What does COP29 mean for investors?

Against a backdrop of increasing geopolitical fragmentation and the re-election of Donald Trump as president of the US, COP29 (the 29th annual UN-hosted international climate conference) seemed to go fairly under the radar this year, with less mainstream press coverage than in previous years.

But, over in Azerbaijan, the 29th climate conference took place, with over 65,000 delegates registered to attend and 80 Heads of States present. Though there was some controversy around the choice of country for presidency, and the COP process more generally, climate negotiations continued to happen – indeed, they dragged on over 24 hours past their scheduled end point. 

There are lots of climate-related topics that get discussed and debated at these conferences: from finance, to adaptation, to the just transition, biodiversity and more – but here are some of the key outcomes of COP29 that we think investors should be aware of.

The global climate outlook hasn’t changed much 

The Climate Action Tracker (an independent scientific project that tracks government climate action) released a statement at COP29, saying that ‘the combined global effort of government action on climate change has flat-lined over the last three years’. Nothing that happened at COP29 seems likely to change that. This suggests that, all else being equal, the financial risks associated with the physical impacts of climate change are broadly unchanged – indeed if anything, there is emerging evidence that they may happen sooner and be more severe than anticipated.

While the short-term financial risks associated with the physical impacts of climate change are likely to be unchanged, in the longer term the lack of progress leads to a higher risk of breaching physical tipping points. This in turn increases the risk of significant disruption and uncertainty from a changing climate and extreme weather events. Investors should continue to be aware of these macroeconomic risks and understand how they may impact their portfolios.

There are different factors that could impact what the emissions trajectory could look like for the planet going forward – the re-election of Trump as president of the US is likely to result in the reversal of some climate policies and actions, but at the same time other countries have announced more policies and action plans to address climate change. Our view is that the current position is broadly unchanged.

For the outlook on climate change to alter, there is now global consensus that we need to transition away from fossil fuels – at COP28 last year, this was a big area of focus. Many people were hoping to see announcements at COP29 of policies that would put this transition into practice. However, no decisions or policies were agreed around fossil fuel phase-down and the debate on this has been pushed back to COP30, taking place in Brazil next year. In our view, the short-term global outlook for fossil fuels hasn’t directly changed as a result of the talks.

However, in the longer term we still expect the fossil fuel sector to be significantly impacted by the transition to a net zero economy, given the international consensus.

One of the more technical areas that was discussed at COP29 was the details of how international carbon credit markets should be structured – an agreement was finally made on this after almost a decade of debate. Some people believe that carbon credits, as well as carbon taxes and permits, can play an important role in addressing climate change and reducing global emissions. Investors may be able to benefit from more widely established carbon markets.

There are likely to be opportunities for private investors

One of the big areas of discussion at COP29 was climate finance for developing countries. The Independent High-Level Expert Group on Climate Finance (IHLEG) published a report which set out just how much money could be needed to address climate change. It also provided detail on how this money needs to be allocated between different types of countries (split up into advanced economies, developing countries excluding China, and China), where this money should come from, and where this money should be spent.

A headline figure that sparked a lot of debate was the amount of money needed from developed countries to go to developing countries (excluding China). The headline figure the report gave for this was $1trn a year by 2030, rising to $1.3trn by 2035.

At COP29, an agreement was reached for countries to provide $300bn a year by 2035.

This is a large figure in itself – indeed, it is 3 times the current level of commitment of $100bn a year from developed countries for developing countries. At COP29, it was agreed that this $300bn would mostly come from public finance, but that would include private finance that is mobilised by public finance.

In practice though, this $300bn is still far from what is required.

Additional capital will likely still need to be mobilised to meet the target levels of investment set out by the IHLEG – at COP29 this was acknowledged, but only with a vague agreement that this additional capital will need to come from ‘other sources’, which will likely include private investors. Provided this agreement translates into a supportive policy environment, we expect this to pose many investment opportunities for private investors – especially in the clean energy transition, where the most significant amount of capital is needed, but also for other areas such as natural capital and the just transition. In addition, opportunities may come in the form of blended finance structures within the $300bn target.

It is worth noting that these financing costs pale in comparison to the potential economic damage we are likely to see if climate change is not addressed. Based on analysis by the Climate Policy Initiative, social and economic losses from climate inaction are projected to reach at least £1,266 trillion between 2025 and 2100.

The UK appears to be aligned with progressing the climate transition

The UK government has positioned itself as continuing to hold a strong stance of climate action. It was one of three countries to publish its updated ‘Nationally Determined Contributions’ at COP29, where it has committed to reducing emissions by at least 81% compared to 1990 levels (excluding emissions from international aviation and shipping), in line with advice from the independent Climate Change Committee. Although this is in line with existing commitments in place regarding the UK’s carbon budgets, the reiteration of this goal and the language used positions the UK as continuing to take climate action seriously.

It is important that this commitment to reduce emissions by 81% is followed by clear policies and clarity for investors that make this reduction possible. The Government is expected to publish its Action Plan for Clean Power 2030 in the coming weeks which will set out plans to eliminate carbon emissions from generating electricity within 5 years. 

The language being used by the UK government is one that positions the UK as wanting to be a leader on climate transition, with a particular focus on the clean energy transition, and of understanding that the costs of inaction are likely to far outweigh the costs of action.

Secretary of State for Energy Security and Net Zero, Ed Milliband’s Statement that accompanied the UK’s NDC announcement stated that

‘The clean energy transition is also the economic opportunity of the 21st century and will support the creation of hundreds of thousands of good jobs across the UK, protect our economy from future price shocks, while delivering a range of social and health benefits.’

To maintain this direction and greater policy certainty, it is important for asset owners to show their support for climate transition to the UK government. One way you can do this by endorsing our climate policy asks, which we are using to drive policy change. You can find the details here, and how to sign up.