Here are 4 key takeaways from COP27 and its various impacts on SMEs.
Overview
The 2022 United Nations Climate Change Conference, also known as COP27, was held from 6 - 18 November 2022 in Sharm El Sheikh, Egypt. Global progression on meeting targets set at COP26 did not seem as promising as expected. With major challenges such as loss and damage and fossil fuel phase out being discussed, what policies and agreements were promised at COP27? How does this impact SMEs?
Key Takeaways from COP27
Loss and Damage
Please have been made by developing countries for decades to gain financial support from developed countries to deal with the unadaptable impacts of climate change like sea-level rise. Fortunately, COP27 was the first climate summit where significant financial commitments were made by developed countries. Commitments amounted to more than £364 billion (US$300 billion) from countries including the EU, Canada, and New Zealand.
However, this is sadly not enough to fully support developing countries. A study has shown that the total residual damages for MENA, SSA, SASIA, China, EASIA and LACA range from £240-700 billion (US$290-580 billion) (Figure 1). More support from developed countries is necessary during the coming years to combat this global challenge and protect the environment.
Fossil fuel phase-out
A consensus could not be reached on how to reinforce the commitments made at the COP26 pledge to "phase down" coal. Therefore, fossil fuel phase-out was a key theme at COP27. However, fossil fuel lobbyists at the summit which included major fossil fuel companies and some Western and African governments have emphasized the crucial role fossil fuels will play, especially as we are experiencing a severe global energy crisis. Research shows that oil and gas corporations are preparing to boost their production capacity, which would release more than 24 years' worth of US emissions (115 billion tons of CO2).
There were some positive advancements made such as the multi-country agreements for renewables made at COP 27 outnumbering agreements for fossil fuels. Support from the government for carbon capture and storage has increased. 45Q[1] in the US, tax incentives, and funding support in countries including Europe, Canada, Australia and Malaysia have seen major progression.
Although record-breaking investments in the energy transition were observed last year, £1.73 trillion (US$2.1 trillion) will be needed each year from 2022 to 2025 and double that amount every year from 2030 on to maintain the Net Zero route, according to EY. Will the economy realize the potential of renewables and how it could be a key solution to the energy crisis AND climate change?
First introduced in 2008, Section 45Q of the Unites States Internal Revenue Code provides a tax credit for CO2 storage. The policy is intended to incentivize deployment of carbon capture, utilisation and storage (CCUS), and a variety of project types are eligible. (IEA)
Climate finance
A major challenge to climate change has been climate financing. Finance is necessary for all countries, industries, and sectors, in order to achieve respective targets, set to collectively accomplish net zero by 2050. One of the positive outcomes was the European Investment Fund’s (EIF), the largest venture capital and private equity funder in Europe, commitment to investments totaling £213 million (€247 million). This funding supports the European Green Deal, which outlines a strategy for making Europe the first continent to be climate neutral by 2050, as well as REPowerEU, which aims to decrease reliance on Russian fossil fuels at a rapid speed and accelerate green transition.
As promised at COP26 in Glasgow, adaptation finance must increase by 2025 to account for 40% of all climate finance. However, COP27 did not expand on the Glasgow agreement on adaptation funds by laying out a step-by-step plan for how to get there (or at least appoint a body to do so). All nations, but especially the most vulnerable developing nations, will experience an increasing number of preventable losses and damages if adaptation continues to get insufficient funding and three years pass without that doubling being achieved.
Greenwashing
The UN secretary-general formed a task force to suggest requirements that businesses should fulfill to prove themselves against greenwashing.
The suggestions state that the targets should encompass the short, medium, and long term and should result in an overall decrease in all emissions, including those from the supply chain. Progress should be documented in a manner that facilitates comparison with competitors, and detailed transition plans should indicate how capital spending will be coordinated with the targets.
The suggestions also list actions corporations should not do, such as deforestation and claiming to be net zero while still increasing the supply of fossil fuels. Offsets are strongly discouraged unless a company is already on track to reach its goals or offers high-quality credits. Furthermore, corporate lobbying cannot directly or indirectly harm governmental climate regulations through participation in trade organizations.
What does this mean for SMEs?
Fossil fuel phase-out means cost savings for SMEs
A study shows that implementing policies that shifts towards renewable energy resources for the G7 countries will reduce total energy expense per capita (electricity, natural gas, and gasoline combined) by an average of £111 (US$135) in 2025 (Figure 2). This study also illustrates the long term benefits. By 2030 the total energy bill per capita will be, on average, 25%, £401($488), lower relative to the business-as-usual scenario and by 2035 the average resident of a G7 country will be spending almost 45%, £678 ($825), less each year on their energy.
Small firms usually pay rates equivalent to those of individual families, thus these regulations will likely result in significant financial savings for SMEs too. COP27’s efforts to phase-out fossil fuels and convert to renewables will reduce costs for SMEs and will help them survive through the current energy crisis.
Increased climate finance means more SME innovation
SMEs are frequently among the pioneers creating the climate solutions required to fight climate change. With increased climate finance being a key theme discussed at COP27, there have been many investments made specifically to support SMEs. A good example is EIF’s investment. Out of the £213 million (€247 million) they invested, £24 million (€28 million) was invested to the Growth Blue Find, which mainly invests in Portuguese SMEs that promote sustainable economic activities relating to the oceans. Furthermore, £26 million (€30 million) was invested to PureTerra Ventures which is a water technology early growth fund investing in EU SMEs developing ground-breaking technologies to fundamentally transform the usage, conservation, and treatment of water.
No more toleration of greenwash means more corporates will transform their supply chain
Increasing awareness of greenwashing and intolerance clearly stated at COP27 is forcing large corporates around the world to publicly report its climate action and strategies which will fulfill their commitments to net zero and respective sustainability targets. This includes transforming their supply chain into a sustainable one. Countless SMEs are a part of large corporates’ supply chain, therefore, will gain support from the large corporates’ capital and capacity to implement sustainable strategies. Since the number one reason most SMEs lacking sustainable initiatives is the lack the resources to strategize and implement climate solutions, this will be a great support for SMEs around the world.
[1] First introduced in 2008, Section 45Q of the Unites States Internal Revenue Code provides a tax credit for CO2 storage. The policy is intended to incentivize deployment of carbon capture, utilisation and storage (CCUS), and a variety of project types are eligible. (IEA)