Things you need to know about COP29 as a business owner

This year the 29th Conference of the Parties (COP29) to the United Nations Framework Convention on Climate Change (UNFCCC) is taking place in Baku, Azerbaijan. This annual gathering will again unite world leaders and various stakeholders to discuss the progress and further actions addressing climate change.

You don’t have to be a climate activist or a government policymaker to closely follow the developments of COP negotiations. The outcomes of these negotiations can have a direct impact on your business, especially if you're involved in commodity manufacturing or trading. 

What key lessons can we draw from previous COP sessions, and what should you expect from COP29 to inform your business strategy?

Each COP plays a crucial role in advancing global climate action and building on the progress of previous conferences. However, not all COPs have resulted in landmark breakthroughs like COP3 in Kyoto, Japan (1997), which led to the Kyoto Protocol, or COP21 in Paris (2015), where the Paris Agreement was adopted. Some COPs are considered less successful than others — for example, COP27 in Sharm-el-Sheikh may be considered a failure by some sources, overshadowed by Russia’s war against Ukraine and prioritisation of energy security over energy transition from fossil fuels, and other unfortunate issues.

COP is about Pledges.

Countries need to commit to taking serious actions to cut emissions. These include pledges to accelerate the world's transition to renewable energy sources and implement new sector-specific emission reduction regulations. 

The central issue has always been the role of fossil fuels, the combustion of which is a major source of greenhouse gas emissions. In the past, countries have set broad reduction targets through Nationally Determined Contributions (NDCs). For example, at COP26, the Glasgow Climate Pact committed nations to reduce carbon dioxide emissions by 45% by 2030 compared to 2010 levels and to scale back fossil fuel subsidies.

However, fossil fuels themselves remained “They-Who-Must-Not-Be-Named.” It’s no surprise that fossil fuels are a critical source of income for many countries, or make up a significant share of their energy portfolios. Fossil fuel lobbying and prioritisation of energy security remains a reason for criticism during COPs.

Let’s remember the last COP28 event in Dubai that was characterised as dramatic when a hard-fought final agreement to "transition away" from coal, oil and gas was reached. It was definitely a milestone — for the first time the conference officially acknowledged fossil fuels as the primary cause of climate change. However, the wording was seen by many as a compromise, avoiding stronger language like "phase out fossil fuels," which would have signalled a firmer commitment.

During COP29 you can expect further pressure from countries impacted by climate change (especially from the Alliance of Small Island States that felt uninvolved during COP28) to strengthen the language and fix the loopholes. 

However, the tougher you go with restricting fossil fuels, the harder it is to achieve. Any strong commitments will push countries to introduce stricter policies on their economies that may go against their national interests, which is why attempts to soften the language where possible are still very much expected.

COP is about Finance. 

Somebody needs to pay for mitigation and adaptation for climate change. Also, massive investments are needed for energy transitions. Climate finance can be viewed in terms of 3 buckets:

1. Big projects, big returns (e.g. direct investments into wind and solar farms)
2. Borrowing instruments (e.g. government bonds)
3. Funds for extreme climate impacts (e.g. grants from rich countries)

Arguably, the most critical outcome of COP29 will be the agreement on the New Collective Quantified Goal (NCQG), a financial target aimed at supporting developing countries in their climate actions beyond 2025. This goal builds on the $100 billion per year commitment made by developed countries in 2009. 

A successor climate finance goal will replace the current $100 billion per year target, and estimates suggest that trillions of dollars may be required annually to meet the climate finance needs of developing countries by 2030. 

Another example is the Loss and Damage Fund that was finally operationalized at COP28, with over $726 million committed to assist vulnerable countries facing severe climate impacts. The creation of the fund was initially blocked during COP26 in Glasgow but gained significant momentum during COP27, culminating in the formal establishment at COP28. Though, it is still only a small portion of the estimated funding needed.

One thing is clear about the climate finance commitments made so far: they are vastly insufficient. COP29 is expected to bring an increase in allocated funds, but the key question remains: how much will countries realistically commit? 

Meeting these commitments will require developed nations to secure substantial financial resources to support vulnerable countries grappling with climate impacts. To raise these funds, governments are likely to rely on a mix of financial instruments and market mechanisms — measures that could prove politically costly, such as tougher carbon pricing, subsidy reductions, and higher taxes.

What to expect?

It’s hard to predict the outcomes of the current COP. Will we achieve a breakthrough, or not? Much will depend on the geopolitical situation, bargaining positions, efficiency of negotiations, leadership, and role of presidency. 

Considering the lessons learnt during previous sessions, we could reasonably expect more work on refining the language of the commitments, setting more ambitious targets, and most importantly — allocating finances. 

Understanding the new pledges and financial commitments made at COP29 will be crucial for anticipating significant shifts in commodity markets. 

There are a few things you need to be aware of:

• Regulatory pressure

Pay close attention to the new pledges, refined commitments, and additional countries joining existing agreements during COP29. Historically, such developments at COPs have driven the creation of new national laws and regulations. Consider the European Green Deal and CSRD reporting as examples. Are you prepared for the next wave of GHG disclosure requirements? Do you actively collaborate with your suppliers and buyers to assess their exposure to emerging regulations? Heightened climate-related disclosure requirements will likely demand additional resources, whether to build internal expertise or to hire external consultants.

• Declining market share

Have you evaluated your business activities for climate-related risks? Do you have a long-term strategy for managing your portfolio? Stricter language on fossil fuels and significant investments in renewable energy could accelerate the decline in demand for traditional fossil fuels. On the other hand, increased investments in low-emission technologies such as LNG, CCUS, and blue hydrogen might suggest an extended timeline for the fossil fuel era.

• Stranded assets

Assets in carbon-intensive industries could rapidly lose value as regulations tighten and market preferences shift. These changes can occur swiftly, leaving limited time to divest. It's worth considering the divestment of certain assets or, at the very least, evaluating the carbon intensity of your assets and products to prepare for potential valuation impacts.

• Cost of capital

Businesses with carbon-intensive operations may face reduced access to capital and higher borrowing costs. Financing for coal-related activities is already becoming increasingly scarce. It’s possible major banks and investment firms will adopt new policies that could further complicate financing for carbon-intensive industries.

• Increase of operational cost

Fossil fuel businesses may face increasing operational costs due to new climate policies, such as carbon pricing. Consider the example of the EU Carbon Border Adjustment Mechanism (CBAM). Higher carbon prices, increased taxes, and reduced subsidies can significantly reduce business margins.

• Be ready for price volatility

As we navigate uncharted territory, where models can only predict a range of scenarios, be prepared for significant price volatility in commodities, energy, and carbon markets.

Want to stay ahead of the market changes and implications for manufacturers and commodity traders bound to arise following COP29? 

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Highlights from the previous COP events: