COP28: A success or a missed opportunity?

The United Nations Conference on Climate Change in 2024 (COP28) didn’t start under the best auspices. Controversies surrounding the host city, Dubai, had created an atmosphere of scepticism. There was fear, echoed in the press but also among many conference attendees, that the agenda might be controlled by oil-producing countries, aiming to influence an agreement that was obligated to be ambitious in order to reignite the global challenge against climate change.

The primary goal of the conference was to assess the progress made since the 2015 Paris Agreement with the aim of keeping global warming below the 1.5-degree threshold. Moreover, the conference also aimed to find new funding to assist less wealthy countries in investments geared towards making their economies more sustainable, at a time when liquidity and access to credit are no longer as straightforward as they once were.

In the whirlwind of negotiations, there was a prevailing concern that the conference might conclude with a watered-down agreement. This led to a clamour for an ambitious outcome, with the stated goal of phasing out fossil fuels from the economy by 2050. But is this a true step forward?

The conference agreed that emissions must be reduced by 43% by 2030, compared to 2019 levels, in order to limit the increase in global temperature to 1.5°C. This goal, which is hardly achievable, signals how governments are lagging behind the targets of the Paris Agreement.

To change course, the consensus reached in Dubai includes “transitioning away from fossil fuels in energy systems” and “reducing both the consumption and production of fossil fuels in a fair, orderly, and equitable manner to achieve net-zero emissions by, or before, or around 2050 in line with science.” The language already suggests that this is an ambiguous agreement with potential loopholes, but the unequivocal novelty is that, for the first time, a path to eliminating fossil fuels is outlined, albeit with a vague target date. This necessity wasn’t a novelty, but the explicit mention and “acceptance,” despite all the ambiguities and controversies, even by oil-producing countries, is certainly a significant development.

Another achievement of the conference, citing one of the most significant among many initiatives, is the establishment of a fund (Loss and Damage Fund) designed to compensate the states most affected by the effects of climate change. During the conference, the first commitments were followed by states contributing $700 million. This amount is minuscule compared to the estimated damages attributed to climate change (which are estimated in the order of several hundred billion dollars). For now, Italy and France are the nations that have put forth the most resources ($108 million euros), while the United States and Japan (first and third countries for CO2 emissions) have offered $27 million and $10 million respectively. China, in second place, hasn’t contributed any funds.

The outcomes of COP28 are labelled as “historic” or “disappointing” depending on whom you ask. Assessing the immediate impact of these measures is far from simple. Will governments begin implementing concrete plans to phase out fossil fuels? Will these plans be adhered to? Will the compensation and damage mitigation fund be endowed with adequate resources for its crucial mission? Only time can provide these answers.

What is certain (as highlighted by critics) is that COP28 falls short in keeping global warming below the 1.5-degree threshold. In essence, there’s been a lack of radical and decisive actions, which might also be unrealistic to expect in such a multilateral and complex context (though these actions will eventually need to be taken to limit climate change risks).

However, we believe that the agreement holds political value and signals a clear message: the world must learn to live without fossil fuels, and it must begin doing so starting today. COP28 sets a clear direction, emphasising that sustainability and investments remain the focus, proclaimed with even greater ambition despite circumstances (such as geopolitical crises) that might have diverted attention elsewhere.

During the conference, on the day dedicated to finance, the crucial role of investments, including private ones channeled through savings instruments, in this transition was highlighted. It emphasised the importance of developing appropriate legislation to encourage these investments. While legislative efforts in Europe are evident in promoting capital inflows, in other countries, we are yet to witness concrete developments.

In essence, amidst many more or less ambitious intentions, what remains concrete for investors from COP28? We believe there are three key points:

1. The “transition away” from fossil fuels represents a huge transitional risk for companies and countries whose revenues or economies rely on hydrocarbons. Some entities might rely on reserves accumulated over years of fossil fuel-related activities to adapt their models to a world without oil, natural gas, and coal. However, other companies and countries could face enormous challenges in adapting. This poses a concrete long-term risk that might, in some cases, be difficult to evaluate accurately in today’s market valuations.
2. The damages linked to climate change, focused on by the “Loss and Damage Fund,” do not cover the financial needs related to climate change entirely. There will be a need to support economies to recover from increasingly frequent extreme events, as well as funding aimed at supporting adaptation and preventing climate risks, such as infrastructure investments. Additionally, there’s the enormous capital required to finance the energy transition. The insignificance of the $700 million collected by the fund reminds us of the difficulty in sourcing these funds, a theme we believe will become increasingly pressing. In this regard, we believe it’s crucial for private investments, not just public ones, to contribute to achieving these goals.
3. Any new legislation could play a crucial role in clarifying the role of sustainable investments, directing funds toward virtuous companies and technologies essential in the fight against climate change, in standardising and increasing transparency in data. This would further improve a landscape that has already seen significant evolution in the last two years. Legislative innovation can only open new opportunities and in the long run, support ESG investments.