Luke Bartholomew: Hello, and welcome to Macro Bytes the economics and politics podcast series from abrdn. My name is Luke Bartholomew, and today we are talking about COP 27, the UN's Climate Change Conference, which has just wrapped up in Sharm el Sheikh, Egypt. And in particular, we want to talk about where we think some of the most progress has been, and, conversely, where we've seen rather less progress, what all this means for investors, and given all of that, what that should tell us about the progress of the the COP institutions more generally. So I'm delighted to say I am joined today by Eva Cairns, who is Head of Sustainability, Insights and Climate Strategy at abrdn, and Jeremy Lawson, Head of the Research Institute and Chief Economist at abrdn, both of whom have just returned from the conference, I'm very much looking forward to hearing about their insights and impressions from that event. So Eva starting off with you, in the run up to the event you guys set out what I think is a very useful framework, in terms of thinking about what needed to be delivered from this conference to be a success, these four gaps as you framed it. So maybe a good place to start is talking us through what those four gaps are, and therefore what it was that you think needed to come from this conference for us to deem it a full success?

Eva Cairns: 06:48
Yes, absolutely. Hi, thanks for having me. So I'm happy to start with that. This was quite critical for us as investors to look at these four gaps and highlight that they really need to be addressed and closed by policymakers to also help set the right incentives for investors and corporates. So the first one was the ambition gap. And this is all about the commitments and targets that countries set. So last year, at COP 26, when all the country pledges were added up, it resulted in a 2.4 degree warming outcome by the end of the century. And countries are asked to come back and update these commitments. So to close that ambition gap and demonstrate that they're increasing their ambition. And we were looking for that really to happen at COP 27 with much more ambitious, nationally determined contributions. So that was the one thing the ambition gap. The second was the credibility gap. And that resonates for us, it's a really important scene, because we have seen so many pledges and commitments, but it's not just the words and pledges that matter, it is really the actions and implementing them. So seeing reactions, and ultimately, the outcomes in reducing emissions, reducing deforestation rates, reducing the use of fossil fuels. So ultimately, if we have lots of pledges, but the actions are missing to implement them, that causes a huge credibility gap. And then we talked about the adaptation gap. So actually, while we talk a lot about decarbonising and net zero one key gap was to have more climate finance flows into adaptation, because we've seen the physical impacts of climate change already happening across the globe today, and the climate finance going into adaptations such as resilient infrastructure, flood protection, water irrigation, a number of technologies there, we just don't see enough finance flowing into that. And importantly, the finance that is flowing, only 2% comes from the private sector. So that was the other key gap we were looking for COP 27 to address. And finally, last, but certainly not least, the justice gap or climate justice and making sure that the most vulnerable countries that have contributed the least to climate change in terms of their emissions, have the support from the developed world to adapt and to mitigate climate change. And the key climate finance promise of 100 billion a year by 2020 from the developed world to the developing world that was made a number of years ago, still hasn't been delivered. And we're really looking for that to be closed to address this climate justice gap.

Luke Bartholomew: 09:35
Super, thanks, Eva. And I think Jeremy, one of the things that you've talked about in terms of wanting those gaps addressed is not just the bits on the sort of rhetoric / promises front but also that there are institutions and mechanisms built into policy that can actually deliver those. So is that something that you want to expand on a little bit?

Jeremy Lawson: 09:56
Yeah, so the example I would use here is the wrangling over the final text of the communique in the last couple of days at the conference. So there's a lot of breathless commentary about whether this particular word is used. How do we exactly describe fossil fuels? What exactly is the language going to be around sort of financial commitments, that you can insert the objective of limiting climate change to one and a half degrees above pre-industrial levels into a document but what matters is not whether it's in the document or not ultimately, but whether the behaviour incentives exist to deliver it. And so I think too much of the analysis of climate conferences, and even the things that happen between those conferences, focuses on the language on what governments, companies, financial institutions are saying, and far too little on what their realised activity is and how these things align. So I think for any reader, also any listener to this podcast, I'd implore you to go underneath what is being said in the documents and think really deeply about whether they can and are likely to be delivered?

Luke Bartholomew: 11:19
Well, let's try and start some of that deep thinking and Eva given sort of the framework, we set out with the things that need to be delivered, and the importance of actual credible institutions, things that will deliver behavioural change, perhaps you can say where some of the most progress has been across those dimensions in terms of what was delivered at COP.

Eva Cairns: 11:40
Yes, absolutely. So let me highlight three areas and refer back to the gaps. I talked about the climate justice and the adaptation gap, which relate much more to addressing the physical risks. I do think that was a key focus of this COP, where arguably most progress was made. It was hailed as a breakthrough that we have a Loss and Damage Fund agreed. And that is something that some of the developing most vulnerable countries have been fighting for. And so a recognition that the loss and damage they already experience from climate change, that they require financial support to address that. So whilst that was really positive, I think we need to be mindful that again, this is for now a pledge, and we really need finance flows to go into that fund. And there is, again, another timeline for this to be implemented by COP 28. And that's a long time or there could be a lot of physical risks that we see over that timeframe, again, so we really just see that implemented in practice. And related to that, also the big focus on adaptation. So with a clear adaptation agenda, 2030 outcomes and a lot of discussion, around mobilising finance, for adaptation and not just the mitigation to decarbonise. So I would highlight that as the second point, the recognition that the financial system globally needs reformed, particularly multilateral development banks. So there was a lot of talk about how we helped mobilise private finance where the barriers are high, the risks are high in certain regions, and the role of derisking and blended finance and multilateral development banks. So I do think that was a helpful discussion, the acknowledgement, and that we now need to see what steps will be taken to undertake that reform going forward. And the third one I would highlight is much increased focus on food and agriculture, which we haven't really seen in previous COPs. We had an agriculture day, and there were a lot of sessions discussing food, not just from a resilience perspective, with food crops being significantly damaged by the physical risks and the and the droughts and higher temperatures, but also from adapting our food systems, and what does sustainable food production look like, on the path to net zero. And I think it was great to hear the announcement from the FAO to have a net zero roadmap for food and agriculture by COP 28 in a similar way as we have for energy by the IEA. So that's something I'm looking forward to seeing more detail on.

Luke Bartholomew: 14:25
Okay, so that's where the good news stories were. But I think as ever, perhaps there is, with these big conferences, there are also areas of rather less progress. So Jeremy, would you want to talk about where we were a bit more disappointed in terms of what was delivered or not delivered for that matter?

Jeremy Lawson: 14:43
Yeah, so I mean, I think the biggest areas of disappointment were around what we might described as as mitigation. So the two gaps that Eva talked about in terms of ambition, and then credible action. So in the last 12 months although at COP 26, it was agreed that all countries ought to before COP 27 or during the conference, update their nationally determined contributions to make them more consistent with a one and a half degree trajectory. Only 24 countries, in fact did so. Most of the countries that made updates are relatively small emitters and so these changes haven't moved the dial at all. Simultaneously, we've seen only very partial sort of changes in practical policies that would mitigate climate change. Additionally, over the period, maybe one way to put it so in 2020, global emissions needed to decline by about 7% per annum, every year in order to reach net zero by 2050. Well in practice 2022 is likely to be a record year for global emissions, there's a pretty good chance to 2023 will be higher again. And so each year, we're falling further and further behind. It's very difficult to work out what the true global carbon price is today, when you sort of look at all the different formal and informal mechanisms through which carbon is priced, but the estimates put it about $6 a tonne. But that needs to reach at least $75 in today's terms by the end of the decade. And when we look across the major emitters, and what sort of changing and what's likely to change, you know, that doesn't seem very plausible. And so really the big takeaway from the conference is that again, although the this language of one and a half degree alignment, and that level of emissions or even holding temperatures well below two degrees has sort of been retained, the actions of countries suggest that that is increasingly unlikely, and a key reason why in a lot of our climate scenario analysis, and analytics, which we use to understand companies exposures, we think that it's more likely that the world is on a 2.3 degrees sort of pathway. So massively exceeding the limits the Paris Agreement was supposed to impose. And that then sort of brings to the fore, then these questions about finance, because actually, the loss and damage claims are only likely to get larger, the need for adaptation will be very significant and in many ways, sort of larger than the amount of financing that is needed to aid the energy transition. And then you bring back the sort of credibility challenges as to whether the finance will be made available for those things. And so the track record of countries so far is that they tend to not just not deliver the amounts, but then they divert it from other areas, so other types of aid, or they provide too much of it in loans that increase the indebtedness of countries rather than in grants. So I think I find it very difficult to be too optimistic coming away from these meetings.

Luke Bartholomew: 18:16
Okay, so given all of that, it would be, I think, interesting to get both of your thoughts on what you think all of this means from the hopefully not too perochial perspective of investors. So maybe Eva starting with you - what do you think the key takeaways are, and important things to think about for investors. And then Jeremy, any thoughts that you have?

Eva Cairns: 16:39
I think what is key is to recognise this widening gap of the policy incentives asnd the trajectory we're on based on current pledges is that emissions are expected to increase by around 10% by 2030. But investors with net zero goals that want to decarbonise are expected to decarbonise by 50% by 2030. So there's a huge misalignment, because you can't just as an investor, or corporate achieve that in isolation from the policy environment, and I think, looking at the outcomes of COP particularly around keeping the 1.5 goal alive, which is very, very unlikely now and that widening ambition and credibility gap. It's really important for investors to have a think about the implications particularly where they’ve setnet zero goals of making that happen. And the second one I would highlight is we talked a lot about credibility. And there's so many initiatives that have been launched across a number of, of areas, to really take that deeper look at the credibility behind words. So as an investor when we look at corporates as well understanding the credibility of their actions, how they implement some of the initiatives that they have signed up to, either as part of COP or outwith, but to understand you really need to look under the bonnet of some of these pledges at corporate policy level, to understand what we can expect to be implemented in the future.

Luke Bartholomew: 20:16
Jeremy has anything that you want to add to that in terms of your key takeaways.

Jeremy Lawson: 20:21
Yeah, and I think this really speaks to what Eva has said, very important to understand that asset prices will ultimately align with the world as it is, and evolves, not the world as we would like it to evolve. And so this is not to say that any asset owner shouldn't set net zero objectives, but when it sort of is trying to understand the implications of that, and whether there are likely to be any tensions between those objectives and their fiduciary responsibilities, the starting point has to be to analyse those probable pathways, and what they mean for asset prices. I think that goes for any investor. Be very, very clear, we're still expecting a very significant energy transition. So even in a world where, you know, we hit 2.3 degrees by the end of the century, that’s still one where there's a lot of mitigation of carbon emissions over the next 80 years. And our analysis shows that throws up both enormous risks and opportunities, dispersion across companies, in terms of what that's going to mean for their businesses as a major structural driver. It's just not sort of moving along a one and a half degree or, or even sort of likely below two degree pathway. I think the second really important one is I do feel like the scrutiny on different forms of greenwashing, whether they be by companies, financial institutions, countries, that that scrutiny is increasing significantly. There is a higher level expert group that was initiated by the United Nations to start to look more closely at this, at the question of the credibility of the commitments that individual companies have been making towards decarbonization. We've developed their own frameworks in these areas - and so I think that's the other aspect is that, you know, sometimes it can feel as though the incentives are to make these sort of really strong claims about your alignment, so what you're going to do in the future, then you have to have a really clear idea about how you're going to achieve them, and what the consequences are. And that even though it may sometimes feel like it might be a less ambitious commitment, if you can deliver it, it might have much more practical benefits than a stretch goal that you can't really deliver, and you haven't properly analysed.

Luke Bartholomew: 22:53
Brilliant. So one final question then. And I suppose Jeremy, given that your, I guess, I think it's fair to say, slightly more negative read on how this conference went, I'd be interested to hear your thoughts on whether you think sort of the COP apparatus, the institutions, the way of convening the governments in this way and running through these annual conferences, is that the appropriate way to deal with some of the challenges that need to be dealt with as part of these climate issues that we're facing?

Jeremy Lawson: 23:26
Yes, I have mixed feelings on this question, because on the one hand, you can look at the evolution of, of these annual meetings and how much progress is being made equally, really downhearted about it, particularly if your focus is on the science based one and a half degree target. On the other, if you have maybe a more realistic view of just how difficult it is to coordinate such complex issues and responses across all the countries in the world, you might look at it again and say, actually, it's remarkable that we're making any progress at all. I've sort of seen suggestions that maybe these decisions will be better off in a smaller group of large emitting countries, so the G20 economies. But actually many of the biggest disputes are there so its not clear to me that you would necessarily make more progress. And at the same time, you'd exclude the global south from the discussions, which are at the epicentre of a lot of the damage from climate change. Or maybe the other way to put it is that, is it the institutions that have the problem? Or is it really just the incentive structures that are so difficult to overcome, particularly for sort of political reasons, that it doesn't really matter what the locus of decision making is, its just always going to be sort of slow progress. The errors if any you know they were made decades in the past and once you get to the point we are now where you need such drastic cuts it's just really, really difficult to consolidate that type of action. I think realistically, we will sort of see each year the negotiations will press forward. One step forward, two steps back in one year, two steps forward, one step back in another. So some meetings will be more successful than others. And then a lot of the progress will just be made by individual countries and ultimately, probably grassroot activism that forces governments to act more. Again, not as quickly as would be desirable but better than what could be the case in a world where emissions go unabated.

Luke Bartholomew: 25:37
I think that probably is a suitably reflective point for us to leave it today. So all that remains for me to say is, please do subscribe and review us on your podcast platform of choice and to thank Jeremy and Eva for their fantastic contributions today, albeit, I think, perhaps somewhat downbeat in, in some respects. So thanks very much to them. And thanks very much for listening. Looking forward to speaking again soon. This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The companies discussed in this podcast have been selected for illustrative purposes only, or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.

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Minding the gap at COP27

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