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Freshfields Sustainability

| 7 minutes read

COP28: the transition moment?

UN Climate Conferences (COPs) grab world attention, with COP28 being no exception. In this blog, we set out its most significant outcomes and key takeaways for companies. In later blogs, we’ll look at how these are landing in different world regions. But first, what happened?

The final statement (“global stocktake”) calls on countries to “take actions towards achieving, at a global scale, a tripling of renewable energy capacity and doubling [of] energy efficiency improvements by 2030.” Importantly, it also directs countries to “accelerate efforts towards the phase-down of unabated coal power, phasing out inefficient fossil fuel subsidies, and other measures that drive the transition away from fossil fuels in energy systems, in a just, orderly and equitable manner, with developed countries continuing to take the lead.” Countries are now asked to come forward with “ambitious, economy-wide emission reduction targets, covering all greenhouse gases, sectors and categories and aligned with the 1.5°C limit in their next round of climate action plans (known as nationally determined contributions) by 2025.”

In COP28 president Dr Al Jaber’s words, “the world needed to find a new way. By following our North Star, we have found that path.” If he is correct, we have started a journey towards a ‘new normal’ for business, building on the consensus achieved in Dubai. The legal implications for companies of a sure-footed transition are significant, from disclosure to litigation, antitrust to M&A. 

Here we examine the key takeaways for business across three themes: energy transition, climate finance and nature.

1. Energy transition 

Article 28 of the stocktake recommended eight actions for energy transition: (a) a tripling of renewable energy capacity and doubling of annual energy efficiency improvements (see Global Renewables and Energy Efficiency Pledge) (b) accelerated efforts to phase-down unabated coal power; (c) acceleration towards net zero emission energy systems, utilising zero- and low-carbon fuels; (d) transitioning away from fossil fuels in energy systems in a just, orderly and equitable manner; (e) accelerating zero- and low-emission technologies, including renewables, nuclear, abatement and removal technologies like carbon capture and utilisation and storage (CCUS), and low-carbon hydrogen production; (f) reducing non-carbon-dioxide emissions globally, including methane; (g) decarbonising transport; and (h) phasing out fossil fuel subsidies as soon as possible.

These eight recommendations go further than previous COP agreements by highlighting action that is needed in this ‘critical decade’. However, the pledges are not legally binding on the 170 signatories of the Paris Agreement; the text only “calls on parties to contribute”. There is also concern that the drafting contains limitations and exclusions which may impact delivery. 

Although the pledges are for consideration by governments, companies should be mindful they may be translated into policy in future. Companies can contribute as follows:

  • Engage with new regulation. If net zero is the aim, ambitious legislation and regulation will be required to decarbonise energy systems. It’s essential that the private sector inputs to the policy development process (e.g., through consultations) so that governments understand what changes are workable for different sectors. On the risk side, regulatory horizon scanning is key to ensure efficient transition planning, lowering the possibility of non-compliance, litigation or investigations (for example greenwashing claims).
  • Embed sustainability in corporate strategy. Energy transition is bigger than power generation, spanning at least the carbon-intensive sectors and arguably the whole economy. Sectors with the highest footprints have the biggest opportunities to decarbonise through innovation and strategic transactions. All companies can use frameworks like TCFD to assess their climate risks and opportunities and tune their strategies and governance arrangements accordingly. Financial institutions have an opportunity to innovate in green or sustainability-linked financial instruments and investment strategies.
  • Target net zero. COP28 pledged “deep, rapid and sustained reductions in greenhouse gases” and a doubling of energy efficiency improvements by 2030. This cannot be achieved without the private sector’s commitment to decarbonise its value chains and bring forward solutions to climate challenges. Corporate transition plans – transparently communicated and externally verified – detailing how companies will follow a downward emissions path will be key. 

COP28 has reaffirmed the need for significant investment in innovation, people and infrastructure to drive the energy transition necessary to achieve the Paris ambition.

2. Financing climate action

While COP28 called on countries to transition away from fossil fuels and triple renewable energy capacity by 2030, the question of how these targets will be funded was left largely unresolved. 

According to the Independent High-Level Expert Group on Climate Finance, global climate investment has increased to around 1% of global GDP, but this is significantly below the 7.5% of GDP that experts believe is needed to reach net zero. It’s tempting to ask, how will the “UAE Consensus” be funded? Look closely, though, and the COP28 outcomes show a clear direction of travel that the business and investor community will monitor with interest.

First, countries will need to factor the UAE Consensus into their own climate targets (nationally determined contributions or “NDCs”). These NDCs are due to be “revisited and strengthened” next year (2024) which, in most cases, will require significant new developments in renewables, grid infrastructure and battery storage. For example, tripling renewables by 2030 would require a doubling of the rate of renewables investment to approximately US$1.2 trillion per year, according to Bloomberg. Most of that money will need to come from the private sector and countries will need to implement policies that ensure investments in renewables are attractive for investors (such as higher guaranteed offtake prices, subsidies or tax incentives).

Secondly, the flow of private capital into ‘green’ investments needs to be accelerated. At COP28, the United Arab Emirates announced that it would put US$30 billion into a new climate finance fund called Alterra, aiming to steer institutional capital towards climate investment and attract US$250 billion by 2030. This will be a for-profit fund that will partly invest in companies that are at the beginning of their transition journey. Regulatory and market efforts in the sustainable finance space so far have largely benefitted companies that are already well ahead in their transition journey, but incentives are needed to allow in-transition companies to tap the sustainable investor base too. 

And thirdly, momentum is building to scale up “blended finance”, where public capital is used as a catalyst to attract private investment. At COP28, the world’s major multilateral development banks (“MDBs”) announced that they were finally stepping up their efforts to attract more private capital for climate. And the UN’s own Green Climate Fund (“GCF”) told a COP28 panel how it is working with the private sector to create a green guarantee company to provide guarantees for climate bonds in developing countries. Through the use of credit enhancements provided by MDBs or the GCF, such as payment guarantees, developing countries can access private capital at lower cost, while investors’ downside risks are mitigated. Much more of these innovative solutions will be needed to attract private capital at scale, but there seems to be at least a consensus that blended finance will need to play an important part in helping bridge the “finance gap”. 

3. The next wave: nature

Scientists have known for decades that climate can’t be fixed without nature, and vice versa (forests, soils, wetlands and grasslands are gigantic carbon ‘sinks’). For the first time, this interdependency was spotlighted at COP. Nature had its own ‘day’, also featuring in a declaration from 159 countries committing them to “revisit or orient policies and public support” among other things to reduce ecosystem degradation. According to WEF, nature is the basis of US$44tn of economic value – over half the world’s GDP. 

Climate and nature come together in ‘nature-based’ carbon markets intended to compensate emissions from polluters. Properly designed, such projects channel investment into climate action, protection of biodiversity, and livelihoods of local communities. Over the last year, the voluntary carbon markets have been plagued by reports of phantom credits, land grabs and greenwashing (even ‘green colonialism’), with investigations exposing exaggerated impact claims as well as potential human rights abuses. Clearly, this presents reputational, if not regulatory and litigation risks for companies, particularly when linked to countries with poor human rights records or without laws governing the sale and taxation of carbon credits, leading to investment disputes.

Whilst a ‘reset’ of the voluntary carbon markets is overdue, the basic premise of directing capital into nature-based projects ($2bn in 2021) remains sound (the ‘polluter pays principle’). At COP28, John Kerry felt it could become “the largest marketplace the world will have ever known”, while the World Bank’s Ajay Banga said there is no other way for scalable resources to reach developing countries. Despite the promise, agreement was not reached on how to operationalise the two relevant articles of the Paris Agreement (6.2 and 6.4), leaving carbon markets in a state of legal uncertainty with the risk of double counting credits. 

Negotiations on Article 6.4, establishing a global carbon credits market for countries, companies, and individuals, failed over proposed standards on emissions reductions and removals, where the EU expressed concerns about environmental integrity. Similarly, with Article 6.2, enabling trading in emissions reductions and removals between countries to meet their NDCs, negotiators couldn’t agree on authorisation processes, including revocation of credits and confidentiality clauses. The EU, UK and some African and South American countries reportedly pushed for stricter standards, whilst the US and other countries including Saudi Arabia wanted greater flexibility. Despite this, some countries have started inking deals to meet their goals, while the emergence of independent standards bodies (VCMI and ICVCM) further boost the integrity of the markets.

For companies observing these debates, two things are clear: first, offsetting strategies complement decarbonisation rather than replace it; second, carbon credits must be of high quality (meeting global voluntary standards/safeguards) to maintain confidence in the market. With this in mind, investments in nature-based solutions can deliver for nature and climate while directing finance to where it is most needed.


climate change, energy and natural resources, energy transition, environment, financial institutions, green energy, sustainable finance