Private-sector expectations are muted for COP27

This November's United Nations climate change conference in Egypt is likely to be starkly different than COP26 held one year ago in Glasgow, as the focus shifts from lofty goals to the trickier challenge of achieving them.

"At Glasgow, the investors were coming with bold big statements. Now a year in, it's hard work," said Kirsten Snow Spalding, senior program director of the Ceres Investor Network, whose 220-plus institutional investment members manage a collective $60 trillion in assets.

Network members include some of the largest public pension funds in the U.S. and range geographically from the Washington State Investment Board, Olympia, overseeing $182.3 billion in assets, to the C$390 billion ($280.9 billion) Caisse de Depot et Placement du Quebec, Montreal, to the Church of England Pensions Board, London, overseeing three pension funds.

"I characterize this as the implementation COP," said Ms. Spalding, who expects that investors and policymakers will discuss how they are implementing their plans to reach net-zero emissions, the best sources of data for making those plans and more.

Pledges made since the 2021 climate conference in Glasgow are "woefully inadequate," reducing greenhouse gas emissions less than 1% when at least 45% is needed, according to an Oct. 27 United Nations emissions gap report.

A further complication this year is the geopolitical shift in Europe and the impact of the Russia-Ukraine war on energy sources, including fossil fuels, that could make reducing carbon emissions harder, logistically and politically.

The war has also diminished hopes raised at COP 26 that more incremental progress would be made on reducing carbon emissions.

"I think the Russian invasion has put pain to that," said Nazmeera Moola, chief sustainability officer for Ninety One in Cape Town, South Africa, with $144.6 billion under management as of Sept. 30. "Expectations are likely to be lower. It has very much shifted the conversation from how quickly you can shut down your power stations to how quickly countries can develop renewables," she said.

As COP27 begins Nov. 6 in Sharm el-Sheikh, Egypt, the location underscores one of its biggest challenges: convincing countries with widely disparate priorities and budgets to agree on next steps, and who pays for what. This year's gathering is expected to emphasize how more affluent countries, along with multilateral development banks, can and should help developing countries tackle climate change, and convince more investors to follow.

Investors will be expecting a lot more from governments from both developed and emerging markets in terms of commitments, resources and policies, Ms. Spalding said.

"They want to see the policymakers implement change. The rubber hits the road when (asset owners) sit with their asset managers, but they can't do that without the right signals" from governments, she said.

When investors go to implement their net-zero plans, "that signal really matters, and where we invest matters, so investing in emerging markets is the No. 1 thing. These are the ones that need solutions first," Ms. Spalding said.

Investors will also be looking for reassurance from countries and multilateral development banks like the World Bank, Inter-American Development Bank and the European Bank for Reconstruction and Development, that the energy transition needed to address climate risk will not be on concessionary terms, said Ms. Moola with Ninety One. Conversations between governments on how to pay for it is now "much more about private capital. It starts with banks and then heads to private finance," she said.

"Ideally what you want to see is development banks guaranteeing it in order to induce private capital into the next tranche. And the private sector needs to be much more clear about what risks you want to be mitigated," Ms. Moola said.

At the center of recent U.N.-convened climate conferences is the Paris Agreement, the international treaty adopted by 196 parties in Paris in December 2015. In effect since November 2016, it calls on countries to limit greenhouse gas emissions to achieve a climate-neutral world by 2050, with the goal of limiting global warming to below 2 degrees Celsius.

The agreement works on a five-year cycle of increasingly ambitious climate actions by countries, many of whom will be defending their records and commitments at COP27.

While the Paris accord is now universally recognized, getting there was "painful and difficult," said Michael McNicholas, London-based managing director of asset management for OMERS Infrastructure within the C$119.5 billion ($86.1 billion) Ontario Municipal Employees' Retirement System, Toronto.

This year, with institutional investors like OMERS Infrastructure looking at climate-related investments on a country-by-country basis, they will be looking closely for country commitments coming out of COP27 to help plan their next investments.

Wael Aboulmagd, Egypt's COP27 ambassador, will be looking for country commitments, too.

Egypt, as host of COP27, plans to focus on how the many promises made since the 2015 Paris accord are being implemented when it comes to emissions reduction efforts, how countries are adapting to climate change, and the level of money and other resources being offered to help the most vulnerable countries do both.

While countries agreed at COP26 to revisit and strengthen their emissions reduction plans this year, few have done that yet in the days ahead of COP27, although a last-minute flurry is expected.

Last year's conference saw increasing numbers of pension funds and asset managers committing to net-zero emissions targets by 2050 or even sooner.

Before COP26 started, half of the members of the U.N.-convened Net-Zero Asset Owner Alliance, which includes the $426 billion California Public Employees' Retirement System, Sacramento, upped their timelines, pledging to cut emissions in their portfolios by 25% or more by 2025.

One year later, members of the Net-Zero Asset Owner Alliance are looking for investments in emerging markets to help meet their emissions target commitment, "across every asset class," said Ms. Spalding with the Ceres Investor Network.

To date, CalPERS has reduced the carbon intensity of its fixed-income portfolio by 51% and its equity portfolio by 30% over the past seven years, CalPERS CEO Marcie Frost said at the Climate Finance Week Ireland 2022 conference on Oct. 19.

Another CalPERS climate-focused strategy is using its voice at events like these climate change conferences. "We seek to educate and influence government and industry leaders across the world to take decisive and far-reaching actions to reduce greenhouse gas emissions," Ms. Frost said.

Whether or not asset owners and managers get the desired support from policymakers and regulators, "my sense is that investors aren't slowing down. They need the policymakers to move with them," said Ms. Spalding, and investor groups like the Net-Zero Asset Owner Alliance are expected to make themselves heard during COP27 about what they want governments around the world to do.

Last year's conference saw the debut of the Glasgow Financial Alliance for Net Zero, a private sector-led initiative to reach net-zero emissions. With roughly 500 member firms from across the financial sector in 45 countries, GFANZ represent roughly 40% of global private financial assets. In Glasgow, GFANZ officials pledged to find projects to mobilize private finance.

Pierre Abadie, the Paris-based group climate director at Tikehau Capital and co-head of its private equity energy transition and decarbonization practice, considers COP26 "the most interesting COP following the Paris Agreement," because it presented a future trajectory of climate commitments for companies to apply.

"Most importantly, COP26 was the conference that shifted the responsibility away from the governments and towards the economy to finance the energy transition," said Mr. Abadie, whose firm has €37.5 billion ($36.5 billion) under management.

"Compared to COP26, it seems like the mobilization for COP27 is not as strong and there is less of a market expectation," Mr. Abadie said. "I expect that COP27 will leverage the agreements from COP26 and build a road map for the private sector that explains how to implement capital to finance the energy transition."

COP26 also saw the debut of the International Sustainability Standards Board to develop global standards for climate disclosure in financial markets through audited corporate financial statements. A topic sure to come up at COP27 is ISSB's decision in October to require reporting companies to disclose their Scope 3 greenhouse gas emissions. Also known as supply chain emissions, they can represent as much as 70% of a company's carbon footprint but also the potential for the greatest carbon reduction. Before the rules are finalized in early 2023, there is sure to be heated debate about whether the more aggressive stance will encourage or discourage countries to embrace them.