skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

MARKETS
November 09, 2022

Collaborating on Climate at COP27

By Bonnie M. Wongtrakool, CFA, Matthew C. Graves, CFA

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Starting this week, representatives and stakeholders from 197 countries will convene in Sharm el Sheikh, Egypt to push for progress on global climate goals at COP271. This year’s climate change conference will seek to build upon the work of prior delegations (which have been meeting since 1995), and in particular will focus on the implementation of objectives set forward at last year’s convention in Glasgow (COP26). Specifically, COP27 aspires to: (i) increase and accelerate ambition on climate targets, (ii) increase preparedness to deal with physical climate risks and (iii) materially scale up existing climate finance efforts.

For those that followed developments at COP26, which culminated in the signing of the Glasgow Climate Pact (GCP), these themes should look familiar. GCP signatories promised to step up ambition on climate change mitigation and to enshrine this ambition by updating and expediting their actual policy commitments, i.e., Nationally Determined Contribution (NDC) plans. Similarly, the GCP noted the urgent need to scale up support for investment in adaptation, while also imploring developed countries to live up to the pledge they made back in 2009 to provide $100 billion in annual climate financing for developing countries, including $40 billion for adaptation.

Progress over the past year has been inconsistent. Only 24 countries have published new or updated NDCs since Glasgow, and, notably, no participating country has aligned its NDC with the 1.5C temperature rise objectives of the Paris Agreement. On the adaptation side, progress has been slow, but moving incrementally in the intended direction. We expect COP27 to intensify the focus on strengthening low-and-middle income countries’ adaptive capacity, as well as their ability to fund these investments. Recent nature-related shocks from Pakistan, in particular, have been a focus in the leadup to the event, as a real-world illustration of the stakes at hand. From a financing perspective, progress against the $100/$40 billion target has been made (the most recent figures from 2020 registered at $83.3 billion and $28.6 billion, respectively). But it’s likely we’ll see continued pressure to reach these funding commitments, given the consensus view that failing to do in the near-term so may lead to a non-linear increase in funding requirements over the medium-term.2

Headwinds in the global macro environment have compounded these challenges. Financial conditions have deteriorated materially since Russia’s invasion of Ukraine, limiting access to global capital markets for many developing and frontier market economies. Yet climate investment needs are most significant in countries that face the greatest financial constraints.3

For COP27 to meets its goals, we obviously shouldn’t expect different results if countries adhere to the tools of the past. A more effective approach likely requires collaboration between multiple stakeholders across the public sector, official sector and private sector. The decision to include financial institutions and investors in this and last year’s conferences acknowledges the critical role that the private sector can play in ramping up climate financing not only sufficiently but quickly as well. Putting the conditions in place for this to happen will take work from all sides.

At the country level, we believe it’s critical to get the policy mix right. Alongside a coherent macro framework, it’s increasingly important to put in place sustainable finance frameworks—as well as green taxonomies for the local financial system—that can accompany (and reinforce) NDCs and national adaptation plans. Those frameworks are most credible when integrated into a country’s economic development agenda and backed by renewed ambition on climate objectives. These objectives can include new NDCs, an identified path toward net-zero/decarbonization, greater transparency on climate budget expenditure, or greater transparency on climate risks and disaster risk reduction planning. There’s also an opportunity to use sustainability-linked instruments to address the intersection of climate- and nature-related objectives, as demonstrated recently by Uruguay’s inaugural sustainability-linked issuance.

The official sector has the capacity to catalyze meaningful private-sector climate investment, and it has indeed taken recent steps in this direction. Last month, the IMF operationalized the Resilience and Sustainability Trust (RST), which will extend low-cost, long-term climate financing to eligible low- and middle-income members. Importantly, RST eligibility requirements will reinforce many of the policy objectives outlined earlier. But we’re also hopeful that multilateral development banks (MDBs) can step up the use of their balance sheets, strengthen their role in de-risking climate-related investments and kickstart a broader deployment of blended finance instruments.

Working in partnership with the public and official sectors, private investors can play a crucial role in accelerating climate efforts. Fixed-income investors, in particular, have a unique opportunity to help build awareness of the importance of good policies given that debt is the principal avenue for investing in sovereigns. Engaging in a robust dialogue with sovereigns on physical- and transition-related climate risks and opportunities can help shape the policy formulation process, as well as encourage syndicate desks and debt management offices (DMOs) to innovate new types of sustainable debt structures. Just as importantly, such investors must ensure that sustainable debt structures are credible, transparent and economically sound. Improving the tools to help investors make these assessments—as the ASCOR4 project seeks to achieve—can also help expand the pool of investors considering good sustainability practices in their investment decisions.

COP26 last year and the Glasgow pact set out an ambitious agenda for the world’s nations in an attempt to keep the goals of the Paris Agreement within reach. Progress since Glasgow has fallen short of promises, as food and energy crises have compounded the challenges inherent in navigating a post-pandemic world. COP27 gives the global community a chance to bring the goals of COP26 back into focus, and to set out a path to realize its aspirations. To close the gap on adaptation and mitigation needs, the public sector, private sector and official sector must work in concert. We’ll be looking to COP27 to renew and push for this collaboration.

  1. COP27 is the 27th annual “Conference of the Parties” of the United Nations Framework Convention on Climate Change (UNFCCC)
  2. https://www.unep.org/resources/adaptation-gap-report-2022
  3. https://www.imf.org/en/Blogs/Articles/2022/03/23/blog032322-poor-and-vulnerable-countris-need-support-to-adapt-to-climate-change#:~:text=Unfortunately%2C%20countries%20that,sustainable%20development%20goals
  4. Formally, the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) Project, where Western Asset represents the Franklin Templeton organization as a member of two working groups, which are focused on climate policy and climate financing, respectively.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.