalism” coming from Republican presidential candidates – may seem laughably misplaced or hyperbolic, there is no doubt that the backlash is having a serious impact. In particular, the argument that collective action on net-zero targets could breach anti-trust legislation has cajoled major insurance players into rethinking their participation in joint initiatives.

The Net-Zero Insurance Alliance has been gutted over the past year, with its membership shrinking from 30 institutions to just 11. Several insurance giants that left the group did affirm their continued commitment to net-zero goals, however.

Other initiatives have not suffered the same rate of attrition, although it remains to be seen how investors will navigate an increasingly complicated political environment in the US ahead of next year’s election.

4. Carbon removals remain controversial

It is widely recognised that net zero does not mean zero carbon. The IPCC has said that carbon removals will have an “unavoidable” role in counterbalancing continued emissions from ‘hard-to-abate’ sectors after 2050, and the need to remove carbon from the atmosphere is certain to be a key agenda item in Dubai.

Reforestation or afforestation schemes are the most prominent method of generating ‘carbon offsets’, which companies can purchase as a way to compensate for their emissions. Other methods that are still to be scaled up involve carbon capture and storage techniques, in which carbon is captured at the point source and stored in places such as depleted oil fields, or is filtered directly from the air.

None of the possible approaches to removing carbon are without controversy. Many critics remain suspicious that carbon offsetting merely serves as a ‘permit to pollute’ for companies that have no intention of curtailing their emissions.

In January, the Net-Zero Asset Owner Alliance announced that members must reduce emissions through the use of abatements alone up until 2030. Any use of carbon removals will not count towards members’ climate targets.

Meanwhile, a series of high-profile media reports into seemingly ‘worthless’ carbon credit schemes in recent months have sent shockwaves through the voluntary carbon market. The intense scrutiny has certainly underlined the need for the market to be buttressed by stringent standards to provide purchasers with confidence that their credits are meaningful.

5. Disclosure frameworks are progressing

The past year has seen further progress in the development of disclosure frameworks designed to provide investors with greater consistency in climate data from corporates.

The landmark move is undoubtedly the inaugural standards issued by the IFRS’s International Sustainability Standards Board in June. The IFRS S2 sets out disclosure requirements on climate issues and is designed to provide a ‘global baseline’ around which other disclosure regimes can build.

David Atkin, CEO of the Principles for Responsible Investment, called for policymakers around the world to make ISSB disclosures mandatory by 2025 at the latest.

There are some reasons for optimism in this respect. The release of the ISSB’s standards has been widely welcomed internationally. China’s vice-minister of finance, Zhongming Zhu, said in June that the country is “fully committed to supporting the work of the ISSB and the development of global sustainability disclosure standards”.

Meanwhile, an example of a more advanced framework that draws on the IFRS S2 is the UK’s Transition Plan Taskforce, which published its final disclosure framework in October. The TPT said in a statement that it leverages “the ISSB’s definition of a climate-related transition plan”.

6. ‘Carbon tunnel vision’ is no longer sustainable

While carbon is obviously the main focus of COP28, the days when policymakers and investors could get away with a ‘tunnel vision’ focus on carbon emissions at the expense of all other environmental and social considerations are clearly in the past.

Indeed, the agenda for this year’s COP28 includes themes such as health, gender equality, nature and water.

The links between the climate and nature crises have increasingly been recognised in recent years. The landmark agreements on biodiversity protection agreed at the COP15 biodiversity summit last December and the recent launch of the Taskforce on Nature-related Financial Disclosures, which is modelled on its climate equivalent, are sure to focus investor minds on the nature topic.

And the fact that COP28 is being held in one of the most water-scarce regions of the planet means that the need to ensure adequate access to water amid increasingly frequent drought conditions is another key focus area.