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November 09, 2022

Collaborating on Climate at COP27

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

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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.

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