COP27: stepping up implementation and the role of finance

Thu 22 Dec 2022

A lot of attention at COP27 was focused on the likelihood of keeping global warming to 1.5 °C, in line with the goals of the 2015 Paris Climate Agreement. The consensus was that we are in real danger of falling off track. Few nations revised their nationally determined contributions to reduce their carbon footprint compared to COP26, and the final COP27 text failed to make further progress on ‘keeping 1.5C alive’. So, from a mitigation perspective, COP27 didn’t turn down the dial.

But not all was lost. COP27 was trialled as the implementation COP, and this article summarises some key messages and outcomes from COP27 and where next for them.

Accelerating adaptation implementation

COP27 emphasised how, alongside mitigating further climate change, attention is needed on the adaptation and implementation of climate resilient strategies to safeguard livelihoods that are already being impacted by climate change. In addition, COP27 stressed the role of local actors to create locally-led sustainability solutions.

Bringing those two themes together, a significant outcome of COP27 was the launch of the Sharm-El-Sheikh Adaptation Agenda. This Agenda aims to enhance resilience for four billion people living in the most climate vulnerable communities by 2030. It has objectives on agriculture, sustainable land management, water and nature systems and infrastructure – all of which will need significant funding from a multitude of sources.

The agenda is underpinned by a signatory population of 2,000 organisations and over 130 countries and is the first of its kind to rally both state and non-state actors behind a shared adaptation plan.

The agenda has three finance objectives:

• The private sector to incorporate physical climate risks into investment choices and continue to develop methods for funding adaptation and resilience.
• Public finance actors to dedicate 50% of climate funding to adaptation and resilience.
• The global property and liability insurance business to develop an industry capabilities framework, actively promoting project execution, and embedding a longer-term industry strategy for climate adaptation.

For financing of climate adaptation to become viable at scale and be successful, more needs to be done. Discussions at COP27 highlighted several blockages to potential progress posed by a wide range of internal and external market factors. These include political influence, conservative risk management, capability gaps, and regional finance mobilization capabilities.

Recognising loss and damage – a historical negotiation breakthrough

Perhaps the most talked about outcome from COP27 was that climate loss and damage was given prominence at a global climate summit for the first time. This culminated in the landmark agreement to create a Loss & Damage Fund. This Fund aims to rectify historic damages caused by wealthy nations regarding climate change. How? By providing a financial shield for developing nations to progress sustainable infrastructure and climate robustness, while protecting local populations and industry from adverse weather and other climate related dangers.

The Fund is expected to act as a short term compensatory financial asset for developing countries to utilise in the aftermath of immediate climate disasters to maintain quality of life and economic function. This contrasts with the COP27 presidency Adaptation Agenda, which aims to create infrastructure that protects communities from adverse effects of climate change.

Despite the historical breakthrough, there is a long road ahead before a global inception of the Loss & Damage Fund. To be an effective tool, influential nations will need to contribute and encourage its expansion so that even more contributing nations come on board.

Mobilising private sector finance

COP27 reiterated that the private sector needs to step-up its climate responsibilities through mobilising funding for climate-related projects and programmes, particularly towards developing countries, and for both mitigation and adaptation.

With COP26’s investment target missed by a significant margin, nations are calling for a blended approach to sustainable development financing. Several themes were covered at COP27 to help achieve financing goals:

• Focusing further on adaptation, through countries disclosing their National Adaptation Plans and directing funding to accelerate the adaptation of developing countries whose communities are the most vulnerable to current and future effects of climate change. Individually, key actors mentioned new initiatives to mobilise more financing for climate adaptation projects. The European Bank for Reconstruction and Development (EBRD) unveiled its Climate Adaptation Action Plan. This pulls together a variety of components to boost climate adaptation financing, including incorporating adaptation into project and policy design, and forming partnerships.

• Improving dialogue and ensuring continuous transparency between investors and local affected parties through every stage of the financial mobilisation process. The establishment of collaborative networks at COP27, such as the Coalition for Climate Resilient Investment, will provide stable investment gateways for large scale private investors to collaborate with governments or invest independently in climate projects.

• Introducing co-ordinated regulatory standards (such as ESG disclosures) to help safeguard investors from public and political scrutiny and to protect local governments and communities from exploitative and unsustainable investors.

• Reforming multilateral development bank practices and priorities to simplify access for investors and broaden potential finance sources.

• Encouraging private financing towards new technologies. Examples include: i) harnessing technology to build climate early warning systems that inform adaptation planning; and ii) risk management data advancements through technologies such as blockchain.

Strengthening climate-related regulatory frameworks

COP27 continued the trend of announcing new regulatory initiatives to strengthen and standardise climate-related regulatory frameworks. These initiatives raise the transparency and accountability of businesses’ actions towards net-zero, and enable investors to compare companies’ actions and the sustainability performance of investment portfolios. This should encourage businesses’ strategies and investment towards sustainability-related activities and mobilise more finance towards climate mitigation and adaptation.

There were several announcements and support at COP27 for businesses producing transition plans. For example, the UK Transition Plan Taskforce announced a Transition Plan Disclosure Framework that it aims to finalise in 2023. These plans play an important role in enabling investors to scrutinise if businesses are making short and medium-term actions/transitions that are consistent with their longer-term net zero commitments.

The International Sustainability Standards Board (ISSB) announced that its climate-related disclosure standards will be published in final form in 2023. This will be the first cross-jurisdictional standard of its kind and will be an important staging post for encouraging greater international consistency in climate reporting.

COP27 discussions also highlighted that to encourage greater financing to countries most impacted by climate change, regulatory bodies and private and state actors should explore how these international standards can be adapted to developing countries. This should include providing capacity and capability building to local actors in developing countries on how to report to those standards and provide reliable assurance services.

Outside COP27, several jurisdictions have announced mandatory sustainability-related disclosure requirements, many of which will apply at scale in the next couple of years.  These, and the announcements at COP27, show that climate-related financial disclosures have become a regulatory compliance necessity for businesses.

Conclusion

For the transition towards a sustainable global economy, and to avoid a climate catastrophe and increase climate resilience, COP27 reiterated that governments, international organisations, financial institutions, and businesses alike must co-ordinate to develop frameworks, strategies, and financing solutions for cross-sector climate action.

The overall outlook from COP27 is that we are entering a new age of global climate conditions. The growing focus on adaptation and ‘loss and damage’ shows that the immediate effects of climate change are upon us and impacting vulnerable communities and economies.

COP27 showed that there is still much to do if we are to mitigate and adapt to the impacts of climate change. Progress is being made in several areas, even if they don’t make the headlines. The message from the ‘implementation COP’ is simple: it’s time to walk the talk.