What to look for at COP27

Nalini Feuilloley

Head of Responsible Investment

What is COP27, and why is it important?

At the 27th annual Conference of the Parties, global government representatives, climate activists and business leaders will take stock of progress in the fight to reduce the impacts of climate change and will negotiate further action.

The United Nations’ annual climate conference becomes more urgent every year, as the fallout from climate change grows and the time dwindles to limit global warming to 1.5 degrees Celsius above preindustrial temperatures. At COP27, an ambitious agenda will contend with global energy and inflation crises that further complicate the economics and politics of climate progress.

What we’re watching

Finance had an enormous presence at COP26 in Glasgow. We do not expect as large a finance turnout at COP27, but we still anticipate major developments with the potential to alter the global climate landscape. COP27 is likely to focus on increasing the pace and scale at which governments move from climate pledges to implementation, along with calls for developed nations to meet and potentially expand financing commitments to developing nations.

Three major questions related to those themes loom over COP27:

Will major emitters commit to more ambitious GHG-reduction goals?

A UN report last year found that current commitments to address emissions will not hold global warming to 1.5 degrees Celsius. It projected that average temperatures could rise 2.7 degrees by the end of the century if the world maintains its current emissions trajectory. ¹

The energy crisis linked to Russia’s invasion of Ukraine has thrown even existing emissions targets into doubt. Some countries, such as Germany and the Netherlands, are responding to energy shortages by accelerating plans to reduce reliance on fossil fuels. Yet some of those same countries have reopened coal plants and are appealing to countries in Africa and elsewhere for new sources of gas. Think tank Ember Climate estimates that European governments will spend at least 50 billion euros this winter on new or expanded fossil fuel infrastructure and supplies. ²

Meanwhile, developments related to Russia’s invasion of Ukraine could push major emitters India, China and Russia – which historically have not fully engaged with COP – further away from the negotiating table. Russia historically has been a conspicuous non-actor among major emitters, and we do not expect that to change.

The outlook for India is mixed: The country is likely to push for greater financing of large-scale renewable energy projects, and the Modi government recently committed to reducing the emissions intensity of GDP 45% by 2030 compared to 2005 levels. (India previously had announced only an intention to reduce emissions intensity by 33% to 35%.³) Yet its net zero commitment remains at 2070,⁴ two decades later than called for by the Paris Accords. ⁵

China has the world’s second-largest economy and emits more greenhouse gases than all other industrialized nations combined.⁶ Yet the Xi government continues to classify China as a developing nation, giving it an ambiguous role in discussions about climate justice. Although the EU has called for Beijing to speed its emissions-reduction plans, China is expected to reiterate its pledges with minimal changes, leaving its target for peak carbon at 2030 and for net zero at 2060.

What we’re looking for: Disclosure of progress and barriers related to commitments made in Glasgow, and the strengthening of countries’ emissions reduction targets per the Glasgow Climate Pact.

Will developed nations increase the pace of financing?

At COP15 in 2009, developed nations committed to providing $100 billion in annual financing for developing nations’ climate efforts by 2020. They have consistently fallen short of this target and have pushed out the target year to 2023. Meanwhile, the most vulnerable countries have received little of the financing that has been made available.

In the absence of financing, developed nations, which have long reaped economic benefits from fossil fuel use, are effectively insisting that developing nations “do as I say, not as I do.” The demand is unfair and also futile, since developing nations lack the resources necessary to fulfill it. Consider Africa: It is the world’s least-developed inhabited continent and produces just 4% of global greenhouse gas emissions.⁷ Yet its people stand to suffer disproportionately from increasingly extreme weather events, such as the flooding that recently has displaced more than 1.4 million people in Nigeria.⁸

Financing for the Global South is difficult to establish but critical to action. A 2019 UN estimate put the necessary global investment in infrastructure at $90 trillion by 2030,⁹ roughly on par with 2021 global GDP of $96 trillion. ¹⁰

What we’re looking for: Greater certainty and action around the delivery of $100 billion annual financing.

Will governments develop a system for financing loss and damage?

At COP26, developing nations pushed for a sorely needed financing facility for loss and damage in addition to the $100 billion annual commitment. Developed nations resisted and instead established the Glasgow Dialogue on Loss and Damage, scheduled to last until 2024.

Recent events illustrate the immediate need for loss and damage financing. Pakistan’s extraordinary flooding this year offers one example of many: It killed more than 1,700 people, injured more than 12,800, destroyed more than 850,000 houses and put more than 6 million people in need of humanitarian aid.¹¹ The country’s government estimates total damage of $40 billion.¹² The lack of a loss and damage financing mechanism threatens to prolong Pakistan’s suffering, delay necessary climate action and increase vulnerability to future extreme weather.

High global inflation, rising interest rates and slowing economic growth threaten to sap developed countries’ ability and willingness to provide the financing needed. Yet developed nations seem to be coming around. Denmark in September pledged 100 million Danish krone (roughly $13 million) for loss and damage, and the United States recently voiced its support for climate reparations.¹³ We will be watching to see whether COP27 can build on these actions with greater commitments and viable action plans.

What we’re looking for: Agreement on an official mechanism with formalized funding arrangements to address loss and damage in the global south.

Implications for investors

Climate action involves a host of interlocking objectives. Public funds alone won’t suffice; private investment is necessary. The interest in being an active participant in fighting the climate crisis is there. More than 500 institutional investors, including BMO GAM, endorsed “The 2022 Global Investor Statement to Governments on the Climate Crisis,” which spelled out ambitious policy proposals including mandated climate-transition plans for investors¹⁴.

But bringing private financing into the process will require new ways of thinking. Investors may need to innovate at a deep level to help make financing for climate action viable. The asset management industry may need to rethink asset classes, develop new mechanisms and/or create new ways to measure performance.

Yet the degree of risk in financing new climate solutions can be prohibitive for private investors, particularly those with fiduciary obligations. Government-backed mechanisms to guarantee against risk could unleash a flood of private capital. We will be looking for progress on such structures at COP27.

The Glasgow Financial Alliance for Net Zero (GFANZ) brought the financial sector together in a shared ambition, but after a few hiccups, the path forward is less clear. GFANZ, established ahead of COP26 and co-chaired by former Bank of England governor Mark Carney, includes 450 financial institutions representing collectively $130 trillion in assets under management, that have committed to climate-related investment targets. This includes both BMO Financial Group, through its membership in the Net Zero Banking Alliance, and BMO Global Asset Management, through its membership in the Net Zero Asset Managers initiative. In the months since, two Australian pension funds have pulled out of the group, and at least three major U.S. banks reportedly are considering leaving amid possible conflicts with U.S. anti-trust laws.¹⁵ COP27 should provide greater clarity around the future of GFANZ and its potential to harness private investment to accelerate climate progress.

COP27 may be more subdued than last year’s conference in Glasgow, as participants try to make progress on climate issues despite a variety of crosswinds. Nevertheless, this year’s gathering is sure to produce key developments that continue to build on climate action required to make real progress. We will be watching carefully to gauge the ways COP27 alters the investment landscape.

Sources

Disclosures

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.

The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

Forward-Looking Statements Certain statements included in this news release constitute forward-looking statements, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions. The forward-looking statements are not historical facts but reflect BMO GAM’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although BMO GAM believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. BMO GAM undertakes no obligation to update publicly or otherwise revise any forward-looking statement or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.

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What to look for at COP27

Nalini Feuilloley

What is COP27, and why is it important?

What we’re watching

Implications for investors

Sources

Disclosures

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