COP27 wrap-up: an historic deal was made, but what comes next?
COP27 wrap-up: an historic deal was made, but what comes next?
The COP27 conference was scheduled to end on Friday, but negotiators only reached a final agreement on Sunday morning. And while an historic deal was made, there is still much left to do.
This COP was dominated by critical discussions on the creation of a new fund to address the costs of loss and damage. These are the costs of climate change that go beyond what countries can adapt to and mitigate against.
For more than 30 years, developing countries have asked developed countries to provide compensation for the damage global warming has inflicted on their economies.
It has always been a highly controversial issue; richer countries have been concerned about liability claims for climate damage caused by their emissions.
After two weeks of intense negotiations, an historic deal on loss and damage was struck, as the nations decided “to establish new funding arrangements for assisting developing countries that are particularly vulnerable to the adverse effects of climate change, in responding to loss and damage.”
This is a very important agreement, reflecting the fact that the costs of global warming have become much more visible and severe. We think the deal has the potential to boost geopolitical stability between poor and rich countries, while improving growth outcomes for developing nations.
However, much of the detail still needs to be defined. For example, the United Nations text does not include how much money will be provided in the fund. A committee with representatives from 24 countries will need to decide who contributes to the fund and who will benefit from it.
We also saw other positive developments during climate negotiations in Egypt. The Global Shield, a new funding mechanism, was launched by the G7 group of wealthy nations and was backed by the V20 (the Vulnerable 20 Group of Ministers of Finance of the Climate Vulnerable Forum).
This is a new insurance-based mechanism that will provide poor and vulnerable people with better pre-arranged finance against disasters.
So far, the total promised is around $282 million, with Germany being the largest contributor, committing to $178 million. France will contribute $20.8 million. Ireland has also promised $10 million, while Canada has pledged $7 million. Belgium, Austria and New Zealand have also pledged some funds. This is a significant step to improving the outlook of climate-vulnerable and developing nations.
However, we also need to highlight that the money promised so far looks very small when compared to the economic costs of climate change. In Pakistan alone, it is estimated that this year’s floods caused damage of around $30 billion.
Another positive outcome of COP27 was the decision to allow vulnerable countries to add new climate resilient debt clauses (CRDCs) to bonds that will be sold on international capital markets.
This is another important step that can help poor countries cope with the economic impact of climate disasters, as they will now be allowed to freeze their sovereign debt repayments for a maximum of two years.
While current policies are not in line with the 1.5C target of the Paris Agreement, hopes for greater ambition were low.
Countries were asked to update and strengthen their nationally determined contributions (NDCs) for 2030 to limit global warming to 1.5C. Only five countries have increased their ambition, according to analysis by the research organisation Climate Action Tracker. Thus, it should come as no surprise that COP27 did not make any meaningful progress on targets to cut emissions.
India, backed by more than 80 countries, wanted to extend last year’s agreement to phase down coal to other fossil fuels. The final Sharm El-Sheikh declaration does not include an explicit reference to reducing the production of oil and gas. There is, however, a call for an increase in renewable energy as well as low-emission energy.
This is likely to support more investment into the renewable energy sector, but also in gas, as this energy source is much less carbon-intensive than coal and oil.
Demands for more ambitious mitigation, essential to reach the 1.5C target, remain. Nature-based solutions, which represent a key mitigation tool, will be a critical topic when world leaders meet again in Montreal for the 15th Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity.
Climate and biodiversity are deeply interlinked. COP15 is likely to set out new goals and develop an action plan for nature over the next decade. A new biodiversity framework is expected to be finalised at COP15 to address and reverse global biodiversity decline.
Learn more about Schroders’ approach to sustainability, visit one of our Sustainability pages:
- Our multi-asset investment views - November 2022
- Outlook 2023, China: will a loosening of zero-Covid provide a spark?
- China’s latest Covid crisis, war in Ukraine: observations for investors
- Economic and Strategy Viewpoint - Q4 2022
- Outlook 2023, US multi-sector fixed income: yields up risk down
- Outlook 2023, Sustainability: five trends to watch
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.