COP 30 wins and losses, and proposed changes to the SFDR

For November’s Impact Insights, we are briefly introducing the main takeaways from the EU’s proposal for changes to the SFDR, and looking back at some of the key takeaways from COP 30, which took place in Belem, Brazil, on the doorstep of the Amazon.

Photograph: Alain Bonnardeaux/Unsplash

■ COP30: countries’ climate targets lead to >2.5C warming - not the 1.5C of the Paris Agreement

Under the Paris Agreement, signed in Paris in 2015, countries are required to submit a Nationally Determined Contribution (NDC), a plan to reduce greenhouse gas emissions across various sectors, which must be updated every five years with increasing ambition. In theory, these plans should be ambitious enough to limit the increase in the global average temperature to well below 2°C above pre-industrial levels. This may not seem much, but above this limit, nearly 99% of all coral reefs will be destroyed, 37% of the population will be affected by severe heat, and more.

However, the content of these plans is up to each country, and achieving their self-defined targets is not legally binding. As a result, current pledges put us on track to overshoot the 1.5 °C warming limit within the next decade, potentially leading to more than 2.5°C of warming. Even current policies are falling short of aligning with these pledges.

Going into COP30, more than 70 countries failed to submit any NDC. Developing countries emphasized the need for increased financial support as a prerequisite for developing and implementing ambitious climate plans. At the forefront of discussions was the need to support them for climate adaptation. Although previous COPs have repeatedly identified the need for developing countries to receive financing to adapt to increasingly extreme weather events and rising water levels, the current funding falls significantly short of the minimum $310 billion needed per year by 2035.

See the Nationally Determined Contributions Registry.

■ COP30: failure to develop a formal plan to transition away from fossil fuels, but this does not prevent South Korea from committing to a coal phase-out

At COP28 in Dubai in 2023, a landmark decision to 'transition away from fossil fuels' was made, and many expected COP30 to clarify how this transition would unfold, to agree on a roadmap. Yet, the final COP30 agreement does not mention the phasing out of fossil fuels, despite a scientific consensus that burning fossil fuels is the leading driver of climate change.

About 80 of 200 countries were leading a so-called pro-roadmap coalition, while pushback was expected from oil-producing countries such as Saudi Arabia and Iran. Thousands of industry lobbyists attended the conference. In addition to the opposition from petro states, the adoption of this roadmap also depended on whether climate funding would be unlocked to enable this phase-out.

Despite the lack of a formal commitment with formal binding value, COP30 has seen examples of countries stepping up to the challenge, such as South Korea. As the world's fourth-largest importer of coal, it has committed to phasing out coal by 2040 by joining the Powering Past Coal Alliance. Although South Korea had already committed in 2020 to no longer fund new coal projects abroad, this new commitment aims to put an end to existing and even recent coal projects by 2040 or earlier. This follows the steps of Germany and the UK, which have already phased out coal. Experts have linked this proactiveness to South Korea's export-oriented nature, which enables it to quickly adopt trends (in this case, decarbonization) that can impact its exports.

■ COP30: Brazil launches $125bn Tropical Forest Forever Facility fund to preserve tropical forests and communities globally

The Amazon absorbs the most considerable quantities of CO2 globally. Yet, the deforestation unrolling there to create space for cattle and crops is threatening to turn it from a net CO2 absorber to a net CO2 emitter. If it reaches that tipping point, the Amazon will turn into a desert. This is not an isolated case - in 2024, 6,730,000 hectares of tropical forest were lost, twice the area lost in 2023.

COP30 was intended as the “Indigenous People’s COP”, and Brazil’s new finance initiative recognizes the importance of safeguarding indigenous territories for climate mitigation. Its flagship “Tropical Forest Forever Facility” (TFFF) fund aims to compensate countries and communities for preserving rainforests, preventing deforestation for ranching or agricultural conversion. Around 70 developing countries with tropical forests would be eligible to receive long-term payments from the fund if they manage to keep their forests intact, with 20% of the funds allocated to local indigenous populations. Beyond preventing deforestation, another objective is to help indigenous communities adapt to severe climate change; many are displaced, and droughts or floods affect access to education facilities, well-being, food security, and lived culture.

A fifth of investments would come from governments in developed countries, and the rest would come from private investors and financial markets. However, while the fund plans to raise $125 billion, only about $7 billion has thus far been promised - check the tracker. The list of initial “sponsor” governments willing to absorb more risk includes Brazil, Indonesia, Norway, France, and Germany.

See DW for an explanatory video.

■ SFDR 2.0: shift from a disclosure regime to a product categorisation regime

The European Commission recently published a Proposal to amend the Sustainable Finance Disclosure Regulation (SFDR) that has applied to financial market participants (FMPs) since 2021. The regulation, which aimed to increase transparency around how financial products consider sustainability, was found to be used as a tool to categorize funds. With a high degree of flexibility and variation regarding how the sustainability ambitions of funds were described, investors found it difficult to compare products using the same “categorization”, such as Article 8 or Article 9.

To address these issues, the proposal introduces both simplified disclosures and a formal set of category labels for funds. The criteria for the new categories, “Sustainable” and “ESG Basics,” broadly reflect existing market practice for SFDR Article 9 and Article 8 products, although with tighter and more precise requirements for greater comparability. The proposal also introduces standardised exclusion rules, which some argue create a more precise and more consistent safeguard system.

A widely welcomed change is the introduction of a “Transition” fund category for products that invest in companies not yet sustainable, but on a credible transition path. In addition, impact investing is formally recognised for the first time within the SFDR, becoming a distinct sub-category for products that aim to achieve a defined, positive and measurable environmental or social impact.

While the details are still being discussed, the adoption of new SFDR rules is expected for 2026 or 2027, with application likely starting in 2028.