COP26: What might it mean in practice for business?

Managing expectations 

Although there are high expectations for COP26, let’s not forget that UN negotiations are more akin to a lumbering cruise liner than a nimble catamaran.

And regardless of whether global leaders are able to reach any breakthrough agreement on things like climate targets or climate finance in Glasgow in a few weeks’ time, the net zero transition will still need to happen if we are to avert the worst effects of climate change. The need for urgent and ambitious action from corporates and financial organisations across the globe does not go away if COP26 turns out to be a damp squib. And delivering a net zero economy will still require a massive reallocation of private capital towards greener, more sustainable activities.

We already know what global investors want from governments on climate change because they have already said so ahead of COP26 (see here and here). In particular, investors want governments to:

• strengthen their Nationally Determined Contributions (NDCs) for 2030 in line with limiting global warming to 1.5°C – having net zero targets for 2050 on their own are not enough, we also need ambitious 2030 targets;
• publish net zero roadmaps, not just targets;
• implement domestic policies to deliver those targets and incentivise private investments in zero-emissions solutions, including phasing out coal power and fossil fuel subsidies;
• make climate risk disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) mandatory;
• agree a global price for carbon – although which form that should take is still up for discussion.

Companies have expressed very similar expectations.

Climate targets and net zero roadmaps

A number of countries (including the UK, US and China) as well as the EU bloc have already announced more stringent climate targets ahead of COP26.

However, some countries have not yet published their detailed net zero strategies – much to the frustration of both investors and corporates alike. The UK government (which is hosting COP26) is expected to announce its own comprehensive net zero strategy either before or at the start of COP26. The EU on the other hand is far more advanced in its net zero plans – with a very ambitious package of legislative proposals in the form of the “Fit for 55” package (see here). Negotiations on that package are just about to start and we already know that it’s going to be a very bumpy ride.

It is possible that other countries will announce more ambitious climate targets either at or just before COP26. If they do then this will mean businesses operating in those jurisdictions will have to adapt to a lower carbon future – which for some may involve having to make significant changes to their business models but for others it may result in business opportunities (e.g. greater investment needed in lower carbon technologies and infrastructure). But those climate targets will still need to be fleshed out in more detail in national strategies and fiscal measures before businesses can properly assess what it really means in practice for their particular sector.

So basically the business world is looking for more detail on how governments plan to achieve their climate goals and for announcements on incentives to encourage private capital participation in the net zero transition.

However, the current energy crisis has thrown a serious spanner in the works. Just as global economies are restarting their economies after the devastating effects of the Covid-19 pandemic, along comes a natural gas crunch which is seeing some countries resorting to increased use of coal power to keep their factories going and the lights on. It’s the perfect storm at the worst possible time. It also raises serious questions about the future of natural gas if that is not accompanied by carbon capture and storage (CCS) technology.

Climate disclosures 

A number of countries are already considering whether to make climate disclosure (in line with the TCFD) mandatory for corporates and financial organisations. The US is consulting on its plans (see here and here). And the UK has already announced that it plans to make TCFD reporting for companies and the financial sector by 2025 (see here), with premium listed companies already required to do so for financial years beginning on or after 1 January 2021 (see here) and the government and regulators consulting on rolling this out to other types of companies (see here and here), asset managers and asset owners (see here), as well as pensions (see here). The EU is also in the process of beefing up its requirements on climate (and other sustainability) reporting via its draft Corporate Sustainability Reporting Directive (CSRD) (see here).

Although mandatory climate reporting is not officially one of the issues that governments have said they will discuss at COP26, we may nonetheless see some announcements on this from countries as they use the UN summit as a platform from which to show increased climate ambition more widely.

But the key announcement on this will be from the trustees of the International Financial Reporting Standards (IFRS) Foundation who are expected to appoint members of a new International Sustainability Standards Board (ISSB) soon and publish a global climate disclosure standard by mid-2022 (see here). The IFRS Foundation has said that responses to its consultation show there is a clear sense of urgency for developing a global reporting standard. Once the climate standard has been developed, the ISSB is expected to turn its attention to developing global disclosure standards for other sustainability issues. The aim is to provide the level of reliability and comparability that investors need. We are expecting further announcements from the IFRS Foundation either at the start of or during COP26. However, even if the forthcoming ISSB publishes a global climate reporting standard, it will still be up to individual countries to decide if and when to make it mandatory and for which economic actors.

Carbon pricing 

This is the perhaps the issue where there is the most uncertainty but the highest expectations.

We know that the G7 and G20 have endorsed the idea of carbon pricing as an effective tool for reducing GHG emissions. We also know that a number of global investors are also calling for a global carbon price (see here). However, what is less clear is what that carbon pricing mechanism should be.

Options include:

• the use of carbon taxes (see for example Austria’s recent announcement);
• emissions trading schemes (such as the EU ETS, UK ETS and China ETS); or
• the EU’s proposed Carbon Border Adjustment Mechanism (CBAM).

It remains to be seen whether the key players at COP26 will make any announcements about carbon pricing.

Is there anything we can be certain about?

Yes, and that is that regardless of what is (or is not) agreed at COP26 in November, the global march towards the net zero transition has no option but to continue and that pressure on companies and the financial sector to produce credible, robust climate plans is not going let up anytime soon.

For our insights on the net zero energy transition and producing robust climate plans, see our Net Zero microsite and Climate Change Plans and Targets.

For more information on COP26 and other related posts, see: 

• What is COP26?
• COP26: what are the key decisions?
• Linklaters COP26 page.