Reflections on the successes and failures of COP26 must motivate the public and private sectors.
This time last week, the term ‘Glasgow Climate Pact’ had not yet been coined. Over the last seven days, we have begun the task of breaking down a fortnight’s efforts to keep the goals of the Paris Agreement in reach. Despite the use of the collective, it’s worth remembering that terms such as ESG and carbon emissions are not yet common currency to worker bees in global financial centres, let alone the wider investing public.
Determination to remain optimistic about potential impact of the steps that have been taken (or pledged) has not obscured the reality of the limited progress made along the Clyde. UN Secretary-General Antonio Guterres made a point of listing what had not been achieved – ending fossil fuel subsidies, pricing carbon, phasing out coal, delivering US$100 billion in climate finance to developing countries – while reiterating his determination to hold countries to more rigorous and regular account on their climate commitments.
Glasgow gave a renewed perspective on the relationship between public and private sectors, a dynamic central to efforts to adapt to and mitigate climate risks, as well as that between developed and developing economies. As Guterres noted, the approved texts “reflect the interests, the conditions, the contradictions and the state of political will in the world today”, underlining the challenges of balancing short-term electoral considerations and long-term whole economy change.
Narendra Modi’s demand for India’s share of the global carbon budget partly stemmed from the importance of coal-sector jobs, while domestic factors will have influenced rich countries’ collective failure to transfer promised funds to poorer, more exposed ones. While the US-China deal suggested at least some capacity to rise above politics-as-usual, the painful passage of the US infrastructure bill did not.
A key question is whether investors and companies will take their lead from Glasgow’s compromises and sit on their hands in lieu of further incentives, roadmaps and regulations, or more proactively respond to the established direction of travel. In challenging areas, from reinforcing resilience in energy infrastructure to decarbonising the built environment, the evidence suggests that the public-private dynamic has to act as a spur, not a brake.
This may also come in the form of further pressure from central banks and prudential regulators. With climate risks already high on the agenda of the Basel Committee and the Financial Stability Board, the campaign by NGOs, including ShareAction, to use prudential capital requirements to accelerate the finance sector’s exit from fossil fuel support may well bear fruit.
For certain, the market for sustainable investments is heating up, with pricing reflecting increased competition among asset managers, although buyers must continue to beware the differences in approach as ‘net zero funds’ become more prominent among fund offerings.
In Glasgow, former US Vice President Al Gore joked that he now used last week’s news coverage to illustrate the physical risks of climate change, such is the increased frequency of their incidence. Canada and Brazil underlined the truth of Gore’s message this week. Such scenes will inspire many investors, but, as US Climate Envoy John Kerry noted this week, investors must be motivated by the opportunities as well as the risks of transition to a low-carbon economy.