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An agreement at Glasgow has been reached, but more needs to be done in subsequent years. We highlight the key pledges from the COP26 summit and what they mean for investors.
The conclusion of the two-week COP26 UN climate change conference in Glasgow was met with mixed reactions. The summit made some tangible progress, although there was also disappointment on some key issues.
Bradley Davidson, ESG Lead at RBS International, says: “It’s a unique event with hundreds of countries and private companies coming together. It’s important to recognise the collaboration, and the outcomes are still positive, even if watered down.”
Keeping an eye on 1.5°C
The Paris Agreement, set in 2015, fixed the world’s attention to keep temperature rises below 2°C, with a target of 1.5°C. Since then, climate science has evolved, and the impact of 2°C of global warming is now known to be more catastrophic than initially predicted.
Part of the Glasgow Climate Pact is that countries must review their emissions targets, described by the UN as their nationally determined contributions (NDCs), on an annual basis in order to keep 1.5°C in sight.
“That’s a significant outcome because each year, they’re going to have to come to the table and assess their performance and formally demonstrate how they’re working towards those targets,” says Davidson. “We look forward to seeing the change that nations have implemented and evaluating those efforts [at COP27] in Egypt next year.
“We now know that the actions resulting from COP21, where the Paris Agreement was signed, would put us on path for well above 3°C. When we’re looking at the Glasgow Climate Pact, it’s vital that the targets we are setting as companies and nations continue to follow the science, but we’re still a long way off that 1.5°C.”
Private and public collaboration propels financial commitments
Going into COP26, analysis from Oxfam suggested that rich countries would fail to deliver on their longstanding pledge to provide developing nations with the $100bn of climate finance funding for the next four years. As the conference drew to a close, countries recommitted to providing that vital lifeline.
“We’re talking in hundreds of billions, but we need trillions to pour into sustainable financing,” Davidson says. “Private markets must continue to act boldly to fill the gap. The billions are a starting point, but the compelling case for investment in sustainable activity strengthens.
“We’ve seen leaders of banks and corporations coming to the table and collaborating with public markets. We need to continue because no individual nation or collective of nations can commit the amount of capital needed. The role of private markets has the spotlight on it. At NatWest Group, we’ve committed £100bn of Climate and Sustainable Funding and Financing by the end of 2025.
In Glasgow, 24 countries and a group of car manufacturers came together to commit to ending the use of fossil-fuel-powered vehicles by 2040 or earlier. “But within the agreement, there were several car manufacturers from the US and EU missing, which we would have liked to have seen there,” says Davidson.
“We’ve seen leaders of banks and corporations coming to the table and collaborating with public markets. We need to continue because no individual nation or collective of nations can commit the amount of capital needed. The role of private markets has the spotlight on it”
Bradley Davidson, ESG Lead, RBS International
“In stark contrast to financing, with cars we have not seen the same collaboration needed. Banks are engaged with climate – and while the cry for the finance industry to do more is valid, we’re at the table listening to policymakers saying they need our support, and we’re continuing to deliver it. That has accelerated progress, whereas other sectors don’t have that collaboration yet. But our efforts will feed through as we help to rewire the economy.”
With climate targets in mind, banks will decide where they place their capital and ultimately influence other sectors, adds Davidson. “With regards to car manufacturing, banks will only look to support car manufacturers that can deliver on their climate promises in line with the Paris Agreement.”
Down, not out, over coal
Much of the media focus centred on the role of coal as a cause of climate change and that COP26 concluded with the agreement among nations to “phase down” rather than “phase out” its use.
Davidson said: “While this is disappointing, we must remember that no previous agreement has included a similar phrase. We can’t let perfection stand in the way of progress. The statement makes it clear the direction in which we are heading. Yes, we need to go further. But it will make it harder for new coal plants to access financing, so there are real-world impacts to the commitment.”
Trees are good
COP26 has tried to allow trees as they stand to have value. “Currently, from a financial point of view, the value of a tree is only created when it is cut down and turned into a product,” explains Davidson. “We are starting to see private market intervention and public policy that creates value for trees while they stand and sequester carbon.”
More than 100 world leaders have now promised to end and reverse deforestation by 2030. “It is essential to look at the countries that have signed up, including Brazil, and 80% of the world’s forests are included within this target,” he adds.
In addition, a £1.1bn fund has been established to protect the world’s second-largest tropical rainforest in the Congo Basin.
“We’re looking at this as a collaboration between public and private markets,” says Davidson. “Policy needs to lead the way and set the course, but ultimately funding is required and much of that needs to come from private markets.
“The fundamental issue is that the financial system needs to be rewired so that environmental impact has a separate value alongside commoditising things like trees into products. We need to accelerate that process, it won’t be easy, but this commitment is a step in the right direction.”
James Close, Head of Climate Change at NatWest, says: “We should regard COP26 as a good outcome that was better than expected, but not as strong as it needs to be.
“If we judge the success of COP26, we have more momentum coming out of it than going in, it’s passed the test, particularly with the engagement of the private sector and the mobilisation of finance through Glasgow Financial Alliance for Net Zero (GFANZ). It’s the basis for building momentum but does leave a lot of work to do to accelerate the pace of decarbonising the global economy.
“Nations and corporations were looking at increasing their ambitions every five years, but now they’ll be reviewing every year. There are structures in place around the money flows to developing countries. We also have a complete Paris Rulebook [on the implementation of the Paris Agreement] that matters, which we can use to hold ourselves and others to account. These are all means for accelerating climate action.
“We stand ready to provide the finance and funding for customers to help manage the transition to net zero.”