After two weeks of frantic negotiations and a tsunami of net zero announcements, COP26 has finally come to an end. So what does it mean in practice for business, in particular corporates and the financial sector in the UK and in the EU?

Schrodinger’s COP

This COP reflected significant engagement from financial institutions and corporates, and the UN proceedings themselves probably produced the best outcome that could realistically be expected. And yet given the science explained in the IPCC Report of August and most recently and most eloquently by Sir David Attenborough, it is as yet insufficient for the challenge. “Tinged with disappointment” – that’s how Boris Johnson the UK prime minister described the final COP26 agreement.

It still feels like the private sector is leading the climate charge with more ambitious plans and more urgency to reach net zero than the governments of the major economies felt able to show. The presence and perspective of major financial institutions and corporates at this COP (not just European and UK companies, but many from other major economies as well) was notable and a reflection of how important the transition to net zero has become for businesses across the globe.

Are we really “keeping 1.5C alive”? 

Not really. In the Glasgow Climate Pact, the parties all agreed that “the impacts of climate change will be much lower at the temperature increase of 1.5°C compared with 2 °C, and resolve to pursue efforts to limit the temperature increase to 1.5°C”. But despite this, the current climate pledges made so far by all the COP26 parties will likely put the globe on track for a 1.8°C increase – but that is if absolutely no one delays or misses their targets. The more realistic (but depressing) estimate from the climate experts is that we are currently more likely on track for a 2.4°C increase.

The 1.5-2°C goal in the Paris Agreement was chosen for a reason – this is the level beyond which extreme weather events (such as storms, floods, droughts, heatwaves, and wildfires) and other climatic changes (such as melting icesheets and rising sea levels) become more frequent and much nastier (see here). There is still time to pull back to inside of the 1.5-2°C range, but the pace of the change required over the next 8 years is eye watering.

According to the COP26 press release, all the parties have agreed to revisit and strengthen their current emissions targets to 2030 (aka their Nationally Determined Contributions) in 2022. This is a really important new commitment which will focus minds, so let’s see what next year’s COP in Egypt has in store for us in terms of further action.

(The official final version of the Glasgow Climate Pact is not yet available on the UNFCCC website at the time of writing so we are using the “2f advance unedited version” which includes reference to the last minute agreement to the “phasedown” of coal.)

A “death knell for coal”? And what about other fossil fuels? 

And here we come to the bit that brought the COP president, Alok Shorma, close to tears on the closing day of COP26.

The parties all appeared set to agree a phase-out of unabated coal and fossil fuel subsidies. The UK government and Sharma in particular had been hoping this might be the COP that would “consign coal to history”. But instead, as a result of a last minute change from India and China, the final wording in the Glasgow Climate Pact was watered down to “accelerating efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies” – with no timeline for doing either of those things. Some have said this is just fancy semantics and that a phasedown is just the natural precursor to a phase-out. And yes, this is the first time a COP agreement has included reference to fossil fuels, so it really is a big achievement. But with coal still accounting for around 30% of the world’s energy generation and demand in developing countries set to rise, we may not have enough time to go from a gradual phasedown to a phase-out before we overshoot the 1.5-2°C climate goal.

Meanwhile, the public/private 'coalitions of the willing' proved a significant stream of additional commitments at (but outside of) COP26, though some appear more popular than others. The initiative focused on avoiding deforestation could be influential, as is the launch of the new International Sustainability Standards Board (ISSB) by the IFRS. The Beyond Oil & Gas Alliance (with the very unsexy BOGA acronym) may yet prove to be important but has so far failed to convince key oil & gas countries to join their efforts to agree a phase-out of oil and gas production. And 20 countries (including the US, UK and Canada) have pledged to end public financing for coal, oil and gas overseas by the end of 2022. This is a significant shift given the extent of the indirect impact it is expected have in discouraging commercial banks from financing these projects.

Financing for developed nations a big disappointment 

The COP26 parties have agreed that the US$100 billion per year that developed countries had promised several years ago to help developing countries adapt to the worst effects of climate change will now be mobilised “urgently” through to 2025. But calls for the creation of a “loss and damage” fund to deal with climate disasters were unsuccessful. Instead Alok Sharma’s team will hold workshops on how to generate funding for “loss and damage” with a view to proposals being considered at COP27.

The reality is that US$100 billion/year, that proved such a hurdle at and in the run up to COP26, is a just a small proportion of what developing countries need in order to cope with climate change and decarbonise their energy supplies. The International Energy Agency (IEA) estimates that investment in energy transition in emerging markets must increase to more than US$1 trillion a year by the end of this decade if the world is to reach net zero emissions by 2050. We’ve just spent two solid weeks squabbling about how to mobilise $100 billion a year, but in fact the issue is more complex. A number of commentators point out that capacity building is urgently required, to develop investable projects for the amounts that can be mobilised.

The Glasgow Financial Alliance for Net Zero (GFANZ, yet another hideous acronym) – which represents 450 financial firms (banks, insurers, asset managers, pension funds, export credit agencies, etc) across 45 countries with assets under management exceeding US$130 trillion – pledged last week to put their considerable financial firepower to the aid of the net zero transition. As Mark Carney said at COP26, the money is there and it is ready to be deployed but investors need the right signals on where to invest. 

Investing in emerging markets is – at least at present - difficult, risky and not very profitable. Which is why BlackRock and other big investment managers are arguing there is no alternative to some system of guarantees from western governments to ‘de-risk’ emerging market investments (see here). That will be unpalatable – so one alternative is to identify how best to build regulatory systems and capacity in cleantech sectors in emerging markets beyond the now well-established renewables plays. Without this, it just isn’t realistic to expect mainstream developed world investors to be happy with the high risks and often low returns of investing in emerging markets.

Paris rulebook agreed for voluntary carbon markets 

One of the few success stories of COP26 is that the parties have finally agreed – after six years of haggling – the rules governing the international trade of emissions reduction units (aka the “Paris Agreement rulebook”).

Article 6 of the Paris Agreement enables voluntary international co-operation on climate action. One of the options envisaged under Article 6 is the possibility of a country that has overachieved its climate targets under its NDC to sell its “spare” achievements to another country. Another option is for the establishment of a global mechanism through which public and private sector participants can trade carbon credits generated from emissions reduction projects to count towards meeting their climate pledges.

Until this week, the parties to the Paris Agreement have not been able to agree on the rulebook for these mechanisms (e.g. because of concerns over "double counting" and whether countries should be allowed to use emissions reduction credits that are generated under the previous international emissions trading regime established by the Kyoto Protocol, to meet their targets). The new rules agreed at COP26 6 give countries the tools needed for a (hopefully) robust, transparent and accountable voluntary carbon market, allowing governments to trade emissions reductions and provide flexibility on how they meet their national climate goals. It should eliminate double counting and support emissions reductions in countries hosting carbon market activities (see here). 

The expectation is that now the rulebook is settled, the carbon markets will grow rapidly given the pre-existing evidence of pent up demand.

Methane pledge and US-China joint statement 

Two unexpected announcements at COP26 give rise to further optimism.

One was just how much traction the US/EU proposal for a Global Methane Pledge got, with over 100 countries pledging to cut methane emission levels by 30% by 2030. Methane is a greenhouse gas that is several times more potent than carbon dioxide, but since it breaks down in the atmosphere faster, reducing methane levels is a quick win for climate action.

The other very unexpected development was the US-China joint statement, setting out the various climate actions the two countries plan to cooperate on. Although the joint statement is light on concrete actions, it does emphasise that both countries have committed to take “enhanced climate action” and that that climate action needs to happen this decade (see here). This is a significant play by both countries and should go some way to assuage concerns that China’s net zero target is 2060 rather than 2050. The joint statement also includes a commitment from China to phase down coal consumption during the 15th Five Year Plan (which covers the period 2026 to 2030) and develop an ambitious national action plan on methane emissions (despite China not signing up to the Global Methane Pledge).

What does it really mean for business in the UK and EU?

In reality, the real impact of COP26 will depend on which country or region you are based in.

The EU and UK already have in place stringent climate targets, as well as evolving policy and regulatory climate frameworks – including the expectation of detailed rules on climate disclosures, supervisory expectations for financial organisations, anti-greenwash rules and detailed net zero roadmaps (see here, here and here). So the fact that COP26 failed to send a more ambitious signal on climate action at a global level has less of an impact on those operating in the EU and UK. Where it is more likely to have a real impact is on net zero investments from the private sector in the EU and UK in countries/regions with less developed climate frameworks, and developing countries in particular.

For those businesses based in the UK and the EU, the focus in 2022 (regardless of the outcome of COP26) will be on turning climate talk into action – in particular making sure that credible and robust climate transition plans are in place and that climate risks and opportunities are properly factored into decision-making and disclosed in line with the recommendations of the TCFD.

Perhaps the biggest takeaway from COP26 was the presence and perspective of major financial institutions and corporates at this particular COP - not just European and UK companies, but many from major economies in the Global South. And the consistent theme from the fringe events was that business accepts that the shift to net zero is inevitable and wants to get on with it. As McKinsey say in their COP wash up: “net zero is now an organizing principle of business”.

It’s onwards and upwards on the march towards the net zero transition.

For our full coverage of COP26, including what it means for business in the US, Asia and Germany, see our COP26 microsite.