Dubbed the Africa COP, COP27 provided an opportunity to tackle issues critical to the continent and a chance to turn the words, drawn up at COP26, into action. Confronted with a global food and energy crisis, increasing extreme weather events and record greenhouse gas concentrations, the summit was a key milestone to instil renewed solidarity between countries and deliver on the landmark Paris Agreement.
Businesses should also note the outcomes of the climate conference, as the agreements made in Sharm El-Shiek, Egypt will eventually lead to national targets, laws, regulations and policies, which they will need to be compliant with.
So, how was COP27 relevant for businesses?
Tackling greenwashing
At COP27, a UN High-Level Expert Group report into corporate greenwashing stressed that net zero is entirely incompatible with the business-as-usual approach for many companies, including those with investment in fossil fuels, deforestation, and other environmentally destructive activities under their watch. Consumers are also increasingly looking beyond a company’s commitments, wanting to see concrete action and progress that shows net zero as more than a marketing opportunity.
At COP27, governments and organisations were expected to take ambitions raised in Glasgow at COP26 and lay out plans to enact them. To standardise this practice and level the playing field, the UN High-Level Expert Group report proposed regulation of net zero pledges and progress reporting. Signalling to companies that they can no longer proclaim their own interpretations of net zero, and must provide substance by means of a science-based transition plan.
“Solving the climate crisis requires strong political leadership. I urge all government leaders to provide non-state entities with a level playing field to transition to a just, net-zero future,” said the Secretary-General at the launch of the Group’s report.
Fortunately, regulators are already demonstrating their intent to hold companies to account. HM Treasury launched the UK Transition Plan Taskforce in the UK to develop the gold standard for private-sector climate transition plans. The draft framework emphasises a focus on concrete action and evaluation against a business’s financial plan. For example, disclosing planned capital expenditure and research & development requirements will assure stakeholders that the low-carbon transition is being committed to the business strategy.
Separately, the UK Financial Reporting Council Lab has released guidelines for companies on preparing for net zero disclosures, based on investor expectations, and observed best practices. This is guidance for companies looking for practical steps to disclose their transition plans and provides the investor’s perspective on what information is needed to support their decisions.
Many companies will welcome this challenge as an opportunity to head off accusations of greenwashing, and investors can anticipate metrics and standards with which to benchmark their investments. We expect that the pending UK Green Taxonomy will heavily lean on the task force’s guidance to define the criteria for what should be considered as green assets and activities.
However, care will need to be taken to ensure parity between regulatory measures across jurisdictions. Companies have learnt from initial attempts at climate-related reporting that a consistent and unifying disclosure framework is critical to success. To date, the array of regulatory requirements and standards has caused great confusion for businesses trying to satisfy their various stakeholders.
For this reason, the commitment of many regulators to adopt the pending International Sustainability Standards Board’s (ISSB) global baseline, and the work of the European Financial Reporting Advisory Group (EFRAG) to ensure interoperability with the new EU disclosure standards are welcome steps by the regulators to streamline requirements.
Transition plans
The largely untapped finance model (enabled by COP negotiations, that monetises avoided or reduced emissions through carbon markets) was tapped into by African nations, who announced a carbon market partnership. Under Article 6 of the Paris Agreement, countries can work together to raise money for much-needed decarbonisation and adaptation projects, through trading carbon credits on regional or international markets.
Then, at the G20, which ran alongside COP27, the Indonesia Just Energy Transition Partnership was launched to help finance the energy transition. This is important because coal contributes to three-quarters of the power sector’s CO2 emissions, and coal needs to be phased out almost six times faster than it has been over the past five years to align the power sector with well below a 1.5 °C global average temperature rise.
Defining a transition plan isn’t just a question of compliance: there’s a compelling business case for companies to align with net zero. Inaction could result in a loss of up to 30% of a company’s value over the next five years, and a significant decline in revenues, scaring investors as consumers transfer their loyalty to brands delivering on their green promises.
In contrast, companies at the forefront of the transition have a competitive advantage, as recognised by their investors, customers, and employees. For example, the number of consumers shunning non-sustainable products has increased by 50% in the last year alone. For corporate laggards, clearer guidance will be a huge support, allowing them the opportunity to catch up with organisations that already have robust plans in place.
Conclusion
The main takeaway for business from COP27 is that – while arguments rage over how it will get there – a large number of nations remain united in the need to address climate change and decarbonise the global economy.
Many businesses will be considering or will already have adopted net zero commitments in order to align themselves with the decarbonised world envisaged by this and previous COPs. They will find useful guidance in the report entitled ‘Integrity Matter‘ published during COP27 by the UN High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities.
Among other recommendations, the report suggests that net zero pledges must be made publicly and assured annually, they must cover the entire value chain of the entities emissions (that is, they must include scope 3, as well as scope 1 and 2 emissions) and they must contain stepping stone targets for every five years with concrete actions.
The report calls for governments and regulators to move from voluntary initiatives to regulated requirements for net zero which will as Antonio Guterres the UN secretary general, said in the report’s foreword: “We urgently need every business, investor, city, state and region to walk the talk on their net zero promises. We cannot afford slow movers, fake movers or any form of greenwashing.”
