COP26 - after the curtain call

As we digest the outputs of the Glasgow Climate Pact, and ask whether enough progress was made, it’s important to remember that no single COP will solve the existential climate and nature crises we’re in. The complex world we’ve created, and the dependencies within it, make negotiations like COP inevitably extensive and multi-year.

Whilst a single COP can’t solve, multiple COPs must. We’re now nearly three decades into discussing the climate crisis, it’s inevitable that we’re asking – is COP the right platform? Are the structures we have in place to facilitate the decisions we need the right structures? Can they deliver the change required? Nevertheless, COP26 is part of a bigger picture and it’s important to find optimism in the progress that has been made and keep working hard towards a better world.

Fossil fuel added to climate pact

There are outputs from COP26 to feel reassured about, none least the inclusion of fossil fuels for the first time in the resulting text – the Glasgow Climate Pact. Acknowledging the fossil fuel problem into the text lays the ground for deeper and more meaningful interventions and action. Acceptance of critical language into the official text also sends a powerful signal to markets and investors – the dominance of black energy is coming to an end.

NDCs to align with 1.5 degrees

From the newly launched Beyond Oil and Gas Alliance (BOGA) to the Glasgow Breakthroughs, where public and private sectors collaborate to mainstream innovation to keep 1.5 degrees alive, Glasgow witnessed some highs. None more so than in the changes to the ‘ratcheting mechanism’ that will see nations yet to submit their Nationally Determined Contribution (NDC) do so by next year. Updates to existing NDCs will have to align with 1.5 degrees requested ahead of COP27 in Egypt. Additionally, a provision is now in place to further update NDCs through to 2030. Many nations had only recently updated their NDCs to further align with 1.5 degrees ahead of Glasgow. This new ‘improved’ ratchet mechanism will enable greater levels of scrutiny, especially on nations moving slowly. Transparency as we move forward is paramount.

A potential -0.5 decrease in warming

If the pledges that have been made in Glasgow are followed through and acted on, then we’re somewhere between 2.2 degrees 1 and 2.4 degrees 2 of warming. Some believe we’re at 1.8 degrees 3 of warming, although that feels optimistic. Given we’re on a pathway to 2.7 degrees 4 of warming, COP26 has theoretically delivered between 0.3 and 0.5 degree fall in warming. Way off where the world needs to be, but, taking into account the last two years and the disruption of Covid-19, it is progress. The next 12 months are critical in terms of what additional progress can be made ahead of COP27. And it is here that accountability is vital.

The role of business and investors post COP26

In order to create the change needed, consideration of the whole system and its issues (plural) is needed. With pledges made, for example the Glasgow Finance Alliance for Net Zero (GFANZ), committing $130trn of assets to Net Zero by 2050, it’s critical to ask if there is accountability to honour these commitments. Will we be able to ensure the pledges made here are anchored in real delivery timetables?

Corporate governance is the key. But it’s one area of the system that hasn’t been recognised for its ability to move the dial. Developments in corporate reporting and disclosure are welcomed, none more so than the launch at COP26 of the International Sustainability Standards Board (ISSB) 5 that aims to

unify disclosures from corporates, helping investors and other stakeholders to properly compare their sustainability performance and related risks.

International Sustainability Standards Board

Working with the Taskforce for Climate Related Financial Disclosures (TCFD), Climate Disclosure Standards Board (CDSB), the International Accounting Standards Board (IASB) and Value Reporting Foundation (VRF), ISSB will drive a better understanding of the risk embedded in business and investment decision making. Whilst this is welcome, the question remains, how are voluntary pledges held accountable?

The call from the newly formed B Corp Finance Coalition (UK) 6 is one way. Fundamental changes in company law and the purpose of a business have the ability to unlock seismic changes in performance and accountability. Directors’ duties are shaped by the purpose of a firm, and that is set out in its constitution. Purpose is currently largely shaped by shareholder needs. If we align that purpose with stakeholder needs, then Directors’ duties are changed to align with broader societal interest. Returns are still central, but they’re anchored in delivering environmental and social value. This change creates a mechanism for accountability.

What does the Glasgow Climate Pact mean for finance?

There has been, for some time, a split happening in finance between those investing for change and those investing in the status quo. The Glasgow Climate Pact serves to heighten the tension between these two worlds. It will increase the pressure on those invested in the status quo to fundamentally change, whilst providing even more opportunities and support to those already investing in the change that needs to happen. Portfolios aligning for the ‘just transition’, and investing in businesses through the lens of the United Nations Sustainable Development Goals (UNSDGs), will find themselves further still on the right side of incoming regulatory and policy developments, along with the uplift in investor and consumer sentiment that will follow.

Where are the investment opportunities?

Investment opportunities for improving carbon performance are abundant. Investing in equality and empowerment of women and girls has a beneficial role in tackling the climate and nature crises. 7 As does sustainable agriculture, green chemistry (and its role in moving us beyond plastic), and more traditional clean technology, energy efficiency and renewable energy infrastructure – to mention just some.

A critically important area for the transition will be moving industries with significant pollution profiles. Steel, shipping, aviation, oil and gas, transport all present opportunities for investing in new disruptive technologies – for example, battery technology and hydrogen. Another investment opportunity creating significant change in these high polluting industries is the carbon markets. The long-awaited adoption of Article 6 in the 2015 Paris Agreement paves the way for more cross border collaboration on carbon pricing and carbon trading. This is likely to lead to a further strengthening of existing emissions trading schemes, as well as seed the conditions for new schemes to come alongside. This is an area we already invest in at Tribe, and we see more investment opportunities linked to carbon in the future.

As we look at what needs to happen, the role of impact investing becomes even more important. For a segment of the finance industry that has been working hard, advocating loudly, and influencing widely, it feels like Glasgow has set the conditions for a system wide shift in global finance markets. This shift will depend on the collective wisdom and experience of the impact investing community to partner and drive the change required. We’re ready.