Sharm el Sheikh is a pretty dire place. As a somewhat dusty resort town at the southern tip of the Sinai peninsula usually frequented by tourists, it was eerily fitting to host COP27. It was good that the parties met in the literal middle between Africa and the Middle East. Both regions have a considerable stake in mitigating climate change: one by shifting the entire local fossil economy, and the other one by holding a lot of untapped mitigation potential. The reality of climate change is different in the glassy climate tech offices in Europe and the US compared with being on the ground in Africa and the Middle East. That said, progress was little to disappointing, and here is why:

• The world is really, really behind. We are expected to reach +11% emissions at the end of the decade vs -43%, which is required to meet current global targets. I could stop the recap here and say that we have failed and continue to fail. While it is great to label this past conference the “implementation COP”, the implementation is clearly not only delayed but also not ambitious enough. Few countries have updated their nationally determined contributions (NDCs) after COP26 and the current numbers are still pointing in the entirely wrong direction. Come in the private sector: Corporations and other private sector players flocked to COP to be an active part of the solution (clearly, their action will be needed complementarily). It remains to be seen how much of the gap between global targets and national contributions can be bridged by private-sector players. Only if corporate action remains well accounted for and is focused on what is additional to current NDCs can the private sector have a meaningful contribution. And what is policy-additional is going to keep changing as NDCs are being reworked, which can lead to quite some uncertainty on the project developer and financing side (see more on the topic of contribution claims below). Overall, a difficult situation, still.
• The cost of inaction is huge: The cost of not doing enough has been re-estimated to staggering amounts. While this is nice to know, it doesn’t help with the fact that these costs are virtual and unallocated. As a corporation, it’s almost impossible to know what share of the theoretical and systemic cost of climate change will actually hit your P&L. And that makes it hard to tackle or put resources against it. Translating climate change into a language that the financial markets understand might be one piece of the puzzle. As the Head of Sustainability from Blackrock said: “We look at climate change as risk.” And if financial markets are good at anything, it’s translating risk into tangible cost (of capital). This is well in line with the SEC’s proposed chapter on climate risk disclosure as well as many banks’ commitments (often very much spurred by regulation) to incentivize climate investment with better cost of capital. The ability to understand climate risk is key to unlocking a risk-based mechanism for climate finance. The outstanding key component is reliable data on climate impact for corporate climate action. Companies will need to step up in measuring and managing what part of their action is contributing to an NDC and is hence accounted for, what part is additional to any NDC and is hence a contribution beyond current plans, what part they can claim for net zero pledges, etc. For voluntary carbon, this means: Only when corporations can report on the climate impact of their portfolios based on scientifically-backed metrics they will be able to translate climate action into improved financials. The freshly launched ISO Net Zero Standard already calls for some of this, requiring corporates to track and report on project types, registries, scope, permanence (or in their words “durability”), and other details of negative emissions.
• The money needs to land somewhere fruitful (and there aren’t many safe bets where that is the case): Hopefully, the risk perspective helps more capital land in climate-friendly activities. On a country level, Article 6 aims to establish a direct market between countries to trade emission reductions (mainly Article 6.2), also from VCM project-like activities (Article 6.4). This will potentially unlock trillions of dollars in climate finance, said Germany’s Director for Climate, Energy, and Environment, Dr. Heike Henn. However, many negative-emission-producing countries cannot deliver high-quality carbon projects. The danger is that after 20 years of living in a sub-par private voluntary carbon market, we start from scratch by building an alternative “A6.4er” market with the same challenges (poor project quality, lengthy and manual MRV processes, questionable additionality, low permanence) - only now with governmental entities in the driver’s seat. Governmental program managers from Uganda and Senegal shared that while activities are starting in their countries, it is hard to pass requirements from the used frameworks and that local capacities are insufficient to build successful projects aligned with international market needs. Looking at the implementation speed of any supranational framework, there seems to be a real risk that increasing but unclear implementation of Article 6.4 halts investment into already running voluntary climate action as buyers might prefer “official” Article 6 credits (we outlined briefly how Article 6 is increasingly leading to risk and uncertainty for established project developers here). In the worst case, these new government-guided activities will not be able to deliver high-quality outcomes because of the need to spend the next years building capacity. In sum, this would lead to shifting investment from at least running voluntary carbon activities to new government-steered carbon projects that only starting to build capacity. Let’s hope we can keep both running and parallel (not to be boring but - it’s “and” not “either/or”).
• That said, at least we know what contribution claims are (and it’s not great): The new wording in Article 6 reinforced the concept of contribution claims, essentially rendering Corresponding Adjustments unnecessary for private buyers. This means there will essentially be a secondary market for A6.4ER outcomes that will not require the adjustment of the host country NDC. There was a lot of speculation about the uncertainty that would come from the need for corresponding adjustments (or lack thereof) to corporate buyers. But now we know. This calls for an even clearer understanding of buyers about what they can claim based on the specific credits in their portfolio. In the second order, the voluntary market will need to stay as a tool to finance beyond-NDC activity for corporates. As said in the beginning, this reinforces the notion for private sector players to focus on really policy-additional credits, i.e., not the ones that are already committed within a usually insufficient NDC. The reason goes back to my first point: If, in theory, companies financed literally all activities to make Parties reach their NDCs, we would still be 50pp off target as it stands today. Hence, those who can pay for more and better mitigation than countries could commit on during COP should do so. See also the fitting, yet not COP-related, piece by Robert Höglund and others on bridging the (private sector) ambition gap.
• Climate change mitigation is about inclusion and diversity: Speaking of private sector projects, it was a recurring theme that the emerging carbon economy is reproducing bias that is already there (i.e. a lot of the engineering workforce needed for carbon project development is expected to be predominantly male as female engineering talent is still lacking). Climate change mitigation will require one of the most fundamental shifts that modern societies have seen so far. We will need to unlock all human potential (especially marginalized groups) to get it done at scale while using the opportunity to right some more systemic wrongs that got us here. Looking into women's empowerment, improved education and other themes will be key to delivering results. To quote former Irish President Mary Robinson at a dinner I was lucky enough to attend: “Climate change is a man-made problem that requires feminist solutions”. Or, you know, just generally more diverse solutions. Let’s make sure chances of success are higher with more diverse thinkers and doers in the room.
• Because prevention fails, minds are shifting to adaptation and resilience: With target achievements continuing to fall into a rather abstract future, the shift to adaptation and resilience seems urgent. Delivering one of the more prominent outcomes of COP27, the yearly USD 100bn commitment to loss and damage mitigation for the most vulnerable nations is a good and necessary result. It was great to see adaptation, water, health, and other topics appear on the agenda this year as climate change is already very much here and very much affecting all of these areas. Early thought on damage and loss mitigation may help the most vulnerable countries buy into climate action more quickly. That said, shifting to loss and damages is also symptomatic of a complete lack of action on climate change mitigation over the past years. The fact that we are still steering to an above-2-degrees-celsius future will eventually draw a lot of capital into adaptation and resilience that would earlier have been available for prevention. 

If anything, we need the world community to continue working on solutions outside of negotiation rooms. While aligning to international targets and securing bullet-proof accounting remain important contributions from the UNFCCC, the parties have not delivered on implementation this year. Good thing there is a whole community out there to do their part.