COP27 – looking back, going forward

Last year, we presented our top takeaways for GCs and in-house legal teams from the UN’s COP26 climate change conference in Glasgow. A year on, COP27 is being held in Sharm El-Skeikh from 6 to 18 November, offering a chance to look at how things have progressed in the last year, and where the points of focus will be at this year’s conference.

Loss and damage 

Given COP27’s location, and that the IPCC has reported that some of the impacts of climate change are now irreversible, the concept of “loss and damage” under Article 8 of the Paris Agreement has come to surface, alongside mitigation and adaptation efforts. See our more detailed blog here. 

Loss and damage refers to the adverse effects of climate change, caused by both acute extreme weather events (like flooding) and slow onset events (like glacial melt and sea level rises) - and importantly who pays for the destruction they cause.

Developing nations have long argued that developed nations have a responsibility to pay compensation, but little progress has been made to date, in part due to nervousness from richer countries over potentially open-ended commitments.

Possibly reflecting differing national priorities, the start of the conference had to be delayed due to a last minute tussle over whether loss and damage should even be on the agenda (it was eventually included) - suggesting negotiations will be tense at best.

Climate finance 

The promise to mobilise US$100 billion of climate finance per year by 2020 to help with mitigation and adaption also remains unfulfilled. However, it’s very much still in the spotlight, being vital to effectively addressing the climate emergency.

The Egyptian presidency has made clear climate finance will be at the heart of COP27 discussions. There is also the question of what form the finance takes – with many of the more ‘generous’ nations giving in the form of loans, rather than grants, which are seen as much less desirable in the context of the portentous “polycrisis” the world is facing.

Upping ambition

There was some cautious hope immediately following COP26 off the back of countries’ having offered updated climate targets (or “Nationally Determined Contributions” in COP lingo), and many promising to do it again at COP27.

However, at the time of writing, only 22 countries have submitted an updated NDC. A key challenge for the conference this time round will be to try and boost momentum towards doing more. As the World Resources Institute recently found, national targets need to be about 6 times more ambitious if the world’s to stay on track for the 45% carbon reductions needed by 2030. The outcome of COP27 will be a useful indicator of current global appetites for climate action.

Despite - or perhaps because of – the low energy showing from governments, there’s a chance for businesses to do more and show leadership in addressing climate risks that impact them and to which they contribute.

Reporting missing in action

COP26 saw the announcement that the International Financial Reporting Standards (IFRS) Foundation was to launch the International Sustainability Standards Board (ISSB), with the aim of standardising sustainability and climate change reporting, largely based on the TCFD framework and incorporating sector-specific SASB standards.

Since then, we’re seen two exposure drafts of the standards, on which the great and the good have offered comments. But as yet, there’s no sign of the final standards from the ISSB, meaning further standardisation of reporting remains some way off. Perhaps they will choose COP27 as their moment?

In the meantime, the UK has said it will incorporate the ISSB’s standards into its domestic reporting regime under the proposed Sustainability Disclosure Requirements regime, on which the FCA has recently launched a consultation.

The UK has also set up a Transition Plan Taskforce (TPT), to develop a gold-standard for what corporate climate transtion plans should look like, which is expected to make an announcement at COP.

Regardless of the ISSB’s and TPT’s silence so far, domestic expectations - from investors, regulators and in legislation - around the quality and scope of climate reporting continue to harden, and bring associated regulatory, litigation-based and reputational risks for those that don’t do enough or don’t do it correctly.

Has sustainability become a requirement to access finance?

At COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) - an alliance of the various financial net zero alliances - announced that a staggering US$130 trillion of assets under management had pledged to align with net zero.

The shine has stated to fade since. Many of the world’s banks and other financial institutions continue to finance fossil fuel infrastructure (even if also financing green alternatives). GFANZ itself has toned down its requirement that signatories adhere to the UN Race to Zero requirements around “phasing down and out" unabated fossil fuel assets, and not funding any new coal - from a “must do” to an “encouraged to do”. Mark Carney, who launched GFANZ, has also been forced to deny rumours that some banks are thinking of exiting the alliance of alliances entirely.

However, some are still calling for more action. 602 investors representing almost US$42 trillion in assets under management have, for example, recently called on governments to stay on track for the 1.5C pathway and introduce a range of ambitious policies including carbon pricing, phase out of fossil fuels subsidies and coal power, and creating just transition plans. This is driven by investors’ need to “decrease [their] exposure to climate risk as a core fiduciary duty and by the potential opportunities associated with the transition to a net-zero emissions economy.”

A challenge for GCs will be to consider the risk that leaving, staying, or not joining organisations like GFANZ carries, and this may be impacted by the level of enthusiasm shown at COP27 for continued ambitious climate action.

Carbon markets to help with net zero?

Carbon markets and offsets offer an additional - but limited - route to help achieve businesses’ net zero commitments. COP26 saw the international framework for how these can work develop, but much of the detail is still being hammered out and it is likely to remain on the agenda at COP27.

In the meantime, a number of voluntary initiatives, such as the Voluntary Carbon Markets Integrity Initiative and Integrity Council for the Voluntary Carbon Market, are seeking to fill the gap and help develop high quality offsets. The US is also set to announce at COP a plan to develop a new framework for carbon credits to be sold to businesses.

However, offsets should be handled with care and can create risks if used as a measure of first resort. For example, the Science Based Targets initiative, a leading standard for corporate climate targets, changed its approach this year to reflect this. Businesses who want to have an SBTi target are now required to have a plan to reduce carbon as much as possible in the first instance, and only then use offsets for the final 10% of unabated emissions. There is also the reputational risk that comes from a company relying solely on carbon markets but otherwise continuing with business-as-usual.

What’s next?

Loss, damage and finance will dominate discussions, in the context of how willing countries are to increase their climate targets and stay firm on things like coal phase out. Although the signs point towards a lukewarm outcome overall this year, the demands of climate change are no less pressing for the possible lack of international vigour. Irrespective of what happens at COP27, businesses will need to engage with the impacts climate change and other sustainability issues will have, and how best address them – with a chance to show real leadership in the partial vacuum left by governments.