Mike Scott says agreements to phase down coal, replace internal combustion engines, cut methane emissions and reduce deforestation were far from sufficient but show investors the direction of travel

As the dust settles on the COP26 climate conference in Glasgow, there is a lot for investors to digest, much of it away from the headline-grabbing announcements made both within and on the sidelines of the summit.

Importantly, there is no longer any dispute about the science, or about the need to limit temperature rises to 1.5C. Those arguments now look largely settled.

Announcements on phasing down coal, replacing internal combustion engines, cutting methane emissions and reducing deforestation, while far from comprehensive, provide ample evidence to the financial services sector of the direction of travel for fossil fuels and renewable energy.

But, as ever, the Glasgow summit brought mixed results, exceeding the expectations of what was possible, while not doing enough to tackle the climate crisis. Mindy Lubber, CEO of US sustainable investment pressure group Ceres, summed up the dichotomy of the event, saying that its outcomes “represent meaningful and significant progress in confronting the climate crisis. At the same time, that progress is not enough to prevent the worst outcomes of this growing crisis or to build the just and sustainable economy that our future demands.”

Or as Ed Rhys Jones of Boston Consulting Group put it, COP26 had “overdelivered given the politics, but underdelivered given the science”. Indeed, if the target was still to keep temperature rises to well below 2C, COP26 would have been seen as a success, pointed out E3G CEO Nick Mabey.

Protesters outside investment bank JP Morgan at COP26 in Glasgow. (Credit: Dylan Martinez/Reuters)

While limiting temperature rises to 1.5C is what HSBC called “all but officially the new target under the UN climate process”, we are still a long way from being on track for that.

“We need to cut global emissions by 45% by 2030,” said Mark Lewis, head of climate research at Andurand Capital Management. “But at the moment, we’re on track for a 14% increase by then. We need to see in the next year clear signals that we are starting to get onto the right trajectory.”

The call for countries to return with more ambitious nationally determined contributions (NDCs) next year, rather than in 2025, creates a real opportunity for the increased ambition that is needed to do so, according to HSBC. “We consider this a significant win because it is outside the normal five-year ratchet mechanism. The UN secretary-general will also hold a meeting of world leaders to close the ‘ambition gap’ in 2023,” the bank said.

Chris Stark, head of the UK Climate Change Committee, added that “NDCs aren’t in the right place for reaching the 1.5C target, but there is a clear recognition that the next decade is critical. Nobody was talking about 2030 until now.”

Using your initiatives

Many initiatives appear to lack impact or critical mass at the moment, but they could be the start of significant movement in areas from ending the use of coal power and internal combustion engines to stopping deforestation.

One of the most effective could be the commitment from more than 100 countries to reduce methane emissions – one of the most harmful greenhouse gases – by 30% by 2030.

The pledge covers countries representing nearly half of global methane emissions and 70% of global GDP. Although major emitters – including China, Russia and India – did not sign up to the pledge, that does not mean they will not act. There are many measures, such as reducing leaks, which make good business sense as well as helping the climate.

The same is true of the pledge by 24 countries and some of the biggest carmakers to sell only zero-emission vehicles by 2040 (or sooner), phasing out new petrol and diesel cars. The deal is expected to cover nearly a third of global car sales, and give investors the confidence to commit to electric mobility, as well as create new investable opportunities.

South Africa will receive $8.5bn to help fund its transition from coal. (Credit: Siphiwe Sibeko/Reuters)

Some point to the absence of key markets such as the U.S., China and Germany and key carmakers such as VW and Toyota, but that does not mean they are not acting. Indeed, according to a Reuters analysis, VW is far ahead of its competitors on investing in battery technology and electric vehicles.

The absence of an updated commitment from China was countered by new commitments from countries such as Indonesia, Vietnam and Nigeria, as well as a deal with South Africa on coal, under which the U.S., UK, France, Germany and EU will pay $8.5bn to help fund South Africa’s transition from coal to a “clean energy economy” over the next five years.

These countries signed up because of the economics, said Mabey. “South Africa signed up to its coal deal because it believes it would not be able to sell its goods or attract foreign investment.”

Indeed, the South Africa deal could provide a template for how governments in developed countries help emerging economies to transition from fossil fuels, which was one area where the Glasgow Climate Pact fell short, with its agreement only to “phase down” rather than phase out coal.

It could also serve as a model for how investors can put to good use some of the $130tn trumpeted by former Bank of England governor Mark Carney as falling under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ).

Oil and gas in the spotlight

Meanwhile, as the agreements on methane and vehicles demonstrate, attention is turning inexorably to oil and gas. Two new initiatives will help to sharpen that focus. The Beyond Oil and Gas Alliance (BOGA) was launched in Glasgow by Denmark and Costa Rica “to deliver a managed and just transition away from oil and gas production”.

Its membership ranges from France, Ireland, Sweden and Wales to Greenland, California and Scotland. It may only account for 0.8% of global oil production, but as Irish environment minister Eamonn Ryan pointed out, it is not just about existing production, but about future reserves and the availability of finance to oil and gas producers. Ireland has committed not to allow exploration in its considerable offshore territory, and also said that its strategic investment fund will not invest in fossil fuels.

(Credit: Pan Demin/Shutterstock)

Greenland, meanwhile, may have no production to speak of, but it has enormous reserves, which will now not be developed. And as we have seen with the net-zero movement, these things have a habit of growing over time.

Another initiative, championed by Mark Campanale, founder of the Carbon Tracker Initiative, is the Global Registry of Fossil Fuels, which he says will provide transparency on the current production and proven reserves that will take the world beyond its carbon budget. “The registry will allow investors to identify the countries and projects that will take us beyond 1.5C. You can’t solve the climate crisis while handing out new licences. It will also allow investors to see which companies have assets that risk becoming stranded.”

This will be complemented by the Fossil Fuel Non-Proliferation Treaty, “which aims to gather countries to permanently retire and cut back production licences in a just and equitable way,” Campanale adds.

Finance front and centre

More than any previous COP, Glasgow placed the financial sector front and centre in the battle to limit temperature rises, said Linda-Eling Lee, head of ESG and climate research at MSCI. “Though couched in the language of diplomacy, the agreement adopted in Glasgow, with its call for ‘financial institutions and the private sector to enhance finance mobilisation’, speaks to the pivotal role that investors will play in producing a more sustainable world,” she pointed out.

She suggested that global investors are willing to play their part and that to do so, they should start differentiating companies based on their future emissions pathways. “Today we take companies’ net-zero pledges at their word. But the proof will be in their pathways going forward. That means we need to do the hard work of differentiating which companies in every sector will help us achieve net-zero, and which will hold us back,” she said.

UK Chancellor Rishi Sunak at COP26. (Credit: Steve Reigate/Reuters)

They also need to insist on climate-related financial disclosures across the entire market, to help them reallocate capital toward climate solutions, along with robust net-zero targets. “Without a holistic picture of companies’ emissions, the locations of their largest facilities and a list of their largest suppliers, investors are left to estimate and to second-guess,” she added.

Lee called for the mandatory reporting of core climate data, something that UK companies will now be expected to do. Just ahead of COP26, UK Chancellor Rishi Sunak announced that asset managers, asset owners and listed companies  will have to publish transition plans to decarbonise by 2050 or sooner, and set interim targets for 2030.

“The U.S. government and governments around the globe should follow the UK’s lead,” Lubber said.

Article 6

There was broad support for the conclusion of talks on Article 6 of the Paris Agreement, on creating a global carbon market and bilateral carbon trading. “This is a solid and ambitious outcome, because it establishes an integrity framework to support the expansion of carbon markets to help governments and businesses deliver higher climate ambitions,” says Dirk Forrister, CEO of IETA, the International Emissions Trading Association.

But Lewis warned that it will take a couple of years for the rules to be fully understood and that, “there are all kinds of grey areas. On the most extreme reading, you could argue that there is no room for voluntary credits and everything will be covered by corresponding adjustments [the mechanism put in place to prevent double counting of credits].”

Nonetheless, said Chris Iggo, chief investment officer at AXA IM, “A new global carbon trading market is starting to take shape. It remains to be seen exactly how the system will work, and how it will be scrutinised to avoid greenwashing. Still, this could allow companies to channel investment into green projects and could be an important step towards the emergence of a global price for carbon.”

The news that the International Financial Reporting Standards (IFRS) Foundation will establish a new International Sustainability Standards Board to develop globally consistent standards for climate and sustainability disclosures was widely welcomed by the market. “This addresses a key challenge facing investors, who need reliable, good quality, comparable information on sustainability factors to make investment decisions,” said Iggo.

A developing agenda

Preserving natural habitats, including in oceans, is key to managing carbon. (Credit: Vlad61/Shutterstock)

There were some clear areas of disappointment or absence in Glasgow, but many of these are likely to be the focus of COP27 in Egypt next year. Iggo highlighted the lack of an international commitment on biodiversity. “While the deforestation pledge was welcome, we believe that preserving natural habitats more broadly, including oceans, is key to managing the carbon in the atmosphere,” he said.

Countries agreed, for the first time,  to a quantifiable target on adaptation finance – equal to $40bn per year by 2025 – but this is only a fraction of developing countries’ estimated adaptation needs. The final text of the Glasgow Climate Pact sets in train the process of delivering a global goal on adaptation, which should ensure the issue gets more attention in future.

Loss and damage was another area where developing countries left Glasgow disappointed by progress. It is a problematic issue that cuts to the heart of the COP process, with developing countries believing that they should be compensated for the problems caused by rich country industrialisation, while those rich countries are reluctant to set a precedent for further payments. Although there was no cash forthcoming for the issue, a “Glasgow Dialogue” has been created on funding for loss and damage, at least putting it on the agenda for future conferences.

Much that was encouraging came out of COP26, but for this encouragement to be turned into progress, the hard work starts here, with investors set to do much of the heavy lifting.

Main picture credit: Matthias Rietschel/Reuters
COP26  Mindy Lubber  Ceres  coal  Fossil Fuel Non-Proliferation Treaty  methane  IFRS  Rishi Sunak  Global Registry of Fossil Fuels  deforestation  nationally determined contributions  UK Climate Change Committee  clean energy economy  Beyond Oil and Gas Alliance 

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