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COP27 lays foundations for long-term investment opportunities in Africa

29 November 2022 Philippa Owen, ESG Lead at GraySwan

After several days of focused negotiations in Sharm el-Sheikh, this year’s COP27 closed with a sense of comfort that the needs of emerging and developing markets have not been overlooked.

The agreement to create and implement a loss and damage fund to rescue and rebuild physical and social infrastructure comes years after questions were first raised about the non-delivery of promised finance to facilitate the developing world’s transition to a greener economy and the move away from fossil fuels.

Yet, it is seen as a first crucial step that places the onus on the countries most responsible for the effects of climate change to contribute to those countries worst affected (and the least responsible).

From a local perspective, South Africa’s request for additional funding, at more lenient repayment terms, was welcomed. The aim of this funding is to fast track the replacement of the country’s fossil fuel infrastructure with renewable solutions and address the crippling energy crisis.

As with other developing countries, the debt burden in South Africa has become a critical sticking point in terms of finance. It therefore follows that accelerated finance, at more attractive terms, will unlock new long-term investment opportunities in Africa.

These opportunities will not only be limited to clean energy solutions and a just transition, but also within projects around the Adaptation Goals, including sustainable agriculture and food security, ecosystems, biodiversity, water etc., while addressing poverty, inequality, and cultural heritage.

One step forward, two steps back?

While the creation of a loss and damage fund was agreed to at COP27, the means of delivery are yet to be established. Mechanisms for finance were not provided, and there were no significant changes to fossil fuel reduction targets.

And although COP27 was due to set a collective quantified goal and action plan for climate finance to replace the failed US$100 billion annual target which has not been met, this too failed to materialise.
Furthermore, there was much criticism of the ongoing greenwashing around ‘net zero’ goals, where companies are preferring to offset carbon emissions as opposed to actually cutting them. Analysts expressed major concerns at what is deemed a misguided focus on rhetoric and measuring mechanisms rather than physical action to reduce emissions.

Climate change a megatrend

There is no doubt that sustainability is a core requirement for long term growth, at both a micro as well as macro level. At GraySwan, we view climate change as an emerging megatrend, that will increasingly impact daily life, touching multiple sectors. From rising global demand for electricity, and the accompanying demand for renewable energy, to a more eco-conscious way of living, as consumers seek to reduce their overall impact by the choices they make when buying products and services. Access to clean water is another growing sector, as is the development of more sustainable transport.

Despite the inherent challenges, being able to understand and navigate the changing markets will present many long-term investment opportunities. It is our view, therefore, that investor research should identify those sectors and industries that will be most affected by climate change, as where there is innovation, mitigation and adaption, there will be sustainability and significant investment opportunity in the long term.

Where sectors, industries and companies are not sustainable, or are not adopting sustainability enhancements, there remains significant risk and therefore these are investments to be avoided.

As a signatory to the United Nations PRI, GraySwan holds values of responsible investing at its core, while developing investment strategies through an ESG lens, that are best positioned to benefit from sustainability in the long term and provide protection from downside associated with climate change.

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