Why investors should already be paying attention to COP28
The poor results of COP27 prompt us to turn our attention to COP28. The analysis by Stephanie Maier, Global Head of Sustainable and Impact Investment at GAM
The application of the EU Regulation on Sustainability Reporting in Financial Services (SFDR) and related Taxonomy continued in 2022, with the introduction of “level 2” (RTS technical standards) which provides for the disclosure of more specific information, including including the assessment of negative effects on sustainability factors (the impact of investment decisions and advice that have very negative effects on sustainability factors).
Starting from January 2023, the first periodic reports will be published (models covering social and/or environmental characteristics at fund level, negative effects on sustainability factors and sustainable investments if relevant) for the “Article 8” and “ Article 9". Coupled with the changes to the MIFID II directive introduced in August that provide for the integration of sustainability preferences into the suitability assessment, these rules will improve the disclosure of the sustainability profile of different funds.
There could be other variations as regulation broadens the scope, from disclosures to denominations, as regulators seek clarity and consistency. ESMA in the EU, the FCA in the UK and the SEC in the US have issued new guidelines and proposals for fund naming and related requirements. This will likely lead to changes not only in fund names and classifications but, in some cases, in investment approaches as well.
The impact of taxonomies will increase: after the EU Taxonomy there are 30 other global taxonomies under development or implementation. While most are based on the same principles, national taxonomies undoubtedly need to consider the specific policy context and channel funding according to the needs of that economy, whether the focus is on the green economy or on transition. As taxonomies expand and related reporting improves, there will be a greater impact on investment decisions as well. Undoubtedly, the diffusion of models, identification codes and taxonomies will lead to application problems, but there will probably be important changes in the way and in the instruments in which capitals will be invested.
What COP28 has in store for us
After the inadequate arrangements made in late November at COP27 in Egypt, attention now turns to the COP28 agenda.
While COP27 has done little to accelerate the policy response to mitigate climate risks, efforts to adapt to climate change have increased. The main success of COP27 was the agreement “to establish a fund to respond to losses and damages” in order to help the most vulnerable countries to counter the effects of climate change. It had been a controversial topic for some time and, even if the details of the agreement are still missing, an important step forward has been made. At the parallel G7 meeting, Indonesia and the International Partner Group (which includes, among others, Japan, the United States, the European Union and the United Kingdom) issued a shared statement on the plan Indonesia Just Energy Transition Plan to accelerate the use of renewable energy and reduce coal.
The poor results of COP27 prompt us to turn our attention to COP28. The Secretary-General of the United Nations has already called a climate summit in 2023, before COP28, to address the "ambition" gap, between intentions and concrete actions, to keep the rise in global temperatures within 1.5° c. The next COP to be held in the UAE will take stock of the progress made and likely highlight that gap, drawing further attention to climate finance.
As the conflict in Ukraine continues, inflation remains persistently high and the energy crisis continues, accelerating the transition to a net zero economy is a priority for governments. The United States has introduced a substantial package, with the Inflation Reduction Act focusing on new technologies and the introduction of electric vehicles and renewable energy, while other governments are looking for less expensive solutions. The need to manage the social cost and implications of the net zero transition will become increasingly relevant.
For investors, the transition to a low-carbon economy, as well as the need to adjust to the new reality, continues to be at the heart of the investment landscape. However, if the appropriate measures are not introduced and social issues are ignored, the likelihood of an uneven transition will increase.
Nature as a resource
Nature becomes more and more important for investors. This hinges both on acknowledging the “interconnected global crises of climate change and biodiversity loss” and on the importance of “protecting, conserving and restoring nature and ecosystems to achieve results in climate change mitigation and adaptation”. At COP27, oceans, forests and agriculture were discussed. The scale of biodiversity loss underway, at a rate not seen since the last mass extinction, signals that we face systemic risk.
At the time of writing, the COP15 on the Convention on Biological Diversity which takes place in Montreal, Canada in December, has not yet concluded. It is hoped that COP15 will agree on the main objectives to be achieved by 2030, including the protection of land and sea on a global scale, the prevention or reduction of the introduction of alien species and the use of ecosystem-based approaches to contribute to the containment and adaptation to climate change. This agreement could represent the version for the nature of the Paris Agreements on climate.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/cop28-anticipazioni/ on Sat, 31 Dec 2022 06:20:47 +0000.