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2022: The year to get real about climate transition

Clim8 Investment Team

21 January 2022 Climate ChangeSustainability

Will 2022 play good COP to 2021’s bad COP?

Despite its many shortcomings, COP26 was at least a partial success. The Glasgow Pact strengthened loss and damage finance and committed to double adaptation finance for developing countries, as well as reducing greenhouse gas emissions with more ambitious Nationally Determined Contributions1 from many countries. Yet assuming all these commitments are met, the planet is still on track for at least 1.8°C degrees of warming, well above the 1.5°C limit cited by the International Panel on Climate Change to avoid catastrophic climate events.

It is vital we demand more in 2022.

This November, according to a now-familiar pattern, a quieter and more technical COP27 in Egypt’s Sharm-el-Sheikh will focus on the more nuanced details of a global climate pact, following the ambitious statements of COP26. Initiatives like the Santiago Network for Loss and Damage2 need technical attention to be made effective, while significant loopholes in the Voluntary Carbon Market (VCM)3 agreed on during COP26 need to be ironed out.

Biodiversity is on the agenda

Running parallel to COP27 is the Convention on Biological Diversity (COP15-CBD), which commits to protecting global biological diversity and halting species extinction caused by human activities. Biodiversity loss is cited by many as the biggest existential threat to the world today. So this might be the year that biodiversity targets are ratcheted up in order to halt the sixth mass extinction.4

In April and May, the convention will meet in Kunming, China to negotiate the global biodiversity framework that governments will aim to meet by the end of the decade. The draft proposal commits governments to reducing pesticide use by two-thirds, eliminating plastic pollution and protecting 30% of the Earth’s land and sea.

Positive moves from the major players

In the USA, large amounts of capital could start to flow into the climate space, with the recently passed bipartisan infrastructure bill allocating billions of dollars to water, transport and energy infrastructure. At the same time, political stalemate makes it unlikely that Biden’s Build Back Better Act with its promised $1.8 trillion will pass in its entirety.  However, in our view the bill’s climate element does command support from the entire Democratic caucus, and is therefore the part that’s most likely to pass. If and when it does, this should accelerate the funding of climate projects. 

This year, China seems likely to expand its vast Emissions Trading Scheme (ETS), currently the world’s largest. The ETS opened last July at a price of $7.4 per tonne of CO2 (by comparison, today’s carbon price in Europe is ~$92 per tonne, while the UK price sits slightly higher at ~$98 per tonne). By the end of this year, new sectors covered by the scheme could include building materials, non-ferrous metals, and oil refining.

New regulations to the rescue

Unfortunately, greenwashing and misleading sustainability claims were rife in 2021. But thankfully a new raft of more stringent regulations should help investors better assess the sustainability credentials of investment products.

Listed companies, for instance, will have to abide by the new EU Corporate Sustainability Reporting Directive (CSRD). This directive will put sustainability reporting on a par with financial reporting, and will broaden the scope of previous regulatory frameworks by including all large companies and companies listed on regulated markets.

Asset managers will face new reporting requirements too. This will be the first year where large asset managers will have to comply with the reporting requirements outlined in the UK Taskforce on Climate Related Financial Disclosures (TCFD) framework. They may also need to disclose how aligned their funds are to the EU Taxonomy as per the Sustainable Finance Disclosure Regulation (SFDR).

The overriding theme of these new requirements is that companies need to improve their sustainability reporting, and asset managers need to then use that data to accurately quantify the environmental impact of their holdings. This allows investors to have clear and comparable information when making their investment decisions.

The year to get real about the transition

2022 should be a year in which we start to see what the commitments made at COP26 mean for economies, people and the planet. We will see pledges for finance, decarbonisation, and cooperation begin to play out in the real world.

Meeting them (or even trying to) will require global cooperation and accountability by all signatories to the Glasgow Pledge, along with a serious attempt to solve the technical challenges of a world in transition. 

1Nationally Determined Contributions (NDCs) are country by country commitments to reduce emissions over a set period of time, as established under the Paris Agreement in 2015. 

2The Santiago Network For Loss and Damage was set up some years ago in Chile, in order to provide financial assistance and advice to countries who have suffered climate related catastrophes. COP 26 agreed to provide funding for the Network to become active, however it will only operate as an advisory body for developing countries, providing them guidance on where to seek funds. 

3The Voluntary Carbon Market has been around since the Paris Agreement in 2015, and in fact still deals with carbon credits that were issued after the Kyoto Protocol in 1997. Countries have an allowance of carbon that can be released, and if they emit less carbon than this, they are issued a credit, which can then be traded or spent. So far, these have not been effective mechanisms, with ‘hot air’ credits (where the emissions reduction was not due to actual climate projects, just incidental) being commonplace. 

4A mass extinction is said to be taking place when Earth’s normal extinction rate (of 0.1 and 1 species per 10,000 species per 100 years) is being significantly exceeded – roughly defined as 75% of the world’s species being lost in less than 2.8 million years. The evidence is complex, but today the current rate of extinction is between 100 and 1,000 times higher than the pre-human background rate of extinction – suggesting that we are facing the sixth mass extinction.