COP28: What are the developments for investors?

There are hits and misses for investors hoping for change with COP28 developments after landmark ‘fossil fuel phase out’ agreement signed.

Copy Of Copy Of FO Black 1200 (103) @Wikimedia Commons.
COP28 announced the "UAE Consensus" after days of negotiations.

As COP28 in Dubai comes to a conclusion, there are disappointments for many who hoped for stronger action on climate change but some hope for others. Investors, however, have been reminded that change is coming, and they must cooperate or be left behind.

Some stakeholders at the conference expressed careful optimism at changes made, particularly around global energy emissions, but there were other areas that were lacking, they said.

All week, the delegates have been debating the draft text on the event’s declaration, known as the ‘stock take’, which was eventually announced Wednesday morning (UK time).

"A new paragraph has been added calling out the role of "transitional fuels", read:
gas (and perhaps also oil), in the energy transition. This feels like a concession."

The “landmark” UAE consensus agreed to ‘transition away’ from fossil fuels, with language that had been heavily debated. The pledge included the following action: “accelerating zero and low emissions technologies, including, inter alia, renewables, nuclear, abatement and removal technologies, including such as carbon capture and utilization and storage, and low carbon hydrogen production, so as to enhance efforts towards substitution of unabated fossil fuels in energy systems.”

It also included: “reducing both consumption and production of fossil fuels, in a just, orderly and equitable manner so as to achieve net zero by, before, or around 2050 in keeping with the science”, and “phasing out of inefficient fossil fuel subsidies that encourage wasteful consumption and do not address energy poverty or just transitions, as soon as possible”.

Sustainability figures, such as David Carlin, from UNEP-FI, who spoke at ESG Investment Leader earlier this year, said in a LinkedIn post that the deal had positive and negative elements. “A new paragraph has been added calling out the role of "transitional fuels", read: gas (and perhaps also oil), in the energy transition. This feels like a concession,” he said. “I believe (and hope) this is not the final version.”

Earlier at the event, the parties pledged to triple renewable energy globally by 2030 and declared their “intent to work collaboratively and expeditiously”, which could prove a boon for institutional investors looking to work in the space.

“[We] commit to work together to triple the world’s installed renewable energy generation capacity to at least 11,000 GW by 2030, taking into consideration different starting points and national circumstances,” said the official release.

“It’s encouraging that the pledge to triple renewable energy appears to have wide support,” said Laura Hillis, Director, Climate & Environment (Responsible Investment), Church of England Pensions Board on the developments of this latest iteration of COP earlier this week. “The pledge could be transformative for the world’s energy system, emissions and economy – critical to us as a pension fund seeking an orderly transition aligned with limiting global warming to 1.5°C for the long-term financial benefit of our beneficiaries.”

Hillis added that it was now necessary that policy actions “unlock the climate finance that will smooth the way for a deployment of renewables”. This policy action must come, she said, alongside investments in grid infrastructure and connectivity, energy efficiency measures, and time-bound commitments to “phase out fossil fuel subsidies”.

“Despite lofty claims from the COP28 Presidency, the OGDC announced
was a repackaging of existing voluntary commitments."

However, like many others, Hillis was more negative about the overall efforts of the conference, especially around its promises at the other end of the spectrum – such as ending carbon extraction from the ground as well as stopping its use in power generation.

“Despite a lot of lofty claims from the COP28 Presidency about what they could deliver on oil and gas, the Oil and Gas Decarbonisation Charter (OGCD) announced over the weekend was largely a repackaging of existing voluntary commitments and included no commitments to address scope 3 emissions – by far the most material source of emissions from the oil and gas sector,” Hillis said.

“It is exactly this lack of leadership and mixed signals from the oil and gas sector that led the Church of England Pensions Board to divest from remaining holdings earlier in 2023.”

At the conference, there were renewed calls for net-zero financial involvement from both public and private sectors.

In possibly positive news, environmental thinktank Carbon Tracker Initiative said “The end of coal power may be coming into view” after the addition of new members to the Powering Past Coal Alliance, the US and the Czechia.

Biodiversity also a focus

While energy transitions and fossil fuels took centre stage, biodiversity efforts were more quietly led.

Sunday, COP28’s Nature, Land Use, and Ocean Day (December 10), saw countries and non-state actors make pledges to nature-based climate action, with $186.6 million of new financing for nature and climate towards forests, mangroves, and the ocean announced. “The commitments made build on those made during COP28's World Climate Action Summit (WCAS) on 2 December, where $2.5 billion was mobilised to protect and restore nature,” was the statement.

The Forest Carbon Results and Credits roadmap was also launched by 15 governments and included an outline to scale investment in forest carbon results and credits.

For investors, one of the key factors was a plant that included more than 150 businesses and financial institutions, which announced plans to set climate and nature targets under the Science-Based Target Network and Science-Based Target International’s Forest Land and Agriculture frameworks. “Under these frameworks, businesses agree to increase investments in nature-based solutions and to begin assessing, managing and disclosing their nature-related impacts, dependencies, risks, and opportunities through the Taskforce on Nature-related Financial Disclosures (TNFD) framework,” said the statement.

Agriculture makes progress

Agriculture – which is one of the world’s leading causes of emissions as well as ESG risks for investors due to supply chain and stewardship discrepancies – saw some progress as well at this COP.

The FAIRR investor network said it welcomed the “first steps towards a roadmap from UN Food and Agriculture Organization (FAO), long called for by a FAIRR-backed statement supported by $18 trillion investors.”

The organisation added that the UN FAO launched the outline of its roadmap to align agri-food systems with 1.5°C and the second Sustainable Development Goal to end hunger, with the full report expected to follow in the coming days.

“It signals investments in sustainable food innovations must play a bigger role in
ensuring global nutrition security while meeting climate and nature goals.”

“[Agriculture] is a complex sector that is both at high risk from nature loss and climate change, whilst also being a critical sector to transition if we are to achieve our commitments set out in the Global Biodiversity Framework and Paris Agreement,” said Alexander Burr, ESG Policy Lead, Legal & General Investment Management. “This roadmap, combined with guidance from initiatives such as the Science Based Targets, enables investors to hold companies and policymakers to account and accelerate the transition.”

The roadmap was created following a statement signed by investors representing $18 trillion and coordinated by the FAIRR Initiative, which urged the FAO to produce plans for a resilient sector that could deliver global food security while striving to mitigate climate change and biodiversity loss.

The initial report released by the FAO today outlines ten targets that are measurable and timebound, covering the issues of crops, soil, and forests, amongst others. However, full details behind these targets and whether they align with the 1.5°C trajectory can only be meaningfully assessed once the full report is published – as it is expected to be in the coming days.

“Policymakers in Dubai have sent a clear signal to the markets that the agri-food sector will be tightly bound into the next round of Nationally Determined Contributions in 2025,” said Sofia Condes, Head of Investor Outreach, FAIRR. “It signals investments in sustainable food innovations, such as alternative protein, regenerative agriculture and deforestation-free supply chains must play a bigger role in ensuring global nutrition security while meeting climate and nature goals.”

So, what should investors take away from this?

Lombard Odier’s Head of Sustainability Research, Thomas Hohne-Sparborth, outlined how investors are coming to terms with the speed and scale of the environmental transition, as well as the value chain disruption that is emerging – all of which will need to be investigated and actioned upon to stay relevant in the market.

“Private markets will be the key to some of the most disruptive solutions, while

new asset classes – from carbon to nature-based solutions – will emerge.”

“Opportunities are unfolding for industry leaders to outpace rivals and reshape the global economy,” Lombard’s statement said.

Hohne-Sparborth added that the changes agreed upon at this year's COP revealed that the climate transition “is not a niche thematic opportunity, but a question of asset allocation”.

“Private markets will be the key to some of the most disruptive solutions, while new asset classes – from carbon to nature-based solutions – will emerge,” he said. “All of this, as investors, raises questions not just around thematic opportunities, but around asset allocation.”

It remains to be seen if the recent deal made will be enough to drive this change.