COP26: What does it mean for business?
So, what was actually achieved at COP26?Despite desires to the contrary, it was highly unlikely, in our opinion, that COP26 was going to deliver on all the hopes and wishes of climate scientists and activists. Politics, economic realities and money (the latter generating too much in terms of profits and not enough in funding to shift corporate or government behaviour) were always going to create roadblocks. Moreover, the global COVID-19 pandemic had, inevitably, adjusted leaders’ priorities (and affected funding). One of the key goals of COP26 was to get commitments that would keep the world on track to limiting global warming to 1.5°C overall and to secure global net-zero emissions by 2050. Our view was the best that could be hoped for was a pragmatic agreement that pushed the world in the right direction, ideally ensuring that a maximum rise of 1.5°C above pre-industrial levels remained achievable. The net zero pledges made in Glasgow suggest that, if delivered, global warming could currently be limited to 1.8°C, according to the International Energy Agency (IEA). We summarise our view of the outcomes from COP26 below. As always, it remains unclear how/when/if some of these commitments made will be delivered but it is also evident that the private sector will have an increasing role to play.
What were the implications for business coming from COP26?At the end of October, the Treasury announced that the UK was to become the first G20 country to mandate Taskforce for Climate related Financial Disclosures (TCFD) – aligned requirements for Britain’s largest companies and financial institutions to report on climate-related risks and opportunities. Speaking at COP26, Chancellor Rishi Sunak stated that the UK was leading the world in becoming the ‘first-ever net zero aligned global financial centre’. By 2023 firms and financial institutions that meet the criteria for TCFD disclosures will be obligated to lay out detailed public plans for how to reach their targets, and these will have to be in accordance with the country’s 2050 net-zero target. All of this follows the Chancellor’s commitment back in November 2020 to make TCFD aligned disclosures fully mandatory across the economy by 2025, going beyond the ‘comply or explain’ approach (source: government press release 29 October 2021). Highlighting the Chancellor’s 2020 comment in its press release would suggest to us that the government intends for this requirement to become universal for all British companies. However, while these plans would need to be published, the government has said that (for now) the UK was not making ‘firm-level net-zero commitments mandatory’, and that its aim is ‘to increase transparency and accountability’. The standards for the plans will be set by an expert panel to protect against greenwashing. Once again, the devil is in the detail. A further key update for UK and international companies was the announcement just before COP26 began that the IFRS Foundation is to develop international standard-setting sustainability disclosures for companies. This will involve the creation of a new International Sustainability Standards Board (ISSB) to develop a ‘comprehensive global baseline of high-quality sustainability disclosure standards’ in order to meet investors’ and other capital market participants’ information needs around sustainability-related risks and opportunities and is a recognition of a growing demand for streamlining and formalising corporate sustainability disclosures. Another interesting development around COP26 was the announcement by the London Stock Exchange on 5 November of its Voluntary Carbon Markets solution, with the aim of accelerating the availability of financing for projects supporting the low-carbon transition (the Voluntary Carbon Markets | London Stock Exchange). Its stated goal is to address two major challenges: access to capital at scale for the development of new climate projects worldwide; and primary market access to a long-term supply of high-quality carbon credits for corporates and investors. The latter is intended to enable companies and investors to augment their net zero transition strategies by financing additional projects to offset ‘unavoidable carbon emissions during their path to net zero’. The concern has always been that some companies will use carbon credits as a ‘get out of jail’ clause, absolving them of actively reducing their own emissions. The criteria to making this work effectively include a fair and effective pricing of carbon and how well the market is policed in terms of who is allowed to buy credits. The point is that investments in carbon credits must be complementing, not offsetting, the reduction in emissions.
Implications for UK issuersWhile reporting standards requirements inevitably start with the biggest players first, our view is that every business in the UK needs to put itself on notice right now that change is coming, and fast. As ever, ensuring the net zero plans are not just spin and are put successfully into action will rely on accountability and how vigorously standards will be enforced, and may, in time, come down to binding legislation. We suspect that this is going to be a case of ‘watch this space.’ Those companies involved in producing fossil fuels will have already been facing and adapting to sustainability demands, while those companies involved in clean tech should be benefiting from a shift in focus that will only continue. However, the transition towards net zero will be demanding on all businesses, in our view and, regardless of size, ultimately, we expect that every company will have to provide corporate sustainability disclosures, show how environmental social and governance (ESG) is incorporated into all major decision making and how it is embedded within the board and company culture. This is the concept of double materiality, which was first formally recognised by the European Commission in the context of sustainability reporting (seen in the EU’s Sustainable Finance Disclosure Regulation or SFDR), in that risks and opportunities can be significant to a business both financially and non-financially. It means that companies should be reporting simultaneously on all issues that are financially material and on those that do not affect its value but are material to society and to the environment (both in impact and in objective). Moreover, we expect that the pace of policy change by regulators will pick up a gear post COP26 and advise all our clients to start thinking seriously about how they will respond and what actions they need to be taking now. We would suggest that these should include:
- Recognising that regulatory disclosures are changing fast and start putting in place now key frameworks and policies to ensure an ability to provide accurate and material disclosure on both financial and non-financial issues (double materiality)
- Understanding and articulating your own story to your shareholders and potential investors: what ESG issues are material to your business and why (and don’t just focus on net-zero, look across the whole ESG agenda)
- Creating a sensible plan on how you have already/intend to deliver on net zero, with clear targets by which you can be judged
- Grasping the chance to open up to new business opportunities while recognising the downside risk and the need for fundamental changes to business models and incentives
- Understanding that an accusation of greenwashing will become a seriously negative reputational risk for any company, so transparency is key
Ignore ESG/sustainability at your perilCapital inflows to ESG/sustainable funds are growing rapidly year-on-year. The value of sustainable fund assets worldwide more than doubled to US$1.9trn year-on-year at Q121, according to Morningstar data published in July 2021 and, according to FT Adviser, £1 in every £12 of overall ESG fund inflows in July were invested in those funds with a UK focus. Moreover, the latest estimates by Bloomberg Intelligence suggest that ESG assets are likely to exceed US$53trn by 2025, equivalent to roughly one-third of global assets under management. The point here is that UK companies need to be tapping into this investor base – and that requires commitment to the ESG/sustainability story – and let’s face it, why wouldn’t you want to do your bit to save the planet?
Subscribe to receive ESG related content
The ‘good, the bad and the ugly’ news on global warming
So, what was actually achieved at COP26?Ahead of COP26, our view was that the best that could be hoped for was that a pragmatic agreement pushed the world in the right direction, ideally ensuring that a maximum rise of 1.5°C above pre-industrial levels was achievable. In our view it was always unlikely that the latter would be confirmed since the gap between countries’ stated plans submitted before COP26 and the cuts scientists calculate are required was too wide, but we could always hope. Originally, it looked like the UK COP26 president, Alok Sharma, had achieved a major success in getting an agreement to phase out coal power, but, sadly, this was watered down at the 11th hour to ‘phase down’. UN climate envoy John Kerry was subsequently quoted in The Guardian (Ratchets, phase-downs and a fragile agreement: how Cop26 played out | Cop26 | The Guardian) as saying: ‘Did I appreciate we had to adjust one thing tonight in a very unusual way? No. But if we hadn’t done that, we wouldn’t have a deal. I’ll take phase it down and take the fight into next year.’ While this was very disappointing, there was a positive in that COP26 got an agreement to return in 2022 to revise national plans on emission targets to 2030 (nationally determined contributions or NDCs). Of course, the big question will be how much will have changed in 12 months in terms of getting firm commitments by each country to deliver on their plans (and how these targets will be achieved). If a year is a long time in politics, it is even more so in the race to reduce global warming. As always, it remains unclear how/when/if some of the commitments made at COP26 will be delivered. A key concern being raised when analysing the commitments made at COP26 is quite how credible some plans really are: how will the commitments be delivered and will there be accountability mechanisms put in place. It is therefore easy to be negative on what has not been achieved, especially given CAT’s worrying forecast regarding global warming. So, what were the positives? Key ‘wins’
- Deforestation – a pledge to end and reverse deforestation by 2030 made by 110 countries, representing 85% of the global forests.
- Methane – a recognition for the first time of the need to cut methane gas by 30% by 2030.
- China-US Climate Glasgow Declaration – an unexpected and welcome deal to tackle climate change and cut emissions.
- Coal – a watered down target to ‘phase down’ coal power but it is the first time coal has ever been mentioned in a COP agreement.
- Carbon Trading rules – the introduction of rules on carbon trading to bring greater clarity, standardisation and a more transparent framework.
- Breakthrough on emissions – 30 countries agreed to work together to increase the use of zero emissions vehicles and plans for ‘green shipping corridors’. 14 states responsible for more than 40% of global aviation emissions committed to a new decarbonisation target. Also, c 450 banks, pension funds and other financial institutions controlling c US$130trn agreed to support ‘clean’ technology such as renewable energy.
- An increase in climate finance pledges for developing countries, a call for full delivery of the $100bn pa goal through 2025 and an urge to countries to increase provisions to $40bn pa.
- 35 countries joined the Adaptation Action Coalition, and over 2,000 businesses, investors, regions, cities and other non-state actors joined the Race to Resilience. Over 40 countries and organisations joined the Risk-Informed Early Action Partnership, committing to make one billion people safer from disaster by 2025.
- An agreement to revisit NDCs next year.
The US-China Climate PactGiven Chinese President Xi Jinping’s refusal to attend COP26, and the strained relations between the United States and China, it was an unexpected but welcome surprise on 10 November when the two nations jointly announced a bilateral pact to boost each other’s efforts to cut emissions and to work together to achieve the 1.5°C temperature goal. According to Xie Zhenhua, China’s head of delegation, the agreement calls for ‘concrete and pragmatic’ regulations in decarbonisation (US-China deal on emissions welcomed by global figures and climate experts | Cop26 | The Guardian), reducing methane emissions and fighting deforestation, including reviving a previous working group between the two countries. As tends to be the case, the declaration is somewhat lacking in details and hard commitments as to how this might be achieved, but it is, nonetheless, an important step forward by the world’s two largest economies and greenhouse gas emitters, especially after President Trump pulled America out of the 2014 US-China pact. The losses
- Funding – the pledge for the developed world to provide US$100bn pa by 2020 to developing nations has not been met. The aim now is to reach this figure by 2023 at the latest. Many argue this is not enough money.
- The detail around pledges for funding and for delivering on several of the targets is unclear.
- The language on reducing coal power usage was ultimately watered down by India and China from the initial agreement to ‘phase out’. This was a major disappointment given the earlier agreement.
- Many of the poorer countries feel that they have been let down (again).
- The key target of ensuring global warming will be reduced to 1.5°C has not been met. At best, the world is looking at an increase of 1.8°C, and the more likely outcome at the moment is closer to +2.4°C.