Episode 26: Reflections from COP29

What was anticipated going into Baku

Mark Lee

Today we are going to examine early outcomes from COP29 UN climate talks, which have been taking place in Baku, Azerbaijan. Going into today's conversation, I should note that we're recording this podcast a couple days before Baku is complete. We are going to focus on some of the ways that the private sector showed up at COP29 and what the event really means for business in terms of moving forward with climate strategy and implementation. To do all of this, I'm with three colleagues from ERM. All of them were attendees in Baku.

Sabine and James, can you give us a sense of what was anticipated going into Baku? Where did you see we are in the process of these unfolding year-over-year negotiations?

Sabine Hoefnagel

I have to say going into Baku, expectations were relatively low. I think that's because at governmental level, it's quite hard to make a lot of progress within a year, but also because there were some really difficult topics on the agenda. The first one being around finance and particularly about how developed countries are going to support developing countries to be able to deal with the energy transition. Negotiations are obviously still ongoing, they're pretty tough. Expectations are that $2.4 trillion per year is going to be needed by 2030 for developing countries, which is four times where we are now. And the questions really are around, how do we address that shortfall and particularly who's going to pay.

The second difficult topic is on what are called the Nationally Determined Contributions (NDCs). Those are plans in which countries set out how they're going to reduce their carbon emissions. The next time that countries need to submit their NDCs is February 2025. There was a lot of expectation on whether countries are actually going to be ratcheting up their plans, so we have any chance of staying within reach of the 1.5 degree temperature rise. Now, a few countries did just that. The UK, for example, came out with quite an ambitious plan with commitments of reduction of 81% from 1990 levels by 2035. Ed Miliband, who is the UK chief negotiator says that would put the UK on track for achieving a per capita 1.5 aligned scenario, which is science backed. The UK is also aiming to be the first developed country with a fully decarbonized power system by 2030. A second country that came out already during this COP was Brazil, who's going to have the COP presidency next year. They have committed to cut emissions between 59% and 67% from 2005 levels by 2035. Brazil's NDC also includes language around moving away from fossil fuels, which was aligned with the decision that came out of COP last year at COP28, although they have not provided explicit targets and very detailed measures or timelines.

Mark Lee

James, I wonder if you had the same sense going in of low or lower expectations than some other times? What are some of your observations about how finance and other themes might have been playing out?

James Stacey

I think it's absolutely fair that expectations were relatively low compared to some of the previous COPs. One of my big takeaways was just being reminded that the world is getting on with this. And whilst there is a very important political negotiation that plays out through the COP structure every year, technologies continue to come down the cost curve, they continue to be deployed at greater scale. Private industry, the private sector continues to recognize that this transition is real. And organizations really need to understand what it means to their future and to their strategy, and they need to be integrating the transition into where they're looking to take their organization.

So almost irrespective of the political discussion, the market is doing its thing and it's moving. We're seeing really quite significant change in some industrial sectors as a result of agreements made in previous COPs, that have enabled the market conditions to be created for organizations to then march on in this space. I came away feeling that the world is getting on with this, I question whether we're getting on with it quick enough and whether we're going far enough within the time that's allowed. That's a really important question. But the world is getting on with this, and anybody who isn't getting on with it is probably being left behind.

Progress in hard-to-abate sectors and carbon markets

Mark Lee

Some of where there seem to maybe be breakthroughs are in some of the hard-to-abate sectors. You were talking about the degree to which industry and the private sector are doing their part. I wonder what you saw in terms of shipping and steel or any of those other parts of the economy that we know need to transition?

James Stacey

I think there is progress amongst the hard-to-abate sectors. Obviously in hard-to-abate we're talking about shipping, steel, cement, chemicals, petrochemicals etc. They do account for a significant amount of industrial emissions, I think it's around 70% of all industry-related emissions. We have seen some breakthroughs, in shipping there was an industry collective commitment to drive forward emission reductions across that industry. We're seeing first of kind carbon capture and storage and hydrogen projects being deployed within these industries, often in less developed parts of the world, so there's breakthroughs happening there. There's still an awful lot to do in those industries, and they're a long way away from being in a place where we are going to see wholesale emission reduction strategies being deployed across the industry. I think some positive indicators but a lot more work to do.

Mark Lee

Linden, there's something called Article 6 that I'd love you to explain and it's about carbon markets, nature-based solutions, how we develop them, how we build confidence in them and how we deploy them. It's been a challenging topic in the COP process and in practice. So, I would love to hear where we are in terms of Article 6 developments, implementation and what kind of progress we're making in that carbon market space.

Linden Edgell

The carbon markets concept has been around for decades. And it's hard because it's about the fact that some people are making reductions in their emissions or removals, and some people are still emitting because of their economies and so on. The thought is that if we could set up some sort of trading mechanism, we can trade emissions and that finance can then help further solutions. In the Paris Agreement in 2015, Article 6 said let's write down some rules about how countries can trade these emissions. The rules have taken up until now to be agreed, and they're still not quite agreed in the lots of layers of detail that exist. There are concerns about things like double counting, about making sure there’s integrity in the actual emissions reduction, if someone has removed carbon. There's been lots of lawyers and accountants and all sorts of people arguing about this for years. There was optimism that at COP29, we might finally get the rules of the game agreed, so that this can actually start to function and real money start to flow through the system.

Good news on day one of COP this year, that landmark piece of the whole component was agreed-ish in COP language. That set a really good tone. It's one of the good news stories out of the early days of COP. On the ground in Baku there were lots of conversations around seeing the carbon markets as a way of unlocking finance for countries that are rich in certain assets. Think rainforests, think about how to improve agricultural production to reduce methane, think of all the things that countries can do to reduce emissions. And if that can all get agreed, then money can flow to those countries to continue to reduce their emissions and to build the carbon sinks that we need, to keep drawing down that carbon dioxide. There's a couple of things at play as to why we need these carbon markets to work.

So we have a supply side and we have a demand side, and again people want to invest money. They want to know that the rules are there, they want to have some certainty around that and they want to know they’re buying something with integrity. So that's what the focus has really been on. We have what we call the compliance markets. This is regulated by various governments who set up schemes within their countries, generally to help their hard-to-abate sectors. So, paying those hard-to-abate sectors to reduce or enforcing penalties if they don't reduce their emissions. Then we have the voluntary markets, which is where companies for example make commitments, like ERM has itself, to reduce emissions. On a voluntary basis we buy some credits to compensate for the fact that we haven't been able to reduce all of our emissions at this point in time, because we still rely on parts of the system, airlines, shipping and other sorts of things to do that. So good progress, there's still lots of detail to be worked out, but the signals are there. There's a potential to unlock a lot of money and we're talking billions of dollars here, to the places that need it to continue to reduce and remove carbon emissions.

Mark Lee

Sabine, I want to flashback to COP28 briefly and get a temperature check on one aspect of what happened last year. At COP28 in Dubai, it was the first time that a commitment to transition away from fossil fuels was put in writing by the parties. Some of the analysis going into COP29 was checking the state of that commitment and progress against it. What is your assessment and how did that play in conversations in Azerbaijan?

Sabine Hoefnagel

As COP29 is happening in Baku, we also have the G20 meeting at the same time in Brazil. The G20 just came out with a statement, I think yesterday, where they supported the overall consensus that was agreed at COP28, but they failed to call out the specific need to transition away from fossil fuels. So, they supported the consensus that includes that statement, but they didn't call it out specifically. Now the expectations are that that's going to make the negotiations in Baku more difficult and countries are in different places on this. There are some that are arguing that it should be taken out, but there are also some that are arguing that actually we should now be pushing to set out much more detailed implementation plans around this commitment. So we'll have to see where this goes over the next few days.

The role of private finance and transition plans

Mark Lee

James, I want to come back to you for a different angle on the theme this year, which has been finance and how we finance the transition. Much of it has been through the lens of how developed nation governments support developing nations in facing their climate challenges and dealing with the impacts. But there is a tremendous amount of conversation going about the role of private finance in doing this, partly because it's needed to make up the shortfall that we see in what governments are bringing to the table. Can you give us a reflection on that part of what was happening in Baku.

James Stacey

In terms of the transfers of money from a high income to low income, through the private finance component, it relies upon a lot of private sector money flowing. If we look very specifically at the conversation inside the private sector and the relationship between corporates, their investors and their lenders, really the central conversation was around transition plans, transition plans being the language that's been put to how an organization articulates how its commercial strategy fully integrates the transition to a low carbon economy, how that strategy delivers a financially successful outcome for that organization and therefore would be attractive to an investor or a lender to be deploying capital into that entity. Now that conversation was very rich across the private sector within the COP.

I think there were a couple of things that really came out loud and clear from it. First of all, the transition plan really needs to be substantiated through detailed financial quantification, a detailed return on investment that's presented and articulated in a way that will resonate with an investor, an investor that has a fiduciary duty and responsibility in terms of how it conducts its investment into that entity. Then secondly, how important it is that that transition plan is communicated in a way that will be understandable and believable by the investor or the lender. So, two really big, very important things coming out there. One, detailed financial quantification that substantiates why this is a financially rational journey for that organization to be going on. Then really careful and thoughtful communication that will enable you to take your key stakeholders on that journey with you. We heard quite a few examples from organizations where they've got lessons learnt and where the quantification maybe hadn't been quite what it needed to be or the communication had gone wrong. And as a result, an investor or lender was not fully aligned with the strategic intent that that corporate was expressing.

Mark Lee

Sabine, did you see some examples of best practice climate transition plans coming forward?

Sabine Hoefnagel

I think transition planning really was one of the most heard buzz phrases on the streets of Baku. I think that is to some extent because it's becoming a legal requirement in some countries. But as James has explained, it also just makes good business sense for a company to understand how climate action can provide resilience, create value or mitigate business risks.

Companies are in very different stages with this. Some companies are already on to their next version, so they have done one and they are onto version two. Many haven't even started or are just starting. Because it's early days, it’s very hard to compare them. There's also very little consensus on what good looks like. In addition, these plans are going to look very different depending on what sector you operate in and also depending on what geography you operate in. So even though investors would love to have something that they can easily compare, that might never become so easy.

There’s also a tension between legal disclosures and telling a story that really provides the reality of where companies are at. In a way, these transition plans are a really great tool to explain how a company is going to get from A to B and what the dependencies are that they might have to rely on. At the same time, the legal departments who might see this as a legal disclosure, will want to be as limited as possible with what they say. That's not necessarily very helpful in terms of the conversations and the quality of the dialogue that's going on between investors and companies. So, it’ll be interesting to see how that plays out.

The last thing I mentioned is should we integrate this with nature transition planning or not? For some companies that makes total sense, especially those that have large amounts of natural assets in their supply chain or if they're reliant on nature. Maybe less so for some other industries. Interesting conversations and definitely a topic that we'll see and hear a lot more about.

Nature and adaptation plans

Mark Lee

Sabine, to what degree was the nature conversation present in Baku and was there that push for these things to be addressed simultaneously.

Sabine Hoefnagel

Maybe this is because of the sessions that I was in or the conversations that I picked up, but I felt that the topic of nature as well as the topic of just transition, were actually not as apparent as I have seen in previous COPs. I think for nature maybe that is because we just had COP16 in Cali, Colombia and because of these other very difficult topics that we've talked about already that were on the agenda, there's only so much you can address.

For just transition, I think what's really hard there, is that it means something different for many different stakeholders. If you think about it from a governmental level, it really is about the kind of transfer of wealth between developed and developing countries as well as the right for developing countries to develop. If you look at it from a business perspective, it can be around local employment, impact of communities, access to energy. Again, it's going to look very different depending on what geography you're operating in.

Having said all that, in our view, you absolutely need to integrate these pieces. You cannot achieve a realistic transition without addressing each of these three points. We had one participant in one of the events that we organized who said “we're not doing climate on Monday, nature on Tuesday and just transition on Wednesday”. Which, I think sums it up very nicely. Hopes are high that next year in Brazil that agenda will look different. What I heard from a number of Brazilians who were there is that they are absolutely looking to lead with those two aspects very much at the forefront, which was less of the case this year.

Mark Lee

Sabine one of the things on my mind is the adaptation / mitigation debate or dilemma. Particularly from the private sector side, what did you hear about adaptation plans in Baku?

Sabine Hoefnagel

Quite a lot because I would say even if there were no more additional carbon emissions right now, climate change is happening and also the science doesn't change. There's a lot of companies talking about this and really thinking about how do they address physical climate risk, in terms of their assets, their supply chains, etc. Companies really planning for that because it's just a pure business resilience issue. If you're looking at the events that are happening very recently in Spain, Brazil, Pakistan, many places in the world and global businesses will have operations and supply chains in all those places. So yes, absolutely a topic.

What I thought was interesting is I talked to one person from a company who said it's not just about their own assets and their own operations. It's also about what does physical climate risk mean for the communities around their operations. Because in many countries, there might be really extreme climate change impacts and governments might not necessarily be ready and able to address that. The expectations are there for companies to step in. So, what are the responsibilities from business vis-à-vis governments, and it's sort of part of the just transition conversation, how is that going to be addressed? So yes, lots of discussion around it and very high on the agenda for most businesses who I spoke to.

Progress on renewables

Mark Lee

Linden, renewable energy is another topic that was a big focus at COP28 in Dubai. We had major commitments announced about the ambition for renewables growth and increases in efficiency by 2030. We must do these things if we're going to deliver on Paris ambitions. Where are we at in terms of progress?

Linden Edgell

ERM is a member of the Global Renewables Alliance, and we are very focused on this tripling renewables and doubling energy efficiency by 2030. We need to move away from fossil fuels and we need to meet the increasing demand for energy around the world, which is growing exponentially. Plus we have a vast number of the world's population who still don't have access to safe, reliable, affordable energy today. When we started the COP session, we heard that in terms of solar, there are now two terawatts of solar installed around the world. That's a massive number. It took I think 65 years to do the first terawatt and about 10 years to do the second terawatt. Something of that order of magnitude. So it gives you a sense of the scale and the reduction in the cost of solar. We know that in many parts of the world, renewables are the cheapest form of energy. We are hearing terms like cost of living and inflationary factors in many economies around the world. It's kind of becoming a no brainer for many economies to jump on this.

In the last year, there were about 430 gigawatts of renewables installed around the world. That's a lot, but it's not enough. So, the real push was around how we accelerate both the generation of power and then get that power to where it needs to be. This speaks to transmission lines, the grids, smart technology, AI systems and so on to move the energy source to where it needs to be, at the right moment of the day and time, meeting industry, household needs and everything else. It also speaks to storage because sometimes the sun doesn't shine or the wind doesn't blow where it needs to. The grid needs to be able to accommodate for that and so we were featured on a panel around the storage and grids question.

Another big topic that came with it, and we've actually published a piece on this, is around both the environmental and the social dimensions of renewables. That's where a lot of the tensions are arising in communities as more of these facilities are being built - solar, wind farms or even offshore wind and the other systems that go with that. Communities are feeling the pressure and I think we need to make sure that those communities are in the conversations, environmental integrity is in and around these developments, while at the same time we accelerate that.

Good news out of the G20 in the last day or so, there was an affirmation about the tripling renewables pledge, so that's good to see coming from the G20. Today it was announced that there is a Global Clean Power Alliance being formed. So this is the UK, Australia, France, Germany, the African Union, talking about mobilizing the finance. The finance is a really critical factor, so good to see that those signals are coming from the G20. Good to see that countries, companies and economies are seeing that renewables are absolutely the way to go. We need to work together right across the system to deploy at speed and scale.

Looking ahead towards COP30 in Brazil 

Mark Lee

I think on that note, we'll make our final pivot and give each of you a quick chance to speak to any hopes you have for the end of the negotiations, and even maybe for COP30 in Brazil.

Sabine Hoefnagel

That governments will continue and recognize even more the huge opportunities that are part of this transition that we're going through. This is not just a story of doom and gloom. There is an enormous amount of opportunity that will create economic growth, will improve people's lives and will actually keep human life possible on this planet. I hope that recognition will be there and they will shine through in the negotiations. And then very practically, I hope we do get an agreement on Article 6 that Linden has been talking about because that would be a major outcome.

Linden Edgell

‘Show me the money’ as the phrase goes. We absolutely need to see serious intent about the money. There's all sorts of political negotiations going on, the amount of money pledged has to be serious enough that it is signaling that people recognize climate change is here now. Impacts are now, not promises into 2050, and so that cash needs to flow. It needs to flow in a way that isn't increasing debt for many of the developing parts of the world, which is currently what is happening. Public money needs to take out the risk, private money needs to follow. So we absolutely need to see that and done in good faith. I think there's all sorts of agendas at play, that's international negotiations, but there has to be good faith at play.

I think very soon after, we need to see that ambition in these country plans. We need to see plans that make sense, that join the dots between what's happening in climate impacts today, the financial flows that will go with that, and what it means for real lives. All these dots need to be joined that makes sense for that country. Looking to Brazil, as we've talked about, I think Brazil will really try to bring us to a point where it says, OK, there's some money, the ambition is there, how do we join the climate agenda, the nature agenda and what it means for people together. 2024 is going to be the hottest year on record. There has been more than $100 billion of insurance payouts for natural disasters this year. That is not going to change. The science is not going to change, and so we absolutely need the action at pace at scale. There's a lot of noise in the system, but we have to just keep going forward.

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