While Climate Summit COP27 Will Under-Deliver, The Market Shifts Towards Sustainability Will Accelerate

Background

November 2022 was named the month of sustainability given that the COP27 Climate Summit is taking place during this time. These high-level meetings, however, will not produce any breakthrough given the global recession, high inflation, and geopolitical tensions due to Russia’s war in Ukraine. There will continue to be momentum towards the 2050 decarbonization targets, but we will fall short of concrete implementation of the climate commitments to keep the temperature increase to 1.5 C.

US Climate Leadership

President Biden’s participation, the only one attending among the top 3 polluters (US, China, and India) confirmed the US strong commitment to addressing climate risk. As the US president addressed the 110 countries' leaders, he celebrated the big shift in green-growth investment at home, supported by strong policies for decarbonization and clean tech development. Most specifically, he presented some of his major accomplishments, including the Inflation Reduction Act, which is the strongest climate legislation ever enacted in the United States. This legislation provides $370 billion over 10 years to support clean electricity, electric vehicles, heat pumps and clean technology. He also presented the Bipartisan Infrastructure Law, which is the largest long-term investment on resilient infrastructure providing $550 billion for roads, bridges, and mass transit, water infrastructure, resilience, and broadband. These laws provide strong incentives for all businesses to produce clean energy and cleantech in the U.S.

Private Sector and Capital Markets

While global summits under-deliver, the private sector and capital market investment in sustainability continues to show strong growth. In 2022 sustainable investments are expected to reach $ 4 trillion (Morning Star) and by 2025 at least 5$ trillion (Blackrock) . The largest recipient of these investments would be clean energy for about $1,4 trillion (International Energy Agency). On the ESG front, according to Bloomberg, assets under management are expected to reach $41 trillion by the end of this year. This means that every 3 dollars under management will have one invested in sustainability.

Net-zero services are also expected to accelerate. According to Mckinesy, the growing demand for net-zero services and technologies will continue to expand and could generate more than $12 trillion of annual sales by 2030 with key leading sectors including transport, power, and construction.

This green growth and clean teaching activism are happening because most corporate and capital market leaders believe decarbonization and sustainability are value creators.

What is the cost to reach Net-Zero?

According to the United Nations, Global carbon dioxide emissions from fossil fuels are projected to increase 1% in 2022, hitting a new record of 37.5 billion ton. If the trend continues, we will inject enough CO2 into the atmosphere to warm Earth to 1.5 °C above pre-industrial temperatures in just nine years. To avoif this and reach Net-zero by 2050, it is estimated that we should invest $30 trillion dollars by 2050, 4 percent of annual GDP (in 2021 money). This price tag is very high; however, the cost of unmanaged and unpredictable climate change would be much higher as climate events could affect about 20 percent of global GDP by 2040. According to Swiss-Re, the European Reinsurance group, by 2050 climate change could cause $23 trillion in global GDP losses corresponding to 11-14 percent of global GDP.

Positive Momentum

There is no doubt that COP27 will continue to galvanize climate advocates and bring the international community closer to executing on their climate pledges. However, some of the more ambitious proposals, such as the Damage and Loss Fund (a fund proposed to compensate fragile states for their loss due to climate change), will not be approved and will get stuck in legal bureaucracy. Furthermore, the $100 billion yearly pledges for developing countries will see slow progress as the largest donors have limited budget space to make do on their commitments.

Conclusions

The good news is that over 140 countries accounting for roughly 90 percent of greenhouse gas emissions have already proposed or set net-zero targets for 2050 or 2060. The United States will play a catalyzing role clearly leading the clean energy future that activates market forces, technological advancement, and investments to tackle the climate crisis. The bad news is that Net-zero targets are not converting into sufficient carbon reductions by countries. Existing decarbonization measures discussed in Egypt would only deliver an 11 percent cut by 2050 according to the IMF. This is a massive gap from last year's ambitious commitment, and it is time for the leading economies to accelerate their green transition now. Or else, risk paying a higher climate price tag.