Road to COP 29: Transition today ─ a progress update 

For Mercer, "transition today"^[1] means going beyond simple emission reduction targets. Mercer’s systems thinking approach to investing for a net-zero future incorporates physical risks and climate adaptation, natural capital, circular economy and the notion of fair carbon budgets, which we believe will support the mobilization of finance to developing countries and drive real-world transition.

Historically, investors have prioritized a mitigation approach by avoiding certain investments to help achieve carbon reduction, but better assessment of transition investing calls for multiple investment approaches, including active ownership, investment allocation and integrating transition into investment decision making. In our paper, we highlight the paradox of portfolios achieving carbon reduction against a backdrop of rising global carbon emissions.

There are a growing range of options for investors looking to invest in companies and opportunities aligned with a broader definition of climate transition. Aggregate inflows to climate funds over the more recent past are lower compared to pre-2023, have lower returns through a more challenging economic environment, dampening investor interest.

Scientists warn that the planet is reaching tipping points for climate and biodiversity that will have massive import for everyone and everything. The window for avoiding these tipping points through appropriate policy reforms and investments is still open but closing fast.  (G20 International Expert Group, 2023)

Finance is a central theme at the 29th United Nations Framework Convention on Climate Change (UNFCCC) Conference of Parties (COP29) in Baku^[2] against a backdrop of limited progress towards climate transition. 

• The Intergovernmental Panel on Climate Change has warned that in the scenarios assessed, “limiting warming to around 1.5°C (2.7°F) requires global greenhouse gas emissions to peak before 2025 at the latest and be reduced by 43% by 2030.” ^[3]
• The world is not on track to keep global temperature increases below 1.5°C.
• Advances towards climate transition have been inequitable, with emerging markets left behind developed market peers in terms of adaptation and transition finance.

At Baku, negotiators and stakeholders will be focused on ramping up financial support of the Sustainable Development Goals (SDGs) in line with the COP29 aim.

Stakeholders will also be working towards setting a new climate finance target to support global climate action funding; the 2020 target of $100 billion set in 2009 fell short. A major question for the 198 country signatories to the Paris Agreement remains how quickly they will need to mobilize finance to sustain developing countries, particularly under the New Collective Quantified Goal (NCQG).^[4]

The global Climate Finance Action Fund mechanism will be a centrepiece of COP29’s action-oriented agenda, ultimately seeking to turn ambition into implementation. The continued development of the Loss & Damage Fund will seek to identify the priority gaps and strategies for addressing them, to ensure that the world’s most climate-vulnerable populations can be protected through new and innovative sources of finance.

In this context, there are few investor incentives to ensure that the policy and investment ambitions of COP29 evolve from ambition to action, enabling investors to accept higher risk and higher carbon intensity assets in both developing and emerging economies – without being penalized – thereby bridging the funding gaps between developed and developing countries. Meeting the COP29 objectives will require private sector investors to play a key role.

Mercer works with institutional investors globally to support climate objective setting and strategy development in pursuit of a transition pathway. Through our collaboration, investors can align with the latest standards in climate integration in order to seek to mitigate climate risk and aim to maximize climate opportunities.

To incorporate broader transition objectives – including physical risks and climate adaptation, natural capital, expansion of the circular economy and the notion of fair carbon budgets – we work with investors to implement additional strategies above and beyond simple emissions reduction targets.

Investors assess current positioning and their net-zero pathway through analysis via Mercer’s Analytics for Climate Transition (ACT) tool, which uses bottom-up portfolio analytics to evaluate how well (or poorly) aligned investment holdings are with climate transition, by analyzing exposure to “grey” climate risks, “green” transition opportunities and “in-between” assets in investment allocations. Such analysis guides decision-making at asset class, sector and underlying company holdings over time.