COP26: Key outcomes and takeaways for investors
Late in the evening on 13 November 2021, Greenwich Mean Time, the curtain came down on the 26th Conference of the Parties (COP26), the United Nations Climate Change Conference in Glasgow. Following two weeks of intense climate discussions and negotiations, an agreement was reached by all 196 countries attending the conference, forming the Glasgow Climate Pact (the Pact).
The Pact, as well as a number of more ambitious bi- and multilateral initiatives and pledges made during the two-week conference, comes at a time when global average temperatures have already risen by 1.1°C above pre-industrial levels and continue to rise year-on-year, despite a blip in 2020. While significant progress has been made with new and updated emissions reduction pledges announced at and leading up to COP26, experts estimate that these pledges – if met – put the world on track for warming between 1.8°C and 2.4°C above pre-industrial levels 1. This is well above the 1.5°C limit that is needed to significantly reduce the risks and impacts of climate change 2. The Pact sets out an expectation of stronger emissions reduction pledges by parties for COP27, with a particular focus on countries that failed to bring increased targets to COP26, including Australia.
Key outcomes
Energy
Some of hardest-fought language in the Pact relates to a requirement for countries to ‘phase down’ (not ‘phase out’) their reliance on unabated coal power for energy generation. While this wording represented a disappointing lack of ambition for some, others welcomed the first-time mention of coal in a global climate pact as a strong step in the right direction. The ‘phase out’ language held in the context of ‘inefficient’ fossil fuel subsidies, however, the definition of ‘inefficient’ remains unclear.
Separate to the Pact, a 190-strong coalition of countries and companies agreed to phase out coal-generated power and end support for new plants, with at least 23 countries making new commitments, including five of the top 20 coal power-using countries (Poland, Indonesia, South Korea, Vietnam and Ukraine). Leaders of the world's biggest economies already agreed to end international financing for coal projects at last month’s G20 meeting in Rome. The US and Canada went further at COP26, committing to stop providing public finance to all fossil fuels by the end of 2022, unless the facilities that use them are equipped with carbon capture and storage.
A Beyond Oil and Gas Alliance was launched, led by the Danish and Costa Rican governments. The alliance committed to end new concessions, licensing or leasing rounds and to set a Paris-aligned date for ending oil and gas production. Major global oil and gas producers did not participate.
Deforestation
More than 140 countries, representing approximately 90% of the world’s forests, have endorsed the Glasgow Leaders’ Declaration on Forests and Land Use, pledging to halt and reverse deforestation by 2030 3. These countries include Brazil, Canada, Indonesia, Russia, the US, UK, and Australia.
Methane
The US and the EU were the driving force behind the Global Methane Pledge, an initiative targeting methane emissions reductions. More than one hundred countries, including six of the world’s largest emitters, have pledged their support, promising to cut methane emissions by 30% from 2020 levels 4.
Transport
As part of the Breakthrough Agenda (outlined below), 30 countries including Kenya, India and Rwanda, agreed to ‘work together to make zero emission vehicles more accessible, affordable and sustainable in all regions by 2030 or sooner.’ 5
Nineteen countries, including Australia, Japan, New Zealand, Norway, Sweden, the UK and US set out intentions to establish ‘green’ shipping corridors to allow for zero emission shipping on key routes globally.
Twenty-three countries, including the UK and US, launched the International Aviation Climate Ambition Coalition, committing to the development of national plans to reduce aviation emissions and promote the development and deployment of sustainable aviation fuels.
Public finance and aid
With respect to ‘loss and damage' (compensating developing countries for costs relating to climate impacts resulting from rich countries emissions), the Pact provided little for developing countries, who were left feeling frustrated. Developing countries wanted a new financing facility, however, the Pact essentially only gives them access to a ‘dialogue' to discuss 'arrangements'. On finance, which in climate diplomacy usually refers to public funding for foreign aid and development, developing countries got something – an agreement that richer developed countries must 'at least double' funds for adaptation to help them cope with the impacts of climate change they are experiencing in real time. However, developed countries held out against making good on their promise to deliver $100bn in climate finance to developing countries by 2020. And there will be no catch up mechanism.
Carbon trading
Signatories to the Pact finally agreed on a set of rules relating to Article 6 of the Paris Agreement. The rules will allow countries to partially meet their emissions reduction pledges by buying offset credits representing emission cuts by others. The integrity of trading mechanisms and participants will require ongoing monitoring. Demand for offsets will depend on governments’ ambitions for reducing emissions, as well as their willingness to implement effective carbon pricing in one form or another. To date, four-fifths of global emissions remain unpriced and the global average emissions price is only US$3 per tonne 6. However, a framework to operationalise global carbon markets is likely to spur investment in carbon offset projects globally and support the scaling up of voluntary carbon markets used by some investors and businesses.
Disclosure and reporting standards
The International Financial Reporting Standards (IFRS) Foundation plans to establish the International Sustainability Standards Board (ISSB) to develop a common global baseline of disclosures, addressing the impact of climate and sustainability issues on company valuations and building on the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD). The ISSB will sit alongside – and work closely with – the International Accounting Standards Board, to help ensure compatibility with the IFRS Accounting Standards and support a clearer line of sight between climate-related risks and opportunities and their financial impacts.
International partnerships
Bilateral and global collaborations remain critical to tackling the climate challenge. In addition to the coalitions outlined above, of note is the US and China announcement of a joint climate declaration, an agreement that will see the world’s two largest GHG emitters working together to address the climate crisis through this critical decade with a focus on reducing methane emissions, ‘phasing down’ coal, promoting decarbonisation, protecting forests and technical cooperation.
Over 40 leaders representing more than 70% of the world’s economy, including the US, India, EU, China and developing economies, signed up to the new Breakthrough Agenda, which will see countries and businesses collaborate and strengthen their action to tackle climate change. The first five goals collectively cover more than half of global emissions across key areas including power, road transport, steel, hydrogen and agriculture.
What does the Glasgow Climate Pacts mean for investors?
Private finance played a supporting role at COP26 and commitments to align with net zero across investor alliances have reached US$130 trillion 7.
There are a number of key takeaways for investors:
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While not all countries made updated emissions reduction pledges in line with limiting global temperature rises to 1.5°C, the direction of travel is clear for countries, as well as investors and corporates.
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While net zero by 2050 commitments remain important, the focus has now sharpened on 2030 and near-term climate action and accountability in this next critical decade.
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Many countries have not yet set out clear and credible policy strategies for achieving substantial emissions reductions by 2030, and most countries do not have detailed sectoral strategies for decarbonisation that would better inform investors about the intended “glide path” for specific fuels and technologies.
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Investors can expect a dynamic policy and regulatory environment over the next few years and an acceleration of ‘catch up’ climate action across the real economy.
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Impacts on assets, asset classes and geographies will be different depending on national and state governments’ levels of ambition and the political choices they make about how to distribute costs and opportunities. Investors may wish to engage policymakers on the settings needed to facilitate an orderly transition and drive private investment in climate solutions.
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Capital is now lining up but investors will not and cannot invest without risk-adjusted returns; governments, therefore, need to define sectoral pathways, create markets and build institutions that will attract private investment on these terms.
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It will only get harder for fossil fuel projects and carbon intensive companies to attract investment, particularly for thermal coal. It is perhaps too soon to determine the impact, if any, from methane reduction pledges and phasing out of fossil fuel subsidies.
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The increased focus on accountability, transparency and delivery will also apply to investors and corporates, whose net zero commitments will be analysed even more closely by international investor groups, civil society and regulators who are progressively addressing greenwashing and setting out expectations for climate-related disclosures.
For IFM, the outcomes of COP26 have reinforced the actions we are taking to give effect to our commitment to reduce greenhouse gas emissions across our asset classes targeting net zero by 2050. These actions include our infrastructure portfolio commitments to reducing emissions by at least 1.16 million tonnes of CO2e and phasing out exposure to thermal coal by 2030, as well as enhancing our disclosure and reporting. Our work in decarbonising our infrastructure portfolio will place an emphasis on transition rather than divestment of assets. The development of our climate strategy for our other asset classes – Listed Equities, Debt Investments and Private Equity – continues and we look forward to updating you further on this.
We recognise the importance of accelerating climate action over the next decade, and we are committed to working with our investors and other stakeholders globally to do this. Climate change management will continue to be a critical thematic for IFM in the coming decades as we focus on our purpose to protect and grow the long-term retirement savings of working people around the world.
1 International Energy Agency modelling estimates 1.8°C warming and Climate Action Tracker modelling estimates 2.4°C warming.
2 https://unfccc.int/sites/default/files/resource/cop26_auv_2f_cover_decision.pdf
3 As listed on 12 November, 2021 at https://ukcop26.org/glasgow-leaders-declaration-on-forests-and-land-use/
5 https://www.iigcc.org/news/cutting-through-the-blah-blah-blah-key-cop26-highlights-for-investors/
6 https://blogs.imf.org/2021/06/18/a-proposal-to-scale-up-global-carbon-pricing/
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