COP26: Climate finance is ready to commit to fighting climate change
The COP26 Summit took a step closer to climate change action involving every stakeholder
While Curiosity is Keys was telling you last April that the “Biden Summit” raised new commitments towards reducing greenhouse gas (GHG) emissions, COP26 took a step further towards climate action. On November 13, after 2 weeks of negotiation, nearly 200 countries struck the new “Glasgow Climate Pact” (most recent temporary version here). This edition focused on how climate finance and monetary solutions can actively keep the following target alive: to limit temperature rises to 1.5 degrees Celsius above the pre-industrial level. Country leaders were requested to strengthen their “nationally determined contributions” (NDC) emission targets by the end of next year, accelerating the timeline for climate action.
Main takeaways from the “Glasgow Climate Pact”
The 2021 UN conference marked a turning point in history as for the first-time debates delved directly into increasing coal abatement and phasing down fossil fuels subsidies. The coalition, “Beyond Gas and Oil alliance” (BOGA), led by Costa Rica and Finland, took concrete engagements to end the exploitation of new oil and gas plants on their land. Even if no specific dates were set yet, the coalition members, France, Greenland, Ireland, Wales, Quebec, Sweden, Portugal, New Zealand, and the state of California, are ready to follow up on those commitments.
A key challenge was to keep the goal alive of limiting temperature rise to 1.5 degrees above the pre-industrial level by 2100 as agreed upon under the 2015 Paris Agreement. Country governors were requested to revise their near-term climate targets by 2022 by increasing their NDC to the emission targets. Leaders are expected to hold a summit by 2023 to report on their progress.
For years, developed countries have largely contributed to the global share of GHG emissions. A dialogue with underdeveloped countries was started to set a new fund to cover for “losses and damages”. These irreversible consequences of climate change are estimated to be between $290 and 580 billion per year until 2030. Developed countries were also urged to double their financial support to the Adaptation Fund by 2025 to support developing countries.
Among other key events that are worth remembering and that will impact the industries at large, the countries agreed to set a plan of action to resolve disputes around the rules for global carbon markets. It will from now on prevent the double-counting of emissions reduction credits, providing more credibility to this market. 💥 The IFRS Foundation also stated its intention to create an International Sustainability Standards Board to establish greater disclosures on sustainability matters and tackle corporate greenwashing. 🍀
Nonetheless, some discontent arose, notably among activists and youth movements. Many have expressed regrets that intense debates moderated strong commitments. The final draft only includes weakened wording. India and China’s efficient lobbying cut out a net-zero emission target by softening the “phasing out” of fossil fuels subsidies to a “phasing down”. If it seems trivial, such phrasing is important. According to an intermediary report published by the UNEP, it is most probable that the agreement reached will rather lead to a 2.5 degrees growth by 2100.
However, the deal still sets “tangible next steps and very clear milestones” declared Alok Sharma, the British Minister of State and President of the Glasgow talks, as quoted by the Washington Post. French Environment Minister, Barbara Pompili, shared his opinion and tweeted: “The Glasgow Pact is a useful compromise that seals the package of instruments of the Paris Agreement”.
If COP26 highlighted the challenges of reaching operative international agreements, each governance level demonstrated a united front to contain climate change. As cities have a critical role to play, it is without surprise that mayors from big cities such as Paris, Los Angeles, and Barcelona participated. On November 3, among the 40 mayors that took part in the conference, Montpellier’s mayor presented his plan to foster a greener development of cities, notably through free and clean transport. He declared aiming at making Montpellier “an inspiring city in France, Europe and for the world”.
Climate finance, a key topic: the private sector has a center-stage role
A few days before the start of the UN Conference, Paris held the Climate Finance Day, showcasing how attention is turning towards climate and impact finance. According to the FT, an equity research team at Jeffries argued that if some promises reached during COP26 were “bombastic and eye-catching”, “the grudging rise in international climate finance over the next few years will provide a long-term pipeline of opportunities for high-yielding private-sector investment”.
So far governments have failed to provide $100 billion to climate finance by 2020. They are now expected to reach this pledge from 2009 by 2023. However, this goal re-alignment was overshadowed by the Glasgow Financial Alliance for Net Zero (GFANZ) announcement to put forward a $130 trillion joint net-zero pledge. It will be dedicated to climate change action and to strengthening green investment. 👏 👏 👏
The UN Climate envoy, Mark Carney, underlined that the finance industry will help the public sector to move forward in its fight against climate change by raising private money. It is a strong belief shared by Curiosity is Keys, especially as loans represent most of companies’ financial input and should be directed toward their decarbonization. 450 banks and financial institutions committed to report annually on the carbon emissions of the projects they fund. Meanwhile, an advisory panel made up of 20 independent experts and seven NGOs will ensure transparency and monitor compliance with those new commitments.
COP26 sent clear signals to private investors to turn towards more sustainable investments
COP26 sent clear signals to private investors to turn towards more sustainable investments. On one hand, financial institutions, representing 40% of the world capital, committed to assuming a fair share of the effort to wean the world off fossil fuels. On the other hand, intergovernmental pledges to tackle both deforestation and methane emissions could induce regulatory changes in the coming months and years.
Several instruments already support and secure investors’ commitments to sustainable development. The UN Principles for Responsible Investments (PRI) number more than 2000 signatories, whereas national initiatives create additional incentives. For instance, in France, the Responsible Social Investment (ISR) directs investments according to social and environmental criteria. As financial stakeholders, we have a role to play in the action unfolding as climate change represents the most prominent challenge of our century. It also raises new risks to assets, such as “the impact of extreme weather on agriculture, infrastructure, and productivity”. According to Jessica Alsford, Morgan Stanley equity strategist cited by the FT, investors will need to focus on those in the years to come.
