Articles - A summary of COP26

The Glasgow Pact notes that “climate change has already caused and will increasingly cause loss and damage and that, as temperatures rise, impacts from climate and weather extremes, as well as slow onset events, will pose an ever-greater social, economic and environmental threat.”
This acknowledgement should perhaps be more prominent as it highlights the ongoing risk that we collectively face and is the reason why the world descended on Glasgow this month. It is perhaps for history to judge whether COP26 has been a success but these are some of the key takeaways from the last few weeks.

 By Simon Jones, Head of Responsible Investment ay Hymans Robertson

 There is still a significant gap to 1.5 degrees
 COP26 set out with the ambition of “securing net zero by mid century and keeping 1.5 degrees within reach”. We noted in our previous blog that 84% of global emissions (and around 90% of global GDP) are captured by net zero pledges, yet there is still a considerable gap between these pledges and the expected impact if implemented in full.

 Climate Action Tracker calculates that current policies and actions are sufficient to limit warming to only 2.7 degrees by 2100, whilst full implementation of the all pledges and targets would only be sufficient to limit warming to 2.1 degrees. Emissions reduction plans currently only extend to 2030, with plans for the longer term still to be discussed, likely to begin at COP27.

 The gap still needs to be addressed though future commitments leaving investors exposed to future policy change. It’s in this gap that some of the risks, and potentially the opportunities of climate change may lie.

 Coal is on the agenda, but only just
 In calling for “efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies”, the Glasgow Pact was the first to directly acknowledge the need to curb the use of fossil fuels, albeit the language used was weakened. Coal remains the single biggest contributor to climate change with China the biggest global consumer seeing growing demand for energy and use of coal over recent years.

 There were some positive steps with a commitment from more than 40 countries to move away from coal, although this did not include the US and China. The US was however among countries that agreed to support public financing of unabated fossil fuel projects by end 2022.

 This is clearly an area where more action is required and the failure to address the need to phase down other fossil fuels is clearly an issue for future discussion. Investors can play their part by demanding no new private finance and insurance for coal projects from investee companies.

 Developing countries will move at a different speed to developed nations
 India’s commitment to net zero by 2070 highlighted some stark differences. With the North America and the EU (including the UK) responsible for around half of total emissions, the need for developed countries to act sooner providing room for developing countries to work through their own development and period of change. This has to be backed by technological and financial support if the transition is going to be both successful and “Just”. The promised $100bn of annual finance has yet to materialise although there were commitments to close this gap over the next couple of years.

 From an investment perspective, emerging markets are likely to see higher emissions than their developed equivalents for some time. The need for investors will be to ensure that companies are supported through the process of change, not starved of capital.

 Nature had a presence
 The need for action on nature was the second of the four ambitions for COP26. The World Resources Institute estimates that, if it were a country, deforestation would be the third largest contributor to global emissions, and it was encouraging to see commitments being made on ending deforestation by 2030. As with all the pledges made, this needs to be backed up by clear and measurable policy action from both governments and corporates.

 Deforestation is often used to create different economic activity such as agriculture or commodity production. For investors, the ask must be to ensure that underlying investee companies have clear polices around deforestation where activity may otherwise create such a risk, and for asset managers to seek verification of the effectiveness of such policies.

 Will we see a global carbon market?
 Article 6 of the Paris Agreement sought to set rules for global carbon markets, allowing for offsetting and the trading of emissions credits. The expectation is that this could facilitate emissions reduction efforts, although some see this as a means for continuing to stall the level of change needed. What is however clear is that all potential solutions need to be explored.

 COP26 completed Article 6 ensuring consistency in global standards, expected to be welcomed by sectors where emissions reduction is somewhat harder to implement. Investors in these sectors, such as cement production and airlines, need to understand the potential use of offsets as markets evolve, and the role they are likely to play in companies being able to meet their net zero commitments.

 Achieving global consensus was never likely so COP26 represents just another small step forward. The implementation of policy by governments is now necessary and continued pressure from civil society can be expected to continue – that more concrete action hasn’t been taken simply increases uncertainty around the transition pathway that will be followed. There are however areas where asset owners and asset managers can play their part and help to drive change. 

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