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Taking the temperature ahead of COP27

4 November 2022
Climate talks will shortly resume in earnest at COP27, with the focus anticipated to be on adaptation, loss and damage, and, once again, finance. Against a background of major geopolitical events, the question on most of our minds is – can this summit become a focus for real progress? The outlook right now is distinctly mixed, with much work to be done in all directions.

Corporate Sector Decarbonisation

Mitch Reznick, CFA, Head of Sustainable Fixed Income, Federated Hermes

In September, the Climate Disclosure Project published a status report on how the G7 corporate sector’s decarbonisation policies are doing on delivering the 1.5oC goals of the Paris Agreement.

Given that one of the key themes in the report is addressing “loss and damage” created by the climate crisis, ahead of COP27 the report has an enhanced relevance.

The report found a lack of progress being made by the private sector versus the 1.5oC target. Current policies of corporates in G7 countries imply a temperature rise of between 2.2oC (Germany and Italy) and 3.1oC (Canada). Though seemingly small, the difference between 1.5oC and a best-performing 2.2oC trajectory would have a material, negative effect on millions of people in the developing world.

Given these numbers, it is understandable why COP27’s organisers have focused the agenda on holding developed countries accountable to financial commitments they made at Copenhagen in 2009 to mitigate loss and damage.

To that end, on behalf of the developing world, COP27-host Egypt would prefer that these financial promises are delivered, as a first step. As a second step, it wants to focus on ‘adaptation’ rather than ‘mitigation’, which developed markets prefer.

Energy Security

Martin Todd, Portfolio Manager, Sustainable Global Equity & Impact Opportunities, Federated Hermes

For many countries, particularly in Europe, energy security is now the priority. This is perhaps best illustrated with the recent scaling-up of the Garzweiler II coal mine in Germany, which involved the destruction of a wind farm to allow its development. At COP26 in Glasgow last year, policymakers agreed to a ‘phasing down’ of coal but in 2022 we have seen coal emissions rise year-on-year.

Progress at COP27 requires the collaboration of governments, society and the corporate sector. We have seen some forward movement in the corporate sector, evident in the increasing proportion of companies signing up to Science-Based Targets (~20% of listed equities). At a country level, we hold out less hope on mitigation (reducing emissions) given the aforementioned realignment of priorities towards short-term energy security rather than clean energy.

However, with high fossil fuel prices, and continued decline in renewable energy costs, there is an increasingly attractive investment opportunity in building out renewable energy capacity – both financially and for security of supply.

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