LSEG Insights

COP28 reflections: how climate policy and investment came together

David Harris

Head of Sustainable Finance, Strategic Initiatives & Partnerships
Claire Dorrian

Claire Dorrian

Head of Sustainable Finance, Capital Markets & Post Trade

Last year’s COP28’s 80,000 attendance was the largest ever – with 20 times as many attendees as the first Conference of the Parties (COP) to the UN Framework Convention on Climate Change (UNFCCC), in Bonn in 1995.  

Policy makers, government officials and negotiators are now outnumbered by thousands of investment managers, asset owners and analysts who converged to network, cut deals and understand the latest developments in climate policy.

The engagement of so many from the private sector in general, and from finance in particular, illustrates how integral climate policy is becoming to the global economy and to the movement of capital. There is a desire across the economy to achieve decarbonisation, and to support the climate policymaking that can enable this transition. 

Deepening engagement

Within the finance sector, engagement with COP has deepened in recent years. The Paris Agreement calls for signatories to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. This acknowledges the centrality of the finance sector to the agreement’s mission to reach net zero emissions.  

At COP26, in Glasgow in 2021, the UK Government, realising the important role of aligning capital with climate  priorities, ensured the finance sector was closely involved. The conference was the venue for the launch of the Glasgow Financial Alliance for Net Zero (GFANZ) and the establishment of the International Sustainability Standards Board (ISSB). The UK Government also announced the UK’s Transition Plan Taskforce at COP26, to support the development of private sector climate transition plans and, crucially, to encourage standardised disclosure practices.  

Two years later at COP28, we saw the maturation of many of those efforts. For example, close to 400 signatory organisations, including LSEG, representing more than 10,000 member companies and investors, called for disclosure using the ISSB standards.

Those standards – which were unveiled at an event we hosted at the London Stock Exchange in June – were endorsed by the International Organization of Securities Commissions in July. 

The standards aim to improve trust in companies’ sustainability disclosures and create a common language for disclosing climate-related risks and opportunities. 

The Transition Plan Taskforce was also active at COP28. Its secretariat hosted or co-hosted four events in Dubai and, in its reflections on the outcomes of the talks, noted the relevance of transition plans in the context of the debate over fossil fuels and the focus on transition. The year coming is likely to have a significant global policy focus on transition plans. 

The UN climate conferences can provide the ideal opportunity to promote the sort of internationally co-ordinated action that global capital markets need. For example, President Emmanuel Macron of France unveiled the proof of concept for the Net-Zero Data Public Utility (NZDPU) in Dubai. It will be a global, centralised open-access repository of private sector data related to the climate transition.  

Financial markets depend on accurate and consistent data. David Schwimmer, CEO of LSEG, who has been involved in the NZDPU from initiation, said at the launch, “Accessible, consistent and reliable climate data is essential for enabling the transition to a net-zero economy.” By capturing key emissions and target data, the NZDPU will enable investors and wider stakeholders to track the progress of companies in meeting their climate commitments.  

Room for progress on carbon markets 

Notwithstanding the engagement of the private sector, the climate COPs are part of an intergovernmental process that works within the rules of UN negotiations. Their need for unanimity on key decisions can slow progress until consensus is reached. This was the case at COP28 with the elements of the Paris Agreement rulebook that relate to international carbon markets. 

In the run-up to Dubai, hopes among carbon market participants were high that agreement could be reached on Article 6, which governs the international transfer of carbon credits. This is a highly political part of the negotiations, and it proved impossible to close gaps between key countries in Dubai. Final decisions that would operationalise these international mechanisms may not now be made until COP30, in Brazil at the end of next year. 

A lack of consensus on international carbon trading at COP28 highlights the importance of voluntary carbon market (VCM) mechanisms.

Companies will continue to set net zero targets, decarbonise, invest in climate mitigation projects, and procure carbon credits and the VCM will have a role to play here. Participants will seek efficient mechanisms to procure credits and one way to do that is to invest in funds and companies listed on the London Stock Exchange that are investing in climate change mitigation projects that may issue carbon credits in the form of a dividend in specie. A key advantage of the VCM is that it falls under the London Stock Exchange’s admission and disclosure standards; this gives comfort to investors that funds and companies must comply with a series of rules around disclosure and transparency. 

Looking ahead to COP29

As the negotiations around Article 6 demonstrate, the fundamental role of the COP process is to reach international agreement on how the world is going to tackle climate change. As we note above, internationally consistent policies are also fundamental to the efficient working of capital markets.  

Opportunities exist to further deepen the links between the negotiating process and the investment managers, asset owners and corporate leaders who will enable and deliver the reduction in emissions needed. 

Transition plans are a case in point. Encouraging the global adoption of a common transition plan methodology and approach would greatly simplify the process of designing and assessing these plans for companies and investors, respectively. Similarly, an endorsement of the work of the ISSB within the COP process would help to advance its acceptance by companies and investors around the world. The roll out of transition plans enables the finance sector to engage the real economy on the credibility of these plans. This is a better alternative than simply trying to just reduce portfolio exposure by limiting capital for carbon intensive sectors, which may have very limited impact on global emissions. 

It remains to be seen how much progress we will see in this direction before COP delegates arrive in Baku, Azerbaijan, in November. But it is clear to us that private sector engagement is key to reducing carbon emissions across the global economy. Perhaps by COP30 in Brazil those delegates could number more than 100,000 and, if that enables an economy-wide transition, it should be applauded rather than criticised. 

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