How should private sector respond to outcomes from COP27?
The 2022 Conference of the Parties to the United Nations Framework Convention on Climate Change, also known as COP27, was held in Sharm el-Sheikh, Egypt. It was an implementation-focused COP, meaning the shift in conversations from commitment to action. (1) Mitigating world’s emissions, (2) adapting to impacts from a changing climate, (3) financing for implementation and (4) paying for climate-caused loss and damage are interlinked and have become the spotlights at COP27.
Yet, world leaders still have not yet figured out how to achieve all three targets – mitigation, adaptation and finance, even the final conclusion was delayed to the morning of 20 November. Key actions to achieve carbon peak, clear commitments to coal phasedown and fossil fuel phase-out were not covered in the final version of the text, even key provisions for Article 6.4 of the Paris Agreement on carbon market were removed.
On the other hand, COP27 did advance some areas – a Loss and Damage Fund has been set up as a landmark decision to help compensate for the loss and damage in those poor countries suffering from climate change. However, all the execution details of the Fund such as how to measure the “loss & damage”, who will be financially responsible for it and when to operate the Fund still remain vague. Without details being agreed and any consequence of not keeping up the commitment, this reminds us of the broken US$100-billion promise of climate finance by 2020 made at COP15 in Copenhagen.
Another key outcome of COP27 is the sufficient progress made to Article 6.2 of the Paris Agreement to enable the implementation of bilateral deals on international emission units transfer between countries with less oversight from the United Nations. Various countries including Japan and China welcomed such move and expressed their interest in participating in the carbon market under Article 6 apart from their domestic offset market. Nevertheless, decisions on Article 6.4 about the implementation of an open international emission credit trading market, where public and private sectors can participate, have been deferred to next year, which hinder the involvements from private investments in supporting carbon-related projects due to the uncertainty of key rules and fewer options to invest.
Opportunities to the Private Sector
More voices at COP27 asked the private sector to step up in areas of technology and innovation and finance, as the private sector has more flexibility and resources in executing various climate-related projects, while the market has capacity and huge potential in funnelling financing and investments to projects. With all the key outcomes being set during COP27, they do come with opportunities to the private sector.
It was being highlighted during COP27 discussion that both public and private sectors need to collaborate and establish more public-private partnerships (PPPs) to accelerate the implementation of climate-related projects. It is foreseen that more government activities will be in place to attract more green capitals and engage the private sector to come in and In fact, policymakers are putting efforts to create investable markets. For example, the United States government announced the Energy Transition Accelerator, as a new public-private effort to catalyse private capital to accelerate the clean energy transition through the deployment of renewable energy and the retirement of fossil fuel infrastructure in developing countries. The new Africa Carbon Market Initiative (ACMI) was also inaugurated at COP27 to fund African carbon credit projects with high integrity. In fact, in October 2022, Hong Kong Exchanges and Clearing (HKEx) just launched the Core Climate, an international voluntary carbon marketplace to connect private capitals with climate-related products for carbon credits trading. It is a sign of a growing regulatory interest in voluntary carbon market development, which provides opportunities and better accessibility for investors to invest in low-carbon projects and private companies to buy offset credits.
There have been more funding coming in to support climate-related projects, especially those focusing on scaling up adaptation efforts due to the launch of Loss and Damage Fund and other adaptation initiatives from various jurisdictions. According to Bloomberg, investors expect the climate adaptation will soon be profitable, including electrical grids upgrading and weather-resistant building materials. Other climate adaptation industries cover not only flood protection infrastructure, nature-based solutions or cyclone early warning systems, but also FinTech, supply chain, insurance. The World Economic Forum (WEF) also stated that the adaptation market could be worth $2 trillion per year by 2026. This undoubtedly poses a great opportunity for the private sector in terms of businesses innovation, engagement, financing and investment.
Challenges to the Private Sector
Developments come with not only new opportunities, but also increasing challenges and risks, particularly greenwashing and climate-related risk which are progressively important to regulators, investors and other stakeholders that the private sector should be mindful of.
With more and more companies setting their “net zero” emission target and labelling themselves as green businesses to attract investors and capture more financial support, one of the key messages of COP27 is – zero tolerance for net-zero greenwashing. The United Nations Secretary-General set up a High-Level Expert Group (HLEG) to give out ten practical recommendations with clear standards and criteria, highlighting the importance of integrity, transparency and accountability to draw a red line to any form of greenwashing.
The recommendations include having a net zero pledge with stepping-stone targets and concrete plans, disclosing data and information on net zero transition plans and progress in detail publicly in a way that allows comparison with peers, and establishing credibility through plans based in science and third-party accountability. The HLEG also highlights that city, region, finance and business net zero plans must not support new supply of fossil fuels, and by 2025, must not contribute to deforestation. More stringent rules and coherent standards in jurisdictions are anticipated to regulate and prohibit greenwashing and to ensure high quality credits in carbon market, which leave the private sector with plenty of work to do.
Another challenge to the private sector is the climate-related risks related to extreme weather events and failure to mitigate and adapt to climate change. Risks arising from low-carbon transition economy and physical damage to assets and infrastructures cause financial loss and obstacles to business operation. Policymakers in jurisdictions such as the EU and the US are tightening up regulatory requirements on climate-related disclosure, requiring more granular details and wider data coverage, including scope 3 carbon emissions. This creates the momentum for stakeholders to embed such information into their decision making process through assessing climate-related risks and companies’ climate resilience. That indirectly encourages, and at the same time poses a challenge to the private sector on enhancing their own practices in managing climate-related risks.
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