Now a month since UN Secretary-General António Guterres opened COP27 with a reminder that we are on ‘a highway to climate hell with our foot on the accelerator,’ the outcomes provoke mixed emotions.

Whilst desperately needed progress has been made on providing support for the most vulnerable for ‘loss and damage’ due to climate change, next to no progress was achieved on addressing the causes of the climate emergency – our addiction to fossil fuels.

Many are asking how this could be, just one year after COP26, where the first language on phasing down coal was included in the Glasgow Climate Pact and the financial sector seemed to pledge more than 130 trillion USD to support the transition to net zero?

Realistically, in a time of geopolitical crises on several fronts, COP27 was always going to be tricky. In the face of the Russian invasion of Ukraine, a Covid and commodities-related recession and energy insecurity, climate change has slipped down the agenda, despite its effects being felt in earnest this year with the tail end of a pandemic, floods in Pakistan and a heatwave in Europe.

However, while we pin all our hopes on COP each year, we forget where change actually happens: at home, with the policies of each country. While the focus on non-state actors, including the financial sector, is important, has it distracted from what continues to be missing: rapid, widespread and ambitious domestic climate action?

Government must do more: short-term climate action plans (or NDCs) are still not adding up to enough action and domestic targets sit comfortably beyond the next election cycle, in the distant future of 2030 or, mainly, 2050.

From today, governments could signal near-term increases in carbon pricing, implement regulation to reduce emissions and increase resiliency across sectors, and stop granting licences to drill, making it prohibitive to invest in oil and gas. But they haven’t.

This lack of a clear policy direction makes it possible for other actors – including the financial sector – to stick to the same short termism. In the near term, there’s still way too much money to be made in fossil fuels, and unchecked growth in aviation, unstainable agriculture and land use and other climate-damaging industries.

Given the context, it is unsurprising that many investment and finance sector actors with increasingly ambitious long-term climate goals have no qualms at continuing to make fortunes on oil and gas in the short term.

Since the fanfare launch of Glasgow Financial Alliance for Net Zero (GFANZ) at COP26, many C-suite occupiers have started to realize that, while easy to communicate on, implementing net zero commitments is not easy. Often, short-term returns may be reduced given the R&D and capital investment required upfront from investee companies.

On top of this, the politicisation of the financial sector’s commitment to climate and other Environment and Social Governance issues has made things even more complicated for financial institutions operating in North America, and the threat of legal action will be an effective deterrent for many.

Nevertheless, it isn’t all doom and gloom: COP27 saw a shift towards enacting the deeper, systems-level changes we need. It saw a renewed commitment to the 1.5°C target, action on adaptation and ‘loss and damage’, as well as global initiatives to mobilize finance at scale to transform entire countries and sectors.

While in terms of real economy emissions reductions since COP26, GFANZ may have little to show, it has produced a common framework for Net-Zero Transition Plans for financial institutions. And announcements from the International Sustainability Standards Board demonstrate that standardizing disclosure practice is underway.

But the key problem facing the financial sector remains: how do we move from words to action and reduce the growing risk of ‘net zero greenwashing’ in practice?

A report of the United Nations High-Level Expert Group on Net-Zero Emissions Commitments of Non-State Entities reiterated what is seen as the implicit problems with net zero: targets and pledges must be robust and near-term; use of carbon credits must be extremely limited; change requires robust transformation strategies and capital investment from today; and commitments without transparency and accountability remain only words on paper.

Unfortunately, the UN has no authority to do more than make these recommendations and, let’s be clear: today, investors are looking for where their next profits will come from. If domestic economic policy hasn’t set a clear direction that the future lies in a resilient, low-carbon economy, then why would they invest in it? And the longer the delay, the more painful and expensive the transition is going to get.

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The old adage of ‘think global, act local’ is true – change must start at home. At a small scale, we each can, as clients of the financial system, proactively ensure that our resources are managed according to our ethical preferences.

Finance professionals can seek to understand how climate change can be a threat-multiplier, and how to identify futureproof investment opportunities.

In my home in Edinburgh, the Scottish Government’s National Strategy for Economic Transformation must lead to a rapid and permanent shift away from exploiting North Sea oil and gas and scale up a renewables-based economy.

At the UK level, political instability in the ruling party must not lead to further watering down of national climate policies, such as what we saw this week: placating the backbenchers with a new coal mine in Cumbria after lifting the informal ban on onshore wind.

Globally, all developed countries must increase international climate finance and return overseas development assistance support to levels that match our historic climate responsibilities.

These are the kinds of signals that can convince investors that the economy of tomorrow will be a sustainable one. We, as citizens, clients, and financial actors, all have a role to play.

However, if government policy continues to fail to set a clear, robust and ambitious direction towards a low-carbon, resilient future, then even the most well-intentioned commitments will remain only that: good intentions.

Dr Ian Cochran teaches on the Executive Education programme Climate Change Risk in Finance for financial professionals, supported by Edinburgh Futures Institute, enrolling now.

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