One of the goals of COP26 was to agree a comprehensive new climate deal designed to keep global temperature increases below 1.5C. When it arrived, the 11th-hour agreement controversially removed the requirement to ‘phase out’ coal, instead opting for ‘phasing down’ at the behest of China and India. Despite this, it was still deemed by many to be a mitigated success, although UN Secretary General Antonio Guterres and many environmental groups baulked at the last-minute change. That said, much positive progress was achieved at COP and there are some ‘building blocks for progress’ according to Mr Guterres. Below we sum up COP’s key achievements and explain their impact on business.
- Finance: The finance community will need to play a critical role if we are to transition to a low carbon future. The first week of COP saw a dedicated Finance Day chaired by the former Governor of the Bank of England, Mark Carney. One of the high-profile collaborations in this space is the ‘Glasgow Financial Alliance to Net Zero’, a forum for leading financial institutions to accelerate the transition to a net-zero global economy. Its members currently include more than 450 financial firms across 45 countries, who together are responsible for over $130tn of assets. In the UK, Chancellor Rishi Sunak announced that from 2023, all financial institutions and listed public companies operating in the UK will be required publish their plans on how they intend to transition to net zero by 2050.
What this means for business: Greater pools of capital channelled towards low-carbon infrastructure (with a particular emphasis on the developed world) aligned with a strong emphasis on the quality of corporate disclosures.
- Accounting standards: As Gillian Tett wrote recently in the FT, the new superheroes of the battle against climate change might be accountants. The run-up to COP saw a huge swathe of net-zero commitments from companies across all sectors, which in turn led to growing calls from political leaders, investors and civil society for companies to provide tangible evidence on how they are delivering against these carbon commitments. This will only be possible if we become much better at assessing and disclosing progress against climate targets. This is where the accountants come in, and will also require consolidation of standards supported by organisations like the IFRS Foundation and their newly released International Sustainability Standards Board, which aims to create a single standard to meet investors’ information needs.
This dynamic will surely drive more – and more accurate – disclosure. This will not only counter accusations of greenwashing but also help ensure we have much more robust frameworks for assessing climate risk (and opportunity) and enable a more transparent approach to valuing companies, whether in an investment or acquisition scenario. (If you’re interested in finding out more about the impact of legal risk on asset valuation, read our ‘Heating Up’ report).
What this means for business: Greater standardisation and regulation of disclosures will simplify the process. However, in the future companies will require much greater discipline to capture data in a way that enables comparison across time, companies and geographies and a generates greater understanding of carbon risk and opportunity.
- Carbon price increase: The price of carbon has doubled in 2021 and saw another spike following COP as governments agree on the need to create, expand and strengthen carbon pricing mechanisms to ensure that the right incentives are in place for businesses and consumers to reduce their carbon footprint. This could lead to new – and more regulated – carbon markets, greater scrutiny of voluntary carbon markets and more impactful carbon tax regimes, supported by clear border adjustment mechanisms to minimise the risk of carbon leakage.
What this means for business: As the cost of carbon rises, so businesses will feel the pressure to reduce their carbon footprints (scope 1 and 2) and those of their supply chains (scope 3). We can expect more companies to sign up to tangible net-zero and science-based commitments and invest in delivering against their goals to avoid carbon penalties.
- China – US deal: The Washington and Beijing governments set aside their strategic differences to issue a joint climate announcement recalling their ‘firm commitment to work together’ to keep emissions below 1.5C. The statement was short on details but is likely to include an emphasis on technology to reduce methane emissions. The announcement by the world’s two largest emitters was universally welcomed.
What this means for business: It’s still too early to gauge how serious both nations are, but we can expect regulation on decarbonisation and enhanced market access for low-carbon products and technologies as well as improved Sino-US collaboration across industries and supply-chains.
- The role of technology: Technology will be critical to achieve global emissions targets and was discussed in various fora at COP. But while there is significant attention on innovations that don’t yet exist, the enhancement and scaling up of existing technologies will be critical, particularly in energy generation and storage. We may see nuclear energy back in favour as a necessary transition technology to keep emissions in check.
What this means for business: Over time a scaling up of support for renewable technologies, possibly at the expense of fossil fuel subsidies.
- Deforestation deal: Although agreements on the side of COP do not typically pack the same environmental punch, this year’s deforestation deal (which saw 100 world leaders agree to end and reverse deforestation by 2030) was hailed as real step forward. Importantly, £14bn in public and private funds have already been pledged to achieve the goal.
What this means for business: A boon for conservationists and circular economy advocates, with reduced deforestation creating demand for recycled and secondary sources of wood. This will have a significant impact on the construction and pulp and paper sectors, while the meat industry (a significant contributor to forest loss) will need to adjust.
While the developments above were among COP’s ‘official’ outcomes, a few other trends deserve mention. Firstly the need for collaboration, both within and across industries, which is driving antitrust regulators to look for ways to enable cooperation within the boundaries of competition law. Secondly, the growing call from concerned citizens (across generations, geographies and political boundaries) for political and business leaders to take tangible and sometimes radical action. When this concern changes voting and purchasing behaviour, the 1.5C goal might appear much more achievable. Watch this space.