The close of COP 27 (the UN Climate Change Conference) seems coloured by frustration at an apparent lack of positive outcomes. Yet looking past the negative headlines reveals some progress and reasons to be optimistic. However, genuine net-positive progress will require greater collaborative action from stakeholders.
High profile ideological strategic setbacks distracted from many notable positive implementation achievements
Many may struggle to see a net benefit from COP 27, but the scale of progress in areas like renewable energy highlights the significant scope to accelerate progress if we reduce headwinds
We expect a greater focus on biodiversity and “just transition” in 2023.
The concept of a “just transition” in tackling climate change was high on the agenda at COP 27 leading to an agreement for a “loss and damage fund”1 to be established for vulnerable countries. This was a major highlight of the conference, however the details of the agreement have yet to be fully defined, but it certainly marked a positive step and formal recognition of the need to align the financial burden with those countries which have both the financial means and the footprint. Another welcome announcement was Indonesia joining the Just Energy Transition Partnership2, which coincided with South Africa reporting its first-year progress update having adopted the approach at last year’s conference.
While we welcome these positive outcomes, it is important to note that the loss and damage fund is a function of the future trajectory of climate mitigation and adaptation, where some elements appear to have stalled. This is where gross versus net progress kicks in.
Additional renewable energy capacity reached record levels last year and there remains very strong momentum towards renewables as we approach 2023. Yet, this has been offset by the resurgence of fossil fuel demand and infrastructure expansions resulting from the current energy crisis. Any progress to return to a sustained reduction in fossil fuel use will be particularly beneficial, given the scaling up of renewables.
With regards to climate ﬁnance, collectively we need to dig deeper. Greater momentum is required to follow on from advances such as the diﬀerent sector-speciﬁc alliances under the Glasgow Financial Alliance for Net Zero3. Furthermore, launch of the International Sustainability Standards Board’s climate-related disclosure standards at COP 27 – with a focus on implementation next year – complements initiatives like mandatory disclosures in the UK in line with the Task Force on Climate-Related Financial Disclosures. As investors grapple with Paris-aligned investing, the UK Transition Plan Taskforce4 has developed the Climate Transition Plan concept extending beyond commitments and decarbonisation to a fully aligned approach. Despite these advances, key takeaways from the conference are an absence of “interoperable, decision-useful and implementable”5 global standards and globally coordinated policies.
The total amount of global climate finance (public and private, domestic and international) would need to increase more than eight-fold to reach the near-term target of USD 5.2 trillion per year by 20306 .
Recognition of the critical role that biodiversity preservation plays in climate mitigation is slowly becoming better understood. We expect biodiversity to be a major theme for financial institutions in 2023, and hope that the three thematic days at COP 277 will be a springboard for the UN COP 15 Biodiversity Conference in Montreal. COP 27 saw a formal acknowledgement of the climate and biodiversity crises being interlinked, with particular focus on how agri-food systems can be part of the solution to both the climate crisis and safeguarding food security. We have high expectations for this conference where governments will convene to agree on a Global Biodiversity Framework for the coming decade.
In summary, there is much progress being achieved on very specific climate action tracks, but there still appears to be a handbrake on a necessary acceleration in progressing climate goals. The handbrake is primarily the increasing politicisation of key topics touching national interests including fossil fuels and the funding of climate transition. The G20 Summit, held in parallel with COP 27, sought to reinforce declarations on achieving the 1.5°C target; the phasing out of coal; and the acceleration of climate finance, yet divisions were evident. Our hope is that the aggregated scale of individual transition achievements this year can help create a credible, scalable and economic case for each of these targets.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; ; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).
Disinflation trends vs depletion of excess savings
Despite a rollercoaster few years in terms of global macroeconomic performance – and ongoing geopolitical uncertainty – one area which has proved particularly resilient is consumer spending.
Until the macroeconomic outlook becomes clearer, the favourable supply-demand dynamic in fixed income is enabling investors to diversify portfolios and prepare for all eventualities in the next rate-cutting cycle – be it fast or slow.