Long ReadNov 24 2022

Policymakers twiddling thumbs over climate change action

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Policymakers twiddling thumbs over climate change action

In the famous quantum physics paradox, Schrödinger’s cat is both alive and dead. Or neither alive nor dead, depending on your perspective. The only thing about this cat that everyone is sure about, is that nobody is sure.

What has that got to do with the Cop27 climate conference?

Well, the goal of the Cop26 Glasgow Climate Pact was to “keep 1.5 alive”; for the world to hold the line on limiting global temperature rise to an ambitious 1.5C. For context, scientists believe we have hit 1.2C already.

But a year later, after reading the hard-won agreement reached in Sharm el-Sheikh on Sunday, it is hard to avoid the feeling that 1.5 is not yet dead but not truly alive either.

Still admiring the problem

Unfortunately, reading through the text of the Cop27 agreement it seems as though its parties are stuck in a phase of admiring the problem rather than solving it. 

Rightly, the agreement “recognises that limiting global warming to 1.5C requires rapid, deep and sustained reductions in global greenhouse gas emissions of 43 per cent by 2030 relative to the 2019 level… [which] requires accelerated action in this critical decade.” 

The agreement featured no wording aimed at phasing out fossil fuels generally, or thermal coal.

However, eventual action sometime this decade certainly was not enough to satisfy the “the high-ambition coalition” of mostly small island states alongside a few high-income countries like the UK, Germany, Denmark, Norway and Canada.

To their consternation, the agreement featured no wording aimed at phasing out fossil fuels generally, or thermal coal – the worst climate culprit – in particular.

Although the Cop27 agreement did feature a call to “[accelerate] efforts towards the phase down of unabated coal power and phase out of inefficient fossil fuel subsidies”, this is just a repeat of what was agreed in Glasgow.

Cop26 president Alok Sharma made no attempt to hide his frustration: “Emissions peaking before 2025, as the science tells us is necessary: not in this text. Clear follow-through on the phase down of coal: not in this text. A clear commitment to phase out all fossil fuels: not in this text.

The biggest announcement was a new loss and damage fund... That said, the fund exists only on paper at present. 

"And the energy text [on increasing 'low-emission and renewable energy'], weakened, in the final minutes. Friends, I said in Glasgow that the pulse of 1.5C was weak. Unfortunately, it remains on life support.”

As I mentioned, not yet dead but not truly alive either.

'Loss and damage': funding pending

The biggest announcement was a new loss and damage fund, which aims to compensate developing countries most susceptible to the impacts of climate change that they bear little responsibility for causing. That said, the fund exists only on paper at present. 

The Cop27 agreement sets up a transitional committee, with representatives from 24 countries, that will establish how the fund should work and, importantly, who is on the hook for providing the cash.

The group then will present its recommendations at Cop28 in the United Arab Emirates next year, with a view to getting the fund up and running. This of course means more negotiations and further risk of delay or collapse. 

Time for transformation

Although far from a perfect outcome in terms of fighting climate change, there are parts of the Cop27 agreement that should give investors plenty to ponder when making long-term plans.

As it states: “About $4tn per year needs to be invested in renewable energy up until 2030 to be able to reach net-zero emissions by 2050, and that, furthermore, a global transformation to a low-carbon economy is expected to require investment of at least $4tn to $6tn per year.

'Keeping 1.5 alive' can also be a source of opportunity for your portfolio as well as the planet.

"Delivering such funding will require a transformation of the financial system and its structures and processes."

This wave of capital in search of climate change solutions will be transformative, not just to the financial sector but the global economy as a whole.

So, although the risks of climate change are well understood, it is important to remember that 'keeping 1.5 alive' can also be a source of opportunity for your portfolio as well as the planet.

Lindsey Stewart is director of investment stewardship research at Morningstar