04 Dec 2024
Authors | Ann Meoni, Senior Sustainable Investment Manager | Anna Moss, Senior Sustainability Analyst
After a lacklustre COP16 for Biodiversity in Colombia and media attention on the financial aspects of the COP29 for Climate in Azerbaijan, we provide a download of the key elements from both. We also look at what the latest COP developments mean for investors.
At both COPs, United Nations (UN) member countries were asked to provide action plans for how they intend to do their part to help achieve the goals of two foundational agreements – the Paris Agreement on Climate and the Kunming-Montreal Global Biodiversity Framework. The graphs below show how countries have responded.
CLIMATE: Nationally Determined Contributions (NDCs)* submitted
.png)
BIODIVERSITY: National Biodiversity Strategies & Action Plans (NBSAPs)**
.png)
*A country's ‘nationally determined contribution’ (NDC) outlines how it plans to reduce greenhouse gas emissions to help meet the global goal of limiting the temperature rise to 1.5°C and how it will adapt to the impacts of climate change.
** National Biodiversity Strategies and Action Plans (NBSAPs) outline national priorities, actions, and commitments to address biodiversity loss. They align with global goals, such as the Global Biodiversity Framework (GBF).
The number of national biodiversity strategies and action plans (NBSAPs) submitted at COP16 was disappointing, given this was billed as the ‘Implementation COP’ for biodiversity, with less than a quarter (23%) of participants submitting full plans.
The decision by major economies including China, Germany, France, India and the US not to send top-level representatives to COP29 raises concerns about their commitment to these plans.
The UK distinguished itself by publishing a new NDC at COP29 and a new, more ambitious carbon reduction target to reduce greenhouse gas emissions by 81% based on 1990 levels. Brazil has also stepped forward with ambitious targets, ahead of hosting COP30 next year.
The UK and five other countries (Brazil, Chile, Panama, Switzerland and the UAE) are ahead of the deadline to submit NDCs by February 2025.
These national plans will largely determine how much investment different countries drive into clean technology and into biodiversity conservation and restoration. They also promote transparency and accountability as countries are required to report regularly on their progress. The targets also indicate to business – especially sectors that are carbon-intensive or have a high impact on nature – what policy and regulatory environment they are likely to face in the future.
The lack of NBSAPs leaves an unclear policy landscape, which will hinder the allocation of private capital for nature protection and restoration. We are yet to see how many countries will submit updated NDCs and the extent of their ambition. However, there was no agreement to reiterate and embed the crucial statement from last year’s ‘global stocktake’ supporting “transitioning away from fossil fuels”, nor clear guidance that might have helped strengthen new NDCs. We therefore expect aggregate targets on emission reduction to fall well short of the 60% cut required by 2035. COP30 may be forced to recognise the reality of overshoot, above the Paris Agreement’s temperature target of 1.5°C. This means that climate adaptation analysis and finance will likely grow in importance, as a result.
The lack of high-level representation at both COPs is indicative of a bigger problem. A combination of geopolitical issues and domestic political pressures for many countries is putting climate and nature issues way down the agenda. We are also seeing a diminishing role for the US and potentially the UK and Europe, while China and Brazil are showing an increasingly collaborative approach on climate and other policy areas.
Always the thorniest element of COP discussions, both climate and nature face massive gaps in financing ambition. At COP16, eight governments (Austria, Denmark, France, Germany, New Zealand, Norway, the United Kingdom, and Québec) pledged an additional $163 million (US Dollars) to the Global Biodiversity Framework Fund (GBFF). These funds aim to provide targeted support for conservation and restoration works, and to improve the long-term health of natural ecosystems. While significant, this falls well short of the GBFF goal to mobilise at least $200 billion a year by 2030.
COP29 was hailed as the ‘Finance COP’, with one of the main aims being to set up a 'New Collective Quantified Goal on Climate Finance' (NCQG) to replace the outdated $100 billion annual target. Here are the key takeaways on how effective the negotiations were:
It was widely acknowledged that trillions are needed annually, with developing countries calling for $1.3 trillion a year to be directly funded by developed countries.
Negotiations resulted in the aim to raise $1.3 trillion a year by 2035, but for this to come from a wide number of sources including private investment.
Of this broader figure, it has been agreed that $300 billion will come from developed countries, around half the minimum that developing countries were demanding.
Furthermore, there is no stipulation that this ‘core’ funding will be in the form of grants or ‘grant-equivalent’, and it can include money from public funds, development bank loans, and the mobilisation of private finance by government spending.
.png)
Public funding can support and de-risk additional private funding for climate and nature projects in the form of grants, tax relief or to provide more favourable interest rates. This can remove barriers for the allocation of capital to projects or solutions from private finance.
We need to understand the form of the funding pledged before it’s clear what type of private investment could be affected. Given the abrupt end to COP16 and the overrun to get finance agreed at COP29, details on how the financing will work are very limited. We hope for more clarity from COP30.
Developing economies tend to face the largest physical, social, and financial impacts from climate change, despite historically not being the main contributors of global emissions.
To try to right this inequity, a Loss and Damage Fund was agreed two years ago at COP27 that would provide financial assistance to nations most vulnerable to, and affected by, the effects of climate change. However, while the financial ambition for the Loss and Damage Fund has been high, the actualised funding is just 0.2% of the $387 billion the UN has said is needed every year to help developing countries adapt to climate change. Only a small increase in funding was agreed at COP29.
Meanwhile at COP16, a breakthrough voluntary nature-financing mechanism was agreed, involving a levy on the profits made from digital genetic information. This Digital Sequencing Information (DSI) is currently available on open-source databases, generally created by academic researchers.
Under the agreement, companies that monetise this genetic data – for example, those in the pharmaceutical and agriculture sectors – will be expected (but not obliged) to pay into what is being called the “Cali Fund” (named after the location of COP16 in Colombia), operated by the UN. The levy will be either 1% of their profits or 0.1% of their revenues. The funds will go to public conservation efforts, indigenous people, and local communities from where the data was sourced. The ambition is to raise $1 billion. Despite being dwarfed by UN ambitions for the Loss and Damage Fund, this would triple current funding for nature.
.png)
Note: the circles in the above are for illustrative purposes only, the scale of the disparity is actually larger.
The Loss and Damage Fund has the potential to reduce the financial burden of the impacts of climate change on developing countries. It also offers financing for climate adaptation and recovery from extreme weather events. The Cali Fund could bring additional costs to pharmaceutical, cosmetics, agri-business, nutraceutical and technology conglomerates. However, the full impact will depend on whether companies are left to volunteer to pay the levy or countries/regions choose to make it mandatory.
It was hoped that ringfenced loss-and-damage funding would be brought into the NCQG. But this didn’t occur nor did significant additional finance emerge. This, along with proposed mechanisms like the UK and EU’s Carbon Border Adjustment Mechanisms and likely increased tariffs on clean technology from the US, leaves emerging economies frustrated. These policies affect their exports.
Sectors potentially affected by the Cali Fund levy have raised concerns about knock-on effects. There is an emerging patchwork of rules and regulations. These could disadvantage companies in regions where the levy becomes mandatory, compared with companies based in regions where it’s not.
We’ve seen key emerging economies foster closer partnerships and increasingly diverge from global policy approaches, which has broader economic implications.
One breakthrough at COP29, was the agreement for new quality standards for carbon credit trading. This is a key step towards allowing countries across the world to trade carbon credits with one another to meet their climate targets. It’s also an opportunity to channel more investment into developing countries and nature. While not a done deal, these new standards set the ground rules for a UN-backed global carbon market after almost a decade of impasse.
Just before COP16, a study reported that the ability of the world’s natural carbon ‘sinks’ to absorb carbon has diminished. This is mainly because of drought in the Amazon and extreme wildfires in some of the world’s largest forests [1].
Carbon sequestration by natural systems plays a vital role in a stable climate (normally absorbing over half of man-made emissions). Equally, the degradation of these systems can release carbon into the atmosphere, adding to global warming. Resilient natural systems can also help with climate adaptation and other co-benefits.
UN carbon-credit trading standards should help address concerns around the robustness of carbon credits, which have made the market high risk for investors. Studies also suggest that enabling cross-border cooperation on greenhouse gas reductions could reduce the cost of implementing national climate plans by $250 billion per year [2].
If the new standards create a high-integrity market, then this will make it more investable. We think that nature-based solutions offer benefits to both carbon reduction and sequestration. They can also benefit nature with economic co-benefits. But we are disappointed not to see more focus on the interconnectedness between climate and nature. We’ve already seen the EU’s Deforestation-Free Regulation delayed by a year, partially because of concern from developing countries that it affects their economic development.
What is agreed at a COP needs to be actioned in regulation or policy at a country or regional level before it can have longer -term investor impacts. But that doesn’t mean the talks don’t matter. Hence the high level of lobbying from companies and industry organisations.
There is a positive role played by COPs to increase consensus on difficult global policy issues. While the outcomes are commonly deemed inadequate, they do foster more progress than would be achieved without them.
Given the abrupt end to COP16 and the rushed, albeit extended, end to COP29, we hope for more clarity to emerge when parties convene again next year [3]. An early signal of progress would be the publication of significantly stronger NDCs by the February 2025 deadline.
Risk warning
The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.