COP26: a clear and positive direction for business

With COP26 done and dusted, the Glasgow Climate Pact was supposed to mark the next ‘leap forward’ to follow the Paris Agreement of 2015. However, based on where it leaves us – somewhere between 1.9°C and 2.5°C of warming – it would be easy to conclude that COP26 was a failure. The agreement is undoubtedly an unsatisfactory compromise that reflects vested and short-term political interests. But does it give us a better chance of avoiding a climate catastrophe? Is limiting global heating below 2°C now more possible, or was it just more “blah, blah, blah?” And given that the UNFCCC was established with the aim of “stabilising greenhouse gas concentrations…at a level that will prevent dangerous anthropogenic interference with the climate system,” has the UN process itself failed to deliver what’s required?

Before reflecting further, it’s worth revisiting the context.

The fact is global greenhouse gas (GHG) emissions have risen continuously since the industrial revolution, and continue to accumulate at about 50 billion tonnes of CO2e per year (despite a slight reduction as a result of the pandemic). This has already led to a global mean temperature rise of 1.1-1.2 degrees, which the IPCC estimates could pass 1.5°C by the mid-2030s unless drastic action is taken. Crucially, the IPCC warned that exceeding 1.5 degrees would be much more dangerous than previously thought, and emissions need to be cut by 45% by 2030 to hit net zero by 2050.

Yet despite this, the Paris pledges and nationally determined contributions (NDCs) were set to increase global emissions by 16% by 2030, according to the UNFCCC’s recent synthesis report, equating to a temperature rise of 2.7°C.  Given the above, and the world’s economic disparities and dependence on fossil fuels, it is questionable whether COP26 ever had any real chance of success.

So how far did the COP get?

The Glasgow Climate Pact reaffirmed the Paris goal of limiting global temperature rise to “well below 2°C and if possible, under 1.5°C above pre-industrial levels,” and made moves towards “keeping 1.5 alive” by stating that signatories would “pursue efforts to limit the temperature increase to 1.5°C,” including “reducing global carbon dioxide (only) emissions by 45% by 2030 relative to the 2010 level and to net zero around mid-century,” as well as calling for “deep reductions in other greenhouse gases.”

Nevertheless, one of the key tasks for COP26 was to raise ambition by way of national targets, the UNFCCC Synthesis Report on NDCs having concluded in February that these were not on track to meet the Paris goal. It was disappointing then, that less than half of countries submitted five-year updates in time for the COP, only increasing to around three quarters by its end. On the plus side, signatories agreed to strengthen their 2030 targets in 2022 (instead of five years’ time) and there is to be an annual ministerial round table on pre-2030 ambition from COP27 on, adding more urgency and giving room for optimism.

Also positive, was finalising Article 6 of the Paris Agreement, which clarifies the rules around carbon markets and should support international cooperation on NDCs, as well as helping drive investment in mitigation activity, including new technology.

Much was made by the UK Government of COP26 securing “the end of coal”, and whilst the Pact included action on coal for the first time, the wording of the agreement was watered down in the final stages from ‘phasing out’ to ‘phasing down’ unabated coal, and from phasing out fossil fuel subsidies to phasing out inefficient ones.

There were commitments to significantly increase financial support from developed to developing countries, including via the Adaptation Fund, despite richer nations having thus far failed to channel the US$100 billion per year agreed at COP15 in Copenhagen. This is important because the world won’t limit heating to less than 2°C without these countries fully on board. COP26 also established a dialogue on so-called “loss and damage” from the current impacts of climate change, though funding was not forthcoming for this from the US or EU. The Pact also makes reference to the Climate Finance Delivery Plan led by Canada and Germany.

There were also many initiatives alongside COP, including an agreement to cut methane emissions by 30%, which nearly 100 countries signed up to; a commitment by 130 countries to end and reverse deforestation by 2030; a cement and steel industry carbon emissions reduction agreement; a pledge to accelerate the adoption of green hydrogen; and the setting up of a new International Sustainability Standards Board (ISSB), tasked with producing global reporting standards, with a focus on carbon.

At the COP’s Finance Day, Chancellor Rishi Sunak announced plans for the UK to become the world’s first net zero aligned financial centre and to set up a Transition Plan Taskforce to support the new requirement for net-zero transition plans, which all UK financial institutions and public listed companies will be required to publish. This follows the UK Government’s Net Zero Strategy and a series of UK policy announcements made in the run-up to COP. There were also new commitments announced from coalitions such as the Glasgow Financial Alliance for Net Zero (GFANZ), which brought together around 450 institutions in 45 countries, aiming to align $130 trillion of financial assets with decarbonisation goals.

At the same time, we’re seeing market signals such as Shell’s decision to pull out of the Cambo oil field development, based on the economic case no longer being strong enough, and Ford’s stock price soaring on announcing its $30bn investment in EV.  The number of businesses signing up to the Race to Zero Campaign and associated science-based targets commitments to near-term targets and Scope 3 emissions reporting, is also cause for optimism.

So whilst the nations of the world collectively drag their feet, the institutional investment community would seem to be moving forward apace and has the potential to drive real change. In the words of Mark Carney, “the architecture of the global financial system” is being “transformed to deliver net zero,” so that “every financial decision takes climate change into account.” Whether this, coupled with an era of greater business purpose and transparency, will result in emissions coming down fast enough, only time will tell.

What are the implications for business?

Despite COP’s failings, the commitments made and the associated public and private sector initiatives, make the direction of travel crystal clear. Quite simply, those businesses not planning for net zero will find themselves under more pressure, become increasingly unsustainable and face challenges on multiple fronts, including legislative, investment, competition and in terms of social licence to operate.

This will be partly driven by what some are calling a new era of transparency. As mentioned, UK listed companies will not only need to report emissions, but they will have to publish their plans for net zero. And as the emphasis moves to science-based, near-term targets, and reporting Scope 3 emissions, suppliers will come under greater pressure to report and reduce their emissions if they want to retain business. Companies will also find their “carbon credentials” coming under greater scrutiny when seeking finance or investment.

Importantly, it is business and industry that will have to deliver the change that governments have agreed they need to happen, ultimately transforming investment into a net zero economy and society. The need to speed up this delivery between now and 2030 came through loud and clear in Glasgow and will be felt more acutely going forward. And whilst interventions in the economy will be needed to make this happen, delivery will increasingly become the focus.

For businesses then, climate change is fast becoming the biggest risk and biggest commercial opportunity. COP26 is one key part of the jigsaw but the investment markets, and the companies they invest in, may turn out to be the most significant driver of change from here on out. For those businesses that haven’t, now is the time to re-assess climate risk and invest and innovate to benefit from the inevitable transition that’s coming – whether in new products, new market opportunities or completely new business models.

What to do now

Despite its painfully slow progress, COP26 should be seen as a watershed moment. And a justification, if another were needed, for step-change – as opposed to incremental – and immediate action – as opposed to long term goals.

My advice to businesses, post COP26 would be:

• Reappraise what net zero transition means for you. And having done so, upgrade your plans – don’t delay. Lobby government to help level the playing field (e.g., through the CBI and other industry bodies) but don’t expect the government to solve the problem.
• Take a science-based approach. Establish short-term targets. Invest strategically to achieve them. Measure and communicate progress. Expect your carbon reduction commitments to be ahead of your current capacity to deliver them. Now is the time to catch up.
• Think about leadership and governance: the best-laid plans will fail if not incentivised from the top down and supported from the bottom up. C-suite leadership, carbon reduction integrated into the business strategy, incentivised delivery.
• Learn from, educate and collaborate. With staff, customers and suppliers. Engage in pre-competitive collaboration within your industry. The transition to net zero will take place across the value chain but it will be brought about by individuals playing their part within it.
• Grasp the opportunities. Think of your business as part of the emerging future economy. Act strategically to develop new market opportunities. Examine the potential for a more sustainable business model. Start investing in the transformation to a net zero business and embedding future value.
• Keep a watching brief. Change is happening and likely to speed up – don’t get left behind! Expect to see more announcements from the government and potentially on the international stage as the UK continues its COP presidency until November 2022.
• Seek help! Making a successful transition can be a steep learning curve for many businesses but there’s no need to re-invent the wheel. And not all companies will have the right skills in-house. A focus on getting it right in terms of strategy, performance and communication is key. It’s not all straight forward but with appropriate expert support, net zero is achievable.

COP26 was a global ‘staging post’ and a gathering point for government, business and civil society. We must hope it will also be a historical turning point. The challenge for all of us is to keep up the momentum and transition to net zero as quickly and equitably as possible.