COP27 Reaffirms Cohesion, But No Greater Impetus for Decarbonization

The 27th Conference of the Parties of the United Nations Framework Convention on Climate Change (COP27) was held in Sharm el-Sheikh in Egypt on November 6-20. COP27 overran its initial schedule, but did produce an official agreement. This represents a qualified success, including the establishment of a fund to address loss and damages, which aims to ease the disputes between developed and developing nations on the subject of global warming and its adverse effects. However, we think the fund failed to add overall impetus to the move toward net zero given that details have yet to be discussed. We had thought it would be difficult to achieve a strong consensus on accelerating decarbonization initiatives given the growing awareness of near-term energy security considerations, and the outcome was essentially in line with these low expectations.

COP27 Results in Line with Low Expectations

The figure below shows the key points of the Sharm el-Sheikh Implementation Plan.

Key Items Agreed at COP27

  1. (1)Fund to address loss and damage, particularly to support vulnerable developing nations
  2. (2)Commitment to pursue efforts to limit warming to 1.5°C
  3. (3)Achieving 1.5°C target will require 43% reduction in 2030 greenhouse gas (GHG) emissions versus 2019 levels
  4. (4)Countries will reconsider/step up 2030 emission reduction targets by end-2023
  5. (5)$4trn per year in renewable energy investment needed through 2030
  6. (6)Phasedown of unabated coal power, phase-out of inefficient fossil fuel subsidies

Source: Nomura, based on Nikkei data

Of these, we focus most on point (1), the establishment of a fund to address loss and damage. This follows the establishment of the Warsaw International Mechanism for Loss and Damage at COP19, held in Warsaw, Poland in 2013. However, the subsequent 2017 action plan did not include financial support. The outcome of COP27 builds on this history. We think the international community's interest in the subject of loss and damage is gradually increasing.

We would note that when the Sharm el-Sheikh Implementation Plan was drawn up the details of the fund had yet to be decided. The areas covered by the Implementation Plan include a Transitional Committee that will operate the fund. The Committee has been tasked with submitting recommendations by COP28 (scheduled for 2023) after assessing the current loss and damage scheme and its deficiencies. While the scale and structure of the fund to be established have yet to be decided, we expect discussions about the details to take place in the coming year.

Despite growing global awareness of energy security, there was no change in the stance of phasing down unabated coal power in item (6). We view this positively as evidence that Europe is not rolling back the achievements of its previous climate change initiatives despite the threat to energy security. In Europe, the EU indicated in its REPowerEU plan that it intends to accelerate adoption of renewable energy and reduce its reliance on natural gas from Russia. We think this was a key factor behind the lack of a notable pullback in previous climate change initiatives at COP27.

United Nations Calls for Companies to Step Up Net Zero Initiatives

The recent increase in GHG emissions has prompted calls for countries to rethink and strengthen their targets for reducing emissions through 2030, also as expected. This would likely result in expectations for a greater contribution from cuts to corporate emissions. On the same front, a United Nations expert group announced a proposal to eliminate greenwashing by companies during COP27, and the UN and International Organization for Standardization (ISO) released guidelines for developing net zero emissions plans. In both cases, the focus is on reducing absolute emissions volume rather than offsetting emissions using carbon credits to become carbon neutral. This may drive a greater focus on companies' plans for reducing emissions and their effectiveness.

Summary from "Nomura ESG Monthly (December 2022)"

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