What happened at COP26 and why it’s not just government commitments that matter

There are mixed feelings coming out of the COP26. On the one hand, there were multiple new agreements and declarations that progress in the fight against climate change. On the other, they do not yet go far enough: we’re only just keeping the 1.5°C scenario alive. Pre-COP 26, we were on course for 2.7°C warming and the announcements during the conference put us somewhere between 1.8 °C and 2.4°C, depending on which study and organisation you believe. Of course, the devil is in the detail and the implementation. There is an enormous amount of work to be done to convert these commitments into action and to work out how these commitments will be policed.

A summary of two intensive weeks of discussion, debate and announcements:

The positives

  • Agreement to phase down use of coal. While the wording was watered down from ‘phase out’, it is still significant as it is the first time coal has been mentioned in a COP text
  • Methane emission reduction agreement. Agree to cut emissions by 30% by 2030 vs. 2020
  • Carbon trading rules. The so-called Article 6 rules emerged to establish a framework for the trading of carbon credits.
  • Deforestation pledge. To halt and reverse deforestation by 2030. This could make a difference as the main countries involved (Brazil, Russia, Canada, and Indonesia) signed up to the agreement, as did major investors commit to eliminate investment linked to such activities.
  • Growing investor commitments. Banks, investors and insurers representing USD 130trn in assets commit to decarbonise their businesses by mid-century, this includes their investments
  • Scrutiny on emissions reporting. New rules were agreed that allow for greater scrutiny, meaning climate targets should finally be comparable
  • China-US. With tensions easing, the two countries put out a joint statement expressing alarm that efforts to reduce emissions are falling short of what is required and stressed the vital importance of closing the gap as soon as possible.

The frustrations

  • No new pledges for financing poorer country climate pledges by rich countries
  • Concerns the carbon trading agreement has weaknesses, including the inclusion of old carbon credits which could dilute the market
  • Language on reducing coal was watered down when coal urgently needs to be phased out
  • While it was recognised that countries vulnerable to climate catastrophies will need help, the details and the amounts were pushed back for further discussion at COP27
  • National pledges currently put world on track for 1.8°C to 2.4°C, still far from the 1.5°C target.

What is important to remember is that the COP conferences are hard-nosed talks not about which country is the most altruistic and ‘green’, but about who will pay for what we now realise is an unsustainable economic system. Developed countries what to hold onto what they have, and poor countries want to be allowed to attain the same development through the cheapest means possible. Despite enormous progress in renewable energy technology and cost, many of the needed changes come at a price premium and developing countries are demanding financial support. Rich countries will need to help finance these changes, and the most important way to do this will be through attracting private capital and developing the technology to get there. The new framework for carbon trading is a valuable step to enable this flow of capital, as private corporations finance projects in emerging countries in exchange for carbon credits.

As diplomats negotiate over particular phrasing in agreement texts, and as countries make big commitments without detailed targets, corporations are able to be more nimble. We see the role of corporations in the fight against climate change as growing, something made clear by the considerably greater presence of corporations at this COP relative to previous conferences. As an example of companies and industries pushing the agenda forward, a voluntary commitment was reached at COP26 between 30 governments, 40 states and regions, 11 automotive manufacturers, 28 fleet owners and 15 investors for all new cars and vans to be zero emissions by 2040, and by 2035 in leading markets. These commitments are in line with European plans, but far ahead of other national commitments. Auto manufacturer signatories include Ford, General Motors and Volvo, fleet owners include Iberdrola, Siemens and Unilever. Additionally, we have seen much progress in commitments to cut emissions; one in three of the largest public companies in G20 countries now has a net zero target, up from one in five last year, according to Net Zero Tracker, an international research initiative. Some of these commitments are more credible than others, and those in Europe especially are doing so under the heavy hand of growing regulation and a growing carbon price. Many more may be motivated by PR and marketing benefits, but in our opinion that’s perfectly fine. Whatever the motivation, these commitments will alter investment decisions and start to shift capital spending to projects that reduce emissions.

The role of the financial community is also growing in the fight against climate change. Financial institutions will play a pivotal role in allocating capital away from carbon intensive activities and towards low carbon activities. It’s a USD 100trn problem that needs to be financed. Mark Carney launched the Glasgow Financial Alliance for Net Zero in April this year, ahead of the COP. It is a coalition of financial institutions who commit to accelerating the decarbonisation of the economy and to achieving net zero emissions by 2050 and has to date recruited members with USD 130trn in assets. This is supported by the evolving definition of fiduciary duty; asset owners increasingly see portfolio externalities, especially as it relates to global warming, as a responsibility and associated action as part of their fiduciary duty. Key to this alliance is the setting of nearer term targets for emissions across portfolio holdings; we plan to join this group and set our own targets soon.

And finally, citizens are demanding a green society, and are demanding progression not just of governments but of companies and the finance industry. Their consumption decisions are also changing, and this is shifting the business opportunity to greener products and services for many industries. This in turn accelerates the change, without any involvement from government.

For our portfolios, we welcome all national commitments, regulation and voluntary agreements that progress climate change mitigation and adaptation. Both transitional and physical climate risk is a key part of our analysis of companies, resulting in portfolios with low exposure to carbon intensive industries. We will continue to campaign for greater climate disclosure from our global investments and commit to vote more actively against boards that are not yet setting emission reduction commitments. The next few years will be critical, and individuals, investors and corporations must play their own role in minimising emissions especially when government action is too slow. As David Attenborough noted, « If, working apart, we are a force powerful enough to destabilise our planet, surely working together we are powerful enough to save it”.