Virtual Participation
Following the daily live streams from the event and also the McKinsey Sustainability panel discussions were useful to get an overview of the progress. An important takeaway for companies is the increased demand for climate-related reporting. For instance, the role of scope 1 (direct), scope 2 (indirect through electricity purchases) and scope 3 (Indirect through product use) emissions were highlighted in the McKinsey summary[1].
Key Takeaways
An unedited version of the Glasgow Climate Pact was published after nearly 200 nations completed the negotiations at COP26. The focus of the pact is on science and urgency, adaptation, mitigation, finance, technology transfer, capacity building and collaboration.
- 1.5 °C target: The Climate Pact reaffirms the goal of the Paris Agreement: Striving to limit temperature increase to 1.5 °C above pre-industrial levels. Rapid, deep and sustained reductions in global greenhouse gas emissions are required. The target is a 45 percent reduction by 2030 and net zero by 2050.
- New commitments: India announced its first goal of achieving net zero emissions in 2070. South Korea, Thailand and Vietnam also presented new goals[2].
- Rules for a global carbon market: A deal to set the rules of carbon markets is designed to channel trillions of dollars to reduce climate change. Avoidance of double-counting carbon credits and the cut-off for credits issued before 2013 is intended to ensure that the focus is on newer credits that lead to actual emission cuts[3]. Norway and Singapore led the carbon markets negotiations, so despite winning the "Fossil of the Day" for doing the most to do least, Norwegian delegates did make an important contribution to the final pact.
- Coal and fossil subsidies: An important phrase is the "transition towards low-emission energy systems, including by rapidly scaling up the deployment of clean power generation and energy efficiency measures, including accelerating efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies"[4]. The term "phasedown" over "phase-out" of coal has caught disappointed attention, though its inclusion in the pact is important. Also how "inefficient" fossil fuel subsidies are defined remains to be seen.
- Resilience: Investments in climate adaptation can protect both people and companies from extensive and damaging climate risks.
- Methane and deforestation: Over 100 countries agreed to cut methane emissions by 30 percent and end deforestation by 2030. USD 19 billion will be invested to ensure the development.
- Finance: The private sector is urged to play its part to mobilize finance needed to deliver climate adaptation plans. Over $130 trillion of private capital is committed to transforming the economy for net zero. More than 450 firms and 45 countries have committed to the financing[5].
- Shipping: Denmark initiated tougher climate targets in shipping[6], followed by countries like Norway and the USA. While the International Maritime Organization (IMO) has previously set shipping emission targets outside of the Paris Agreement, the inclusion of shipping in the Climate Pact is instrumental. As much as 90 percent of world trade is transported by sea, so global shipping accounts for nearly 3 percent of global CO2 emissions4.
- Just transition: A recognition of the need to "support to the poorest and most vulnerable in line with national circumstances and recognizing the need for support towards a just transition"[7]. Significant finance flows from developed to developing nations are included.
- Largest surprise: China and USA signed a joint declaration where they committed to cut carbon and methane emissions by accelerated action from 2021 and onwards.
Investment Implications
Before COP26 the temperature increase steered towards 2.7°C of warming. With the new commitments, temperatures are estimated to rise between 1.8°C and 2.4°C. Regardless of wording, the investment implications are clear: Companies that are transparent, clear in their transition journey, showcases on progress and milestones, invests according to its targets and operates within clean energy, energy efficiency, resource efficiency and targeted transition, will benefit if well positioned in its respective segments. Companies are faced with high transition risks and large opportunities towards 2030. Investors can thereby seek exposure to segments that will support a green and just transition, as well as support portfolio companies.
The Glasgow Climate Pact leaves a blend of hope as well as slight frustration. As COP26 President Alok Sharma noted: The agreement keeps the 1.5°C target alive, though the pulse is weak. A major breakthrough is the agreement of all countries to disclose their nationally determined contributions (NDCs) every year, rather than the previously agreed update every five years. The investment implications are clear: Increased climate ambitions worldwide will colour the decades ahead.
[1] McKinsey Sustainability, https://www.mckinsey.com/business-functions/sustainability/our-insights/COP26-made-net-zero-a-core-principle-for-business-Heres-how-leaders-can-act?cid=cl4c-cml&consentparameter={SF:Consent}
[2] Energi og Klima, https://energiogklima.no/nyhet/cop26/glasgow-pakten-dette-kom-ut-av-klimatoppmotet/
[3] Reuters, https://www.reuters.com/business/cop/factbox-whats-glasgow-climate-pact-2021-11-13/
[4] Glasgow Climate Pact (2021), page 4, https://unfccc.int/sites/default/files/resource/cma3_auv_2_cover%20decision.pdf
[5] Glasgow Financial Alliance for Net Zero (GFANZ, 2021), https://www.gfanzero.com/press/amount-of-finance-committed-to-achieving-1-5c-now-at-scale-needed-to-deliver-the-transition/
[6] Reuters (2021), https://www.reuters.com/business/sustainable-business/denmark-us-12-other-nations-back-tougher-climate-goal-shipping-2021-11-01/
[7] Glasgow Climate Pact (2021), page 10, https://unfccc.int/sites/default/files/resource/cma3_auv_2_cover%20decision.pdf