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Countdown to COP26: Avoiding Past Mistakes

As the COP26 summit fast approaches, policymakers must overcome the inertia and infighting that has typified recent climate diplomacy.

Global temperatures are going to increase by at least 1.5 degrees Celsius in the next 20 years and humans are to blame. This stark and conclusive finding from the Intergovernmental Panel on Climate Change (IPCC) report released last week means attendees at the imminent COP26 must achieve far more than their counterparts managed at COP25 in 2019.

Policymakers must go further than the efforts made by representatives from the G20 nations at July’s climate change summit in Naples, which is largely seen as a benchmark for November’s COP26. The Italian event managed to secure global climate change targets, but failed to reach agreement on phasing out coal, or removing subsidies for fossil fuels, because of opposition from Russia, China, India and Saudi Arabia.

There can be no repeat of the disappointing COP25 summit held in Madrid, which UN Secretary General António Guterres said resulted in “the international community [losing] an important opportunity to show increased ambition on mitigation, adaptation and finance to tackle the climate crisis”.

This view was reinforced in a now infamous and impassioned speech by climate change activist Greta Thunberg in which she said: “Countries are finding clever ways around having to take real action. Like double-counting emissions reductions and moving their emissions overseas and walking back on their promises to increase ambition or refusing to pay for solutions or loss of damage. This has to stop.”

And stop it hasn’t.

Heeding the wake-up call

Yet there is still a chance that with enough impetus, COP26 could provide the requisite action to move the world away from the terrifying forecast laid out in the IPCC 2021 report.

Alok Sharma, the UK minister presiding over the COP26 summit, said: “If ever there was going to be a wake-up call to the world when it comes to climate change, this report is it. But the future is not yet written. The very worst of climate change is still avoidable.”

If the very worst is to be avoided, then the investment industry must continue to play its part in driving the agenda. To its credit, it has been instrumental in making significant advances towards meeting the Paris Agreement on climate change.

Climate Action 100+ (CA100+), formed in 2017, now has more than 615 members across asset owners, asset managers and engagement service providers, responsible for over US$55 trillion in assets under management. It is engaging the most heavy-emitting companies on improving climate change governance, cutting emissions and strengthening climate-related financial disclosures.

And this has had notable impact since the inertia of the COP25 summit. The initiative’s latest progress report shows that during 2020, nearly half (43%) of companies engaged by CA100+ set a net zero by 2050 target.

Andy Howard, Global Head of Sustainable Investment at Schroders, a signatory of CA100+, says: “It’s very clear that many companies, not just in the heavy industries but across the board, are already working on or have carbonisation plans. It’s very clearly shifted from climate change being a sort of distant risk topic within boardrooms to one that’s much more firmly on the agenda.”

Far from complacent

Despite this progress, there is much left to do. According to CA100+, only 10% of focus companies have net-zero targets that explicitly cover the companies’ most material Scope 3 emissions, making the organisation far from complacent about the work still needed to meet the Paris Agreement. COP26 then will be a critical forum for institutional investors to keep pushing their plan.

Meanwhile The Investor Agenda, a collective of 457 investors with US$41 billion in assets under management, has pledged its commitment to tackling climate change ahead of the COP26 summit.

In a mission statement sent out in June, the collective set out a five-point plan calling on countries to strengthen their nationally determined contributions (NDCs) for 2030 before COP26, “to align with limiting warming to 1.5-degrees Celsius and ensuring a planned transition to net-zero emissions by 2050 or sooner”.

The United Nations Framework Convention on Climate Change (UNFCCC) reported that it had received new or improved NDCs from 110 parties (58%) before its 31 July cut-off date. As well as calling on non-submitting countries to redouble their efforts ahead of Glasgow, the UNFCCC expressed disappointment with submitted NDCs, saying “collective efforts fall far short of what is required” to limit climate change event to two degrees.

Mandatory disclosure requirements

Investors may take heart from The Investor Agenda putting its weight behind the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. It calls on policymakers to commit to implementing mandatory disclosure requirements aligned with the TCFD.

Should COP26 result in such a step being taken widely, the results would be significant for investors. The UK is the first G20 country to make TCFD reporting compulsory, suggesting that there is a good chance that the persistent obfuscation and lack of consistency in company reporting may come to an end.

And in 2021 the UK became the first G7 country in which trustees of pension schemes are “statutorily required to consider, assess and report on the financial risks of climate change within their portfolios”.

Guy Opperman, the UK’s minister for pensions and financial inclusion, said the decision to mandate pension schemes was critical to ensuring the “country’s ambitious climate change target” was passed into law to reduce emissions by 78% on 1990 levels by 2035, noting that it formed a key part of the UK government’s private finance strategy in the run up to hosting COP26.

It is no surprise then that asset managers are keen to demonstrate their commitment to voting on ESG issues. Since 2020, Legal & General Investment Management, BlackRock and Fidelity have been among the big-name asset managers competing to prove their willingness to wield their stewardship powers with greater force, if companies fall short on climate change disclosure.

Timing is tight

The UK’s commitment to the climate change cause ahead of its role as host to COP26 is admirable – even if it remains short of detail in some key areas – but it is just one of the G7 nations that need to demonstrate more tangible support.

One major difference since COP25 is the change of administration in the US. President Joe Biden has put in place an ambitious climate plan which he intends to use as a galvanising force at COP26. Biden has pledged trillions of dollars to meeting net zero targets by 2050 and vowed to encourage other nations to follow suit.

However, this summer Biden’s agenda looked more shaky as big oil and gas fought back against plans to pause oil and gas lease sales in the US, arguing such attempts to curb their industry was unlawful. This is just one example of repeated obstacles thrown in the way of Biden’s plans to clean up his nation’s act.

And of course, any effort by the US is only important if mirrored by similar action in China.

The Chinese government has set out a target of reaching net zero emissions by 2060, and has said its emissions will peak by 2030, but there is no escaping its ongoing support for coal-fired power stations, which could not be further from the direction in which COP26 discussion needs to be headed.

Important agreements may be reached at the G20 leaders’ summit in Rome, but timing is uncomfortably tight. It is scheduled for 30-31 October, directly ahead of the opening of COP26 in Glasgow.

The current political climate suggests there is some hope that the COP26 summit will not be a repeat of the frustrating affair of 2019. The IPCC report should, at least, act as a serious motivator to get policy in place on which the major nations agree and will implement to deliver positive change, but much remains uncertain.

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