The agenda for COP26, the 26th United Nations Climate Change Conference of the Parties to the Paris Agreement on climate, was one of great ambition, on a par with that of Paris itself in 2015. But it needed to be. If we are to maintain a climate within 1.5°C of pre-industrial levels, we must completely reshape our global energy and economic systems over the next 30 years. And while we do it, we must maintain economic stability and achieve energy equality among and within the developed and developing worlds.
But it took 100 years, on average, to achieve previous energy system changes. Will moving from fossil fuels to renewables be similarly drawn out? Neither private markets nor governments can do this alone; it will require changes in technology, regulation and consumer behavior across 193 UN members.
There was no “Eureka!” moment at COP26. Huge gaps persist among nations and between past pledges and real actions. Nonetheless, it kept the world’s biggest emitters accountable and forced through increased ambitions. At COP25 in Madrid in 2019, “keeping 1.5 alive” seemed all but impossible. Glasgow has offered a path to net-zero, and a north star to guide us.
Key COP26 Takeaways
Let’s begin our review of the Conference by setting aside the Glasgow Climate Pact itself for a moment, and focusing on some meaningful announcements that came out of the wider program of events.
The mobilisation of private sector finance is perhaps the single most important factor in the pursuit of net-zero. The Conference saw the establishment of the Glasgow Finance Alliance for Net Zero (GFANZ), a network of 450 financial institutions managing a total of $130 trillion that have pledged net-zero emissions by 2050, building on the progress already made by the Net Zero Asset Managers Initiative and Net Zero Asset Owner Alliance. A new Sustainability Standards Board was announced by the International Financial Reporting Standards foundation (IFRS). The UK government also announced plans to mandate net-zero transition plans for financial institutions and listed companies.
A coalition of 190 countries and companies agreed to phase out coal power and end support for new plants. At least 23 countries made new commitments, including five of the top 20 coal power-using countries. There were also commitments to scale up clean power and ensure a just transition, while financial institutions made landmark commitments to stop funding “unabated” coal power generation. Collectively, these moves are expected to transition some $17.8 billion a year from fossil fuel to clean energy funding.
3. Nature and Land Use
More than 100 countries, representing around 85% of the world’s forests, pledged to halt deforestation by 2030, supported by nearly $20 billion in public and private funding. A similar number of countries pledged to reduce methane emissions by at least 30% in the next decade (but, so far, not China, Russia or India). This covers 11 of the 20 highest methane-producing companies. Over 150 organisations committed to leverage more than $4 billion of public funding to develop climate-resilient crops, soil-quality enhancements and other innovations in the agriculture sector.
4. Adaptation, Loss and Damage
Commitments totalling $232m were made to the Adaptation Fund by the US UK, Canada, Sweden, Finland, Ireland, Germany, Norway, Qatar, Spain and Switzerland—more than double the previous highest collective mobilisation.
The RouteZero campaign brought together commitments from policymakers, auto manufacturers and other stakeholders to shift toward 100% zero-emission vehicles (ZEV) adoption by the end of the 2030s. Thirty countries, including some major emerging economies, pledged to work together to make ZEVs more accessible in all regions by 2030 or sooner. A World Bank trust fund will mobilise $200m to decarbonise emerging market road transport over the next decade. In addition, 19 governments set out to establish zero-emission “green shipping corridors” on key global routes.
Highlights From the Glasgow Climate Pact
Turning to the Pact itself, we saw the following developments.
1. Nationally Determined Contributions (NDCs)
Under the 2015 Paris agreement, nations were only required to set new NDCs every five years. Because existing commitments do not meet the 1.5°C target, however, NDCs will be reviewed at COP27 next year. Although seen by some as “kicking the can down the road,” the intention is to ensure laggard countries stay on track and step up commitments.
India managed, at the 11th hour, to get the wording associated with coal watered down from “phasing out” to “phasing down.” That said, COP26 marks the first agreement at this level to make direct reference to reducing reliance on fossil fuels. Given that the ambitious original text would have mandated the closure of at least 40% of the world’s 8,500 coal-fired power plants by 2030, with no new ones built, many consider this more modest attainment as progress.
3. Adaptation and Climate Finance
Developed nations have failed miserably on their 2009 commitment to distribute $100bn a year in climate finance to the developing world, starting in 2020. Even so, rich nations have increased the commitment to $500bn over the next five years, to be focused on adaptation rather than emissions reductions.
4. Loss and Damage
COP26 could not agree on funding for loss and damage in the developing world—one of the most contentious ambitions, given the potential liabilities it creates. This was pushed on to COP27.
5. Carbon Markets
A major accomplishment was agreement on a framework for carbon offset markets. This completes Article 6, the final outstanding piece of the Paris Agreement. The new framework comprises a centralised market open to the public and private sectors, and a separate bilateral system to allow countries to trade credits. The new rules for the centralized system will require project developers to deposit 5% of the credits generated by a project, plus a monetary contribution, into a fund supporting climate adaptations in developing countries; while 2% of the credits will be cancelled to effect an overall reduction in emissions, rather than simply balancing out emissions. In the bilateral system, new rules will prevent “double counting,” where credits are counted by both the country selling them and the country buying them.
Implications for Investors
If COP26 told us anything, it’s that the private sector and private capital will be critical in leading where policymakers are lagging. Governments could come together to introduce carbon pricing and border carbon taxes, and mandate an end to the use of thermal coal and internal combustion engines—but the US and China, which account for half of global emissions, have not taken these steps. China is still only pledging net-zero emissions by 2060 and India by 2070.
By contrast, asset owners and managers representing $130 trillion in assets, including Neuberger Berman, are now committed to net-zero investing by 2050. Many clients expect us to decarbonize their portfolios, anticipating that these moves will change the cost of capital for key sectors and, through the market mechanism, do governments’ work for them. Perhaps the most advanced example of this that we have worked on so far, and we hope the first of many, is a £1.3 billion climate transition-related multi-sector credit strategy with the Brunel Pension Partnership in the UK, which is designed to reduce the portfolio’s carbon footprint to net-zero by 2050.
In our view, a purely exclusionary approach will not be enough to meet those ambitions; there are large financing gaps within the existing energy industry that need to be filled to ensure a just and orderly transition, as the volatility and knock-on impact of natural gas pricing has recently shown. But we should also expect much more focus on how portfolios actively and measurably contribute to climate solutions. The journey to net-zero requires substantial technological innovation: for cement production, for example, net-zero will require the sequestration of half the industry’s emissions using Carbon Capture and Storage (CCS), which remains expensive and unproven at scale; in transportation, the ambition is for still-nascent green hydrogen to play a key role. Some of these solutions will be investable, some not, and as COP26 has shown, policymakers will subsidize advances in certain areas while nudging capital allocation toward others through regulation and official taxonomies of sustainable activities.
Pursuing these investment goals will be meaningfully helped by the IFRS’ new global sustainability disclosure standards, supervised by an International Sustainability Standards Body (ISSB), especially as this new body will merge the existing Sustainability Accounting Standards Board (SASB), Climate Disclosure Standards Board, and related projects of the World Economic Forum and Taskforce on Climate-related Financial Disclosure (TCFD).1 Companies and investors have long called for this kind of consolidation. The Financial Accounting Standards Board (FASB) in the US will not endorse the ISSB, but as there is no competing US sustainability disclosure standard, it is likely that US-listed companies with global shareholders will now look to the ISSB.
An even more helpful advance would be the development of a genuinely global and co-ordinated market price for carbon. That would provide instant transparency into, and internalization of, the emissions incurred throughout any value chain. This, in turn, should lead to accelerated innovation to reduce costs and much more efficient capital allocation by investors. Carbon pricing is a critical input in “Climate Value at Risk” (CVaR) models and a useful reference point to enrich engagement with companies on their Scope 1, 2 and 3 emissions—how to quantify and manage them and, if necessary, pass the costs onto customers.
Unfortunately, as of September this year, there were 64 different carbon-pricing initiatives running around the world, churning out sometimes wildly different prices. The Real Carbon Price Index, a project established by several carbon industry experts, calculates that the average price today is just $4.50 per tonne. As a reality check, the World Bank and the International Energy Agency (IEA) suggest that carbon emissions should be priced between $70 and $100 per tonne by 2030 if we are to achieve net-zero by 2050—and it is notable that the European Union’s Emissions Trading System price has broken through $70 per tonne since COP26 concluded.
The Hard Work Starts Now
Work on global carbon pricing—as well as many other requirements for the journey to net zero—starts now, as the hubbub of COP26 dies away and we prepare to meet again in Sharm El Sheikh next November.
Overall, the results so far arguably justify a “glass half full” assessment. The Conference took place under a veil of political instability, as the world emerged from a global pandemic and the greatest recession for 70 years, against a backdrop of increasingly protectionist economic policies. And yet, after trading barbs throughout proceedings, the US and China surprised us all with a pact to cooperate on climate change, setting it aside from other, thornier disputes. This raised hopes that the “Climate Race” could be the 21st Century’s Space Race—but this time with the two superpowers pulling for the same side.
And there were substantial developments to accompany the fine words. When these parties met in Paris in 2015, we were on a trajectory toward global temperatures of 4°C to 6°C above pre-industrial levels. Today, the IEA puts us on a path to 1.8°C, as long as existing commitments are honoured; Climate Tracker says 2.4°C.
That is progress—and it also suggests huge opportunities to engage with our clients and our portfolio companies on how their investments and their businesses can be part of the journey to net-zero.