As the COP26 meetings in Glasgow last year drew to a close the message was clear – government and private sector plans to decarbonise the global economy were wildly insufficient. The finance available to drive the energy transition, as well as adapt to physical effects of climate change, was also woefully inadequate.

COP27 in Egypt then was meant to be the ‘implementation COP’, where the Paris objectives of holding temperature increases to 1.5°C or at least well below 2°C were kept alive. And where the developed countries in particular finally recognised their responsibility for financing the transition, adaptation and justice needs of the global south.

Four climate tests

Derived from these goals, we set four key tests for COP27:

1. Ambition: Would it close the gap between countries’ stated climate ambitions and their formal commitments?
2. Credibility: Would countries put in place more credible policies to narrow the gap between their commitments and actions?
3. Adaptation: Would countries act to close the gap between the costs of climate change itself and the money available for adaptation?
4. Justice: And would the climate justice gap be closed, both in terms of accounting for the loss and damage from climate change in the most exposed countries, and ensuring that the transition away from fossil fuels benefited vulnerable workers and communities?

The answer to each of these four questions was critical for investors, as they will dictate both the climate risks they are exposed to in the future, and the opportunities available to them.

So by the standard of our four tests, was COP27 a success or failure? The answer is not black and white; the degree of progress did differ across them. But by the most important test of all, to keep the 1.5C goal alive and achieve net zero emissions by 2050, the meetings fell well short of what was required.

Insufficient ambition

This is most obvious in the failure to close the ambition gap. Only 24, mostly small emitting countries, updated their Nationally Determined Contributions (NDCs) over the past year. That left the global sum of all these NDCs on a 2.4°C trajectory, the same as last year. Moreover, despite the agreement to an annual ratchet mechanism in Glasgow, there were no consequences from this lack of ambition. That is a feature of a climate negotiation process that is not legally binding.

This reinforces the worrying misalignment between where country pledges are projected to take us (a 10% increase in global emissions by 2030) and what is needed for Paris alignment, as well as what is expected of investors and corporations (a 50% decrease in global emissions by 2030). As we have repeatedly asserted – private sector financial flows cannot align with science-based climate objectives unless public policies and regulations are credibly aligned with those objectives.

Implementation also falling short

Of course, climate action is not just or even primarily about target setting. Closing the credibility gap through implementation is even more important. Here there was some modest progress, but many more questions, including regarding:

• Standards for disclosures, target-setting and the regulation of voluntary carbon markets are strengthening, and work done to more closely harmonise them across different jurisdictions.
• A new alliance between Brazil, Indonesia and the Democratic Republic of Congo – which together contain 50% of the world’s tropical forests – to arrest deforestation was announced. However, major commitments were also announced last year, yet 2022 is on track to be a record year for forest destruction.
• Encouragingly, food and agriculture were firmly on the agenda with the launch of the Food and Agriculture Sustainability Transition (FAST) initiative and a commitment by the UN Food and Agriculture Organisation to provide a net zero 2050 roadmap by COP28.
• The $20billion Just Energy Transition Partnership (JETP) agreed at a high level between the major advanced economies and Indonesia to accelerate the latter’s phase down of coal was also welcome. That said, there are a lot of details to thrash out, including how much money will be in the form of public grants.

Indeed, scaling up blended finance – where public subsidies and risk layering aim to crowd in private investment to mitigation and other climate goals – was one of the dominant themes of this COP. The history of such financing initiatives has been that they depend too much on loans, target the lowest hanging fruit, fall short of initial funding targets, and divert funds from broader foreign aid priorities. These will all need to be addressed before we conclude that the financing gap is likely to close.

More generally, there has only been weak progress on accelerating climate policy action over the past year. The passage of the Inflation Reduction Act (IRA) was one sign of progress in the US – the world’s second largest emitter – but even the full implementation of its provisions would leave America well short of what is necessary for it to fulfil its full international obligations. Certainly, the de facto world carbon price remains a long way below the levels that are required to rapidly phase down the use of fossil fuels.

Climate justice finally on the agenda

Arguably the most progress was made in addressing the climate justice gap.  For the first time, the topic of loss and damage was on the agenda and the agreement to set up a new fund was hailed as a 'breakthrough'. But is it really? The pledged amounts are still small, and the details thin, including where the necessary funds will come from.

Until we see actual finance flows, it is another pledge. Let's remember that the $100bn climate finance pledge from many years ago to support developing countries has still not been delivered. And as Antonio Guterres emphasised in his concluding speech: 'A fund for loss and damage is essential – but it’s not an answer if the climate crisis washes a small island state off the map – or turns an entire African country to desert.'

More awareness of the importance of adaptation

Meanwhile, it was good to see a greater focus on adaptation at COP27, crystallised in the launch of the Sharm-el-Sheikh Adaptation Agenda that has a goal of enhancing resilience for 4 billion people in the most vulnerable regions. There was wide acknowledgement that the global financial system needs an overhaul to mobilise private capital into adaptation solutions as only 2% of adaptation finance currently comes from the private sector. Particularly reforming the role of multilateral development banks to ensure that climate finance is not only directed towards mitigation goals.

The upshot is that while it is hard to describe COP27 as a success, there was at least some progress in addressing the economic and social consequences of climate change. All four of the gaps we identified remain very large, and in the case of the ambition and climate action gaps, time is running out to close them. This all but guarantees even more money will be needed for loss, damage and adaptation.

A need for institutional reform?

From an investor perspective – and especially those with net zero pledges themselves – COP27 raises difficult questions about whether their objectives are achievable. It may also be time to consider whether the multilateral COP negotiation process needs to be reformed if progress is to be accelerated – though there are no easy options when the reasons for our current failures are so deeply political.

If there is a silver lining it is that even a world that is not aligned with the Paris objectives will still involve a radical reshaping of the global energy and potentially food system over the coming decades. This will touch almost every asset in some way, and is a structural force we don’t think is yet in the price of most climate sensitive assets. Indeed, the steady drumbeat of technological progress continues despite the gaps we have identified and is increasingly less dependent on policy change.