COP26 concluded on November 13 with a deal between almost 200 countries to significantly ramp up global climate action. The final Glasgow Climate Pact (“the Pact”) ties sovereign countries to new commitments on curbing emissions, spending on climate adaptation, trading carbon offsets, and transitioning away from fossil fuels, to name just a few. In this blog, we examine how government efforts to fulfill the Pact are likely to affect the private sector.
1.5°C stays alive
The Pact formally requests all 197 Parties to the United Nations Framework Convention on Climate Change (UNFCCC) to “revisit and strengthen the 2030 targets in their national determined contributions [NDCs]”, meaning their emissions-reduction plans, so as to align them with “the Paris Agreement temperature goal by the end of 2022”. It further requests the UNFCCC secretariat update its “synthesis report” on countries’ NDCs and their temperature alignment on an annual basis.
These provisions principally relate to limiting global temperature increases to 1.5°C above pre-industrial levels. “Keeping 1.5 alive” was a key objective of many of the COP26 constituents, to reduce the destructive consequences that a temperature rise above this threshold implies. The Pact even describes the carbon dioxide reductions that countries have to make to meet this limit — 45% by 2030 relative to 2010 levels, and to net zero around 2050 — though it does not contain a resolution binding Parties to achieve these cuts.
Still, by forcing Parties to “revisit” their NDCs before next year’s COP, the Pact will induce some countries to reconsider their targets and redraw their emissions pathways. And this will cascade down to business, likely pushing many organizations to accelerate their own decarbonization plans. In addition, by laying out the “45% by 2030” emissions target in black and white, the Pact has set a clear benchmark for evaluating the credibility of businesses’ climate transition plans. Those that fail to integrate this target could find themselves the target of climate activists, investors, and even legislators.
Climate finance pledges pumped up
Since the Paris Agreement was signed in 2015, most constituents have understood that unprecedented amounts of capital are needed to power the transition to a low-carbon economy, as well as into schemes that protect countries from the extreme weather and other physical impacts of a changing climate. It has also long been recognized that the bulk of this financing should be, and indeed only can be, provided by rich nations — which are also most responsible for the build-up of greenhouse gases in the atmosphere.
However, these same countries have continually fallen short of what is required of them. The Pact acknowledges this in a paragraph that notes “with deep regret” the failure of developed countries to provide USD$100 billion of climate finance annually to help developing nations. It also tells them to “at least double their collective provision of climate finance for adaptation to developing country Parties from 2019 levels by 2025”.
This could and should prompt rich nations to ramp up their financing of resilient infrastructure, ecosystem-based adaptation schemes, and disaster relief programs, among others, over the next four years. Businesses should be alert to the opportunities this dynamic offers to initiate and/or expand climate-friendly projects in the developing world, or to service other organizations that do so.
Businesses are also explicitly invited by the Pact to help countries turn their climate ambitions into reality. In a section on climate adaptation, the Pact calls upon “multilateral development banks, other financial institutions and the private sector to enhance finance mobilization” of the kind needed to achieve climate plans. This could open the floodgates for a new wave of financial innovation, which in turn could draw a greater number of businesses to the global effort to fund climate change mitigation and adaptation.
Together with the non-governmental pledges made during COP26 (see, for example, the Glasgow Financial Alliance for Net Zero (GFANZ)), the Pact also heralds a step-change in the volume and pace of private financial institutions’ investment in climate solutions. Banks and other investors will be racing to find impactful and creditworthy businesses in which to invest climate capital. This could lead to the rapid scaling up of climate-focused businesses, and as a result a wholesale transformation of the competitive landscape in ‘green’ technologies and manufacturing.
Established firms will not only have to be aware of the opportunities this wave of capital could bring — they will also have to be on guard for new entrants fuelled by climate-friendly investments. Such organizations could disrupt prevailing business models that do not adequately factor in the importance of climate mitigation and adaptation.
Carbon markets get a boost
A major output of COP26, recognized in the Pact, was the completion of the Paris Agreement program. The Glasgow summit tied up a number of loose ends left hanging when Parties signed the Agreement back in 2015, including so-called Article 6 negotiations on the mechanisms for trading emissions and carbon offsets across national borders. Decisions were adopted both on what standards apply to the bilateral trading of emissions between countries and on the rules governing a centralized exchange for the buying, selling, and accounting of carbon offsets.
Not only does this deal enable governments to trade emissions with confidence, it also provides a framework against which the credibility and robustness of voluntary carbon markets in the private sector can be judged. This should help bring order to the rash of trading initiatives that have flourished in the years since the Paris Agreement, and incentivize businesses to produce the carbon offsets sold through them. There will also be increased demand for monitoring, assurance, and financial services associated with offset programmes, which many businesses could help fulfill.
Calling time on coal
In a first for a COP summit, the Glasgow Climate Pact tells countries to take steps to cut down on fossil fuels — the single largest contributor to anthropogenic greenhouse gas emissions. Specifically, the Pact calls on all Parties to accelerate efforts to “phase-down unabated coal power and inefficient fossil fuel subsidies, recognizing the need for support towards a just transition”.
Though this language allows for the limited continuation of coal-fired power, and gives countries discretion over determining what fossil fuel subsidies count as “inefficient”, the very mention of fossil fuels in the Pact is significant. Pressure on the coal industry has ratcheted up in recent years, and COP26 has made its future all the more challenging. Businesses involved in, or related to, the industry should take heed, and take steps now to disentangle themselves from this fossil fuel.
As for other fossil fuel businesses that depend on government subsidies, the Pact makes the ongoing provision of this support uncertain. This should lead to a reassessment by financial institutions of the credit risks associated with lending to such entities. Businesses of all types should also be incentivized to switch to renewable energy in order to sidestep the price increases and disruption of supply that could result from the sudden or slow withdrawal of subsidies from the coal and oil and gas industries. Finally, the language on “a just transition” should push countries and businesses to launch projects that help employees in the fossil fuel industry make the switch to new careers.
The agreements reached in Glasgow will have far-reaching implications for business, and this blog has only scratched the surface of what could result following the Pact’s statements on the pace of decarbonization, climate finance, the global carbon market, and the energy system. What is already clear is that no business, big or small, can afford to ignore the Pact’s ramifications. To do so would mean not only overlooking a whole host of new risks, but also brand-new opportunities that could launch climate-smart businesses into a more prosperous future.