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Commentary

Take Five: In the End, a “Beginning”

A selection of this week’s major stories impacting ESG investors, in five easy pieces. 

COP28 inevitably ran into extra time to reach agreement in Dubai, but claims of consensus seem wide of the mark.

Shoulda woulda coulda – COP28 closed a day later than scheduled with the eventual agreement hailed by UN Climate Change Executive Secretary Simon Stiell as the “beginning of the end” of the fossil fuel era. The outlook for consensus looked bleak on Monday when a draft text did not mention fossil fuel ‘phase-out’, only referencing reduction of consumption and production as one of eight options countries “could” take. Some saw this as an abandonment of climate science, but others – including an adviser to Barbados Prime Minister Mia Mottley – saw it as recognising the reality that “you can’t phase out fossil fuels before you have a massive investment in renewable energy”, implying the need for more certainty on the “huge finance flows” involved. Elements within the COP28 presidency suggested the omission was a deliberate tactic to focus minds. It certainly led to frantic discussions well into Tuesday night, with a final text issued early Wednesday morning, adopted with haste at the closing plenary – to the frustration of the Alliance of Small Island States – and presented to the world as the ‘UAE Consensus’. For the record, the final text called on parties to contribute to “transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science”. These words are rightly recognised as a breakthrough, although the overall significance of COP28 should also recognise the collective impact of almost 200 climate action announcements unveiled over the past two weeks. For all COP28 President Sultan Al Jaber’s commitment to science, many scientists signalled their dissatisfaction with the outcome, including the University of Exeter’s Professor Martin Siegert, who described the failure to make a clear declaration ending fossil fuel use as “a tragedy for the planet and our future”.

Nexus noted – The global focus on one sub-clause of the official response to the first Global Stocktake obscured other potentially significant elements of the 21-page agreement, not least its strong acknowledgement of the climate-nature nexus. This integration process began at COP26 in Glasgow, but Dubai appeared to represent a major forward step toward recognising the dependencies of efforts to address twin crises. Major initiatives included a Declaration on Sustainable Agriculture, Resilient Food Systems and Climate Action, a joint statement on climate, nature and people, and a long-awaited UN Food and Agriculture Organization roadmap. Fittingly, the UAE Consensus final text referred to “the importance of conserving, protecting and restoring nature and ecosystems towards achieving the Paris Agreement temperature goal”, also noting a 2030 target for reversing deforestation, alignment with the goals of the Global Biodiversity Framework, and the role of “sustainable agriculture, resilient food systems, nature-based solutions and ecosystem-based approaches” in climate adaptation.

Unfinished business – Whether a function of the focus on ‘phase-out’, the number of declarations and initiatives unveiled, or the presence of an army of lobbyists, COP28 closed with a large amount of business outstanding. According to Carbon Brief, around a third of agenda items were postponed across key topics including adaptation planning, climate empowerment, and agriculture and food security. It also includes failure to reach agreement on Articles 6.2 and 6.4 – covering bilateral exchanges of mitigation outcomes between countries and mechanisms for validating and issuing high-quality carbon credits – both seen as critical to increasing capital flows to carbon markets. While Lina Barrera, SVP for Global Policy at Conservation International, argued that “No deal is better than a bad deal”, Andrea Bonzanni, International Policy Director at IETA, reflected widespread frustration on the “missed opportunity” to operationalise a high-quality crediting mechanism. It did at least offer the former cowboys of the voluntary carbon markets the opportunity to take the higher ground, after two weeks in which they showed a growing commitment to integrity and transparency.

Cost of climate action – Away from COP28, this week also saw the European Central Bank and the Bank of England keep interest rates at existing levels. Although this was in line with monetary policy in the US, the decisions in Frankfurt and London did not mirror the increased expectations given by the Federal Reserve that 2024 could see a relaxation, allowing borrowing costs to fall from recent highs. The prospect of a ‘higher for longer’ environment for global interest rates is unlikely to be welcomed by investors in renewable energy. High interest rates and inflation have caused turbulence in offshore wind auctions across Europe, but the real damage comes in developing markets where high debt levels and costs make it hard to finance necessary climate mitigation and adaptation projects. Commitments in Dubai such as the pledge to triple renewable energy capacity are welcome, as were the many commitments to funds dedicated to climate action, but reforms and initiatives from multilateral development banks to support the Global South will also be critical to delivery.

Special treatment – In Brussels, agreement was reached more rapidly than expected on the Corporate Sustainability Due Diligence Directive, given its long and troubled history. CSDDD will set new scrutiny requirements and obligations for firms on actual and potential adverse impacts on human rights and the environment, importantly stretching beyond their own operations along supply chains. While looking like a significant step forward on scrutiny of ESG risks, closer inspection reveals a number of compromises, including high thresholds for both EU and non-EU companies, and special treatment for the finance sector in the form of a review to define how it addresses downstream risks.

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