COP27: Four key takeaways for businesses

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COP27 - Mathilde Mignot
Mathilde Mignot, Head of the EcoAct NTBS Portfolio & Partnerships Team at COP27

Opinions on the outcomes of COP27 are decidedly mixed, with optimism over a landmark fund to pay developing countries for climate damages tempered by disappointment about the lack of ambition regarding emission reductions. However, intergovernmental negotiations were only one element of the summit. Corporate and civil society participants continue to make progress, reflecting the near-universal understanding that all entities are vulnerable to climate change and have a role in tackling the crisis.

The establishment of the ‘Loss and Damage’ facility after decades of wrangling demonstrates that urgent action is needed, existing public funds are insufficient, and the private sector needs to step up as an enabler of climate finance. This will come via new blended finance initiatives launched at COP27 and more coordination between public and private financial institutions, as well as bringing corporate treasurers, CFOs, and corporate leadership teams into the climate strategy discussion. Beyond a high-level call to action to mobilise finance, there are several other important outcomes for businesses to consider and follow-ups to look out for in the coming months.

After attending COP27, Mathilde Mignot, Head of EcoAct’s Nature and Technology Based Solutions Portfolio & Partnerships Team said:

“Despite positive progress at COP27, current global efforts to bridge both the emissions and adaptation gaps are proven insufficient if we are to achieve 1.5°C climate targets. COP27 demonstrated that action on climate change cannot be driven by governments alone, with the private sector taking a leading role in achieving global decarbonisation.

Besides setting and working towards science-based targets, companies are investing in emerging climate solutions through carbon finance, fostering the development and innovation of high-quality carbon reduction and removal projects globally. With 16 years of experience in project development, EcoAct’s dedicated Nature and Technology Based Solutions unit is growing to strengthen the development of impactful projects in partnership with international experts and clients. At COP27, I had the chance to meet many other leading actors in the Voluntary Carbon Market, currently delivering projects with a positive impact on both nature and communities. Climate change won’t wait – we need action and results now. The private sector’s involvement is becoming increasingly essential in scaling up climate action.” 

A challenging pathway to 1.5°C

In the leadup to the event, the UN Environment Programme (UNEP) reported that there was “no credible pathway” to meeting the Paris Agreement target of limiting warming to 1.5°C above pre-industrial levels. Some commentators agreed, arguing that abandoning the original aim was necessary to pave the way for more practical policymaking. With COP27 negotiators unable to agree on more aggressive emission reduction goals, it may only be a matter of time before governments resign themselves to missing 1.5°C, which may carry implications for net-zero strategies and science-based emission reduction targets. The Global Carbon Budget report, produced by several European research institutions published during COP, found that there is a 50% chance that 1.5°C will be exceeded in as few as nine years, if current emission trajectories hold. It is worth remembering that every 0.1°C increase in temperature prevented is valuable. At the next critical point of 2°C warming, the IPCC predicts harsher heatwaves, greater natural habitat loss, and more rapid sea level rise than at 1.5°C.

COP27 - Climate Action Tracker
Source – Climate Action Tracker

Regulatory alignment – towards mandatory Scope 3 reporting

Amidst the gloomy outlook, CDP took a positive step toward promoting international regulatory harmony and lowering the cost of sustainability reporting. CDP, through which almost 20,000 companies disclose environmental information, announced it will incorporate standards from the International Sustainability Standards Board (ISSB) into its existing questionnaires. The ISSB Climate-related Disclosures Standard, to be released in early 2023, is expected to require firms to reveal their Scopes 1, 2, and 3 emissions and reveal their use of carbon offsets under any mandatory transition plans, among other tasks. The UK government has already announced its intention to align climate reporting mandates with the upcoming standard, as part of a wider push that includes the creation of a “gold standard” for private sector climate transition plans. With other jurisdictions sure to follow, CDP’s decision will ensure more effective reporting while reducing the number of divergent rules with which firms must comply.

Even the International Organization of Securities Commissions (IOSCO), the slow-footed global standard setter for securities regulation, hinted at more regulatory alignment by launching a consultation on recommendations for the operation of robust compliance and voluntary carbon markets and calling out greenwashing. The UK’s leadership on reporting reflects a broader shift towards enshrining voluntary climate-related actions into law. Also during COP27, the Biden Administration, emboldened by a positive showing in the US midterm elections, announced a proposal to require the suppliers and contractors of the federal government (“the world’s largest customer”) to set science-based emission reduction targets and disclose their greenhouse gas emissions as well as climate-related financial risks.

Planning for net-zero – new guidelines

With the launch of the new International Organization for Standardization (ISO) Net Zero Guidelines at COP27, organisations now have more guidance on how to set and meet climate targets that will stand up to accusations of greenwashing from investors and other stakeholders. Among other key details, guidelines note that any long-term net-zero targets should be complemented by interim objectives, and that firms can only credibly claim to reach net-zero after they have taken “all possible actions” to reduce their emissions. Only residual emissions should remain, and these should be counterbalanced by high-quality removals (i.e., nature-based or technology-based). Firms should seek partnerships with trusted project developers to ensure that any credits used are verifiable and of high quality. Additionally, organisations are told to consider their historical responsibility for climate change, with larger institutions in developed countries encouraged to contribute their “fair share” and set bolder targets.

The UN High Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities released a report with similar intentions and a number of overlapping conclusions.  According to the Expert Group’s recommendations, entities cannot claim to be net-zero while continuing to invest in or build new fossil fuel supply, and must focus on the attainment of absolute emissions reductions, rather than lowering their emission intensity. Perhaps the most critical element is that organisations that want their environmental credentials to be taken seriously cannot associate with groups, including trade associations, that work to undermine government climate policies. With fresh frameworks against which greenwashing can be measured, firms cannot say they have not been warned.

The future of carbon offsetting – no clarity on Article 6

Although carbon offsets should not replace mitigation, they will play a prominent role in corporate sustainability strategies for the foreseeable future. As such, it is important to track progress on Article 6 of the Paris Agreement, especially Article 6.4, which allows for the creation of a multilateral carbon trading system that will interact with the Voluntary Carbon Market. Creation of a specific taxonomy of eligible project types has been pushed back to 2023, leaving the door open for ocean-based activities (blue carbon), such as planting mangroves and ocean fertilisation. Also, although the matter had been considered settled, some parties managed to re-introduce the possibility of crediting avoidance actions, such as those that help keep a forest standing when it might otherwise have been cleared. Another area of tension is the desire from some countries to retain the right to revoke the issuance of credits, which would leave buyers uncertain about their value.

With so much undecided, the goal to begin trading Article 6.4 credits in 2023 now appears unworkable. However, some countries have moved forwards on bilateral agreements, provided for by Article 6.2. Most notably, Ghana and Switzerland have agreed for the former to eventually provide credits generated by a project reducing methane emissions from rice production, to be used towards the latter’s 2030 emission reduction target. Such early action, with rules governing the transparency and reporting of Article 6.2 transactions yet to be finalised, shows a willingness to act even where the regulatory landscape is not yet clear. Following two somewhat disappointing COPs, at least from a government perspective, corporations may take their cue from this more enterprising approach.

Conclusion

Next year, COP28 will host the Global Stocktake, a collective assessment of the implementation of the Paris Agreement and progress towards its goals. Regardless of whether elected officials can agree on common language or a unified strategy, the private sector must continue responding to market signals and consumer demand for bold action, through reducing emissions, channelling finance into environmental initiatives, and continuing to innovate low carbon solutions. With new frameworks giving firms both incentives to move and direction on how best to achieve results, there is plenty of reason to take heart from COP27.

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