Week Two: summary of key takeaways

Developments during the second week of the Conference included:

• While a rise of just 1.5OC  in the global temperature is the target, the carbon reduction measures agreed at COP26 are projected to fall far short, delivering a rise of 2.4OC. Accordingly, in 2022 delegates have agreed to reconvene to try and further refine carbon reduction commitments to achieve the 1.5OC goal.
• A breakthrough was the inclusion of coal in reduction targets – despite coal being the largest contributor to carbon emissions as a fuel source, it has never been explicitly included until now.
• In another unexpected turn of events, China and the US signed a Joint Glasgow Declaration on Enhancing Climate Action in the 2020s.
• Many developing countries urged developed nations to honour their annual funding commitment ($100bn) made at COP15, noting the previous commitments were widely considered not to have been honoured from 2010.
• Over 100 countries pledged to reduce methane emissions by 30% by 2030 through the Global Methane Pledge.
• A coalition of 23 governments (covering 95% of global public investment in clean technology) announced four new ‘innovation missions’ to accelerate the development of clean technologies for cities, industries, and the production of renewable fuels, chemicals, and materials. 
• The Global Action Agenda (backed by 160 allies) aims to increase investment in agricultural research and climate-resilient technologies and practices.
• Leaders committed to review via ‘checkpoints’ progress on making clean technologies and sustainable solutions the most affordable, accessible and attractive option in each emitting sector globally before 2030.
• India, Chile and Sweden committed to the Urban Transition Mission to deliver 50 projects in urban environments by 2030 – providing a pathway for cities to adopt net zero carbon solutions.
• Collaborating through Mission Innovation, 22 governments and the European Commission committed to catalyse investment to accelerate technologies to facilitate urban transitions, eliminate emissions and produce renewable goods. 

Related news

• A new study by the UK Met Office and Newcastle University revealed that a billion people will undergo extreme heat stress as a result of a 2°C temperature rise.
• BMW, Toyota, Volkswagen, Nissan and Stellantis refused to sign a deal to end new car emissions by 2040, citing slow transition to green vehicles in their key markets. However, Ford, Mercedes-Benz owner Daimler and Volvo supported the pledge at COP26.  

Significant announcements for the financial services sector

• EIB and Allianz announced a €500mn public-private climate fund, which aims to support climate mitigation and adaptation in emerging markets.
• Boost to phasing out coal as 23 countries make new commitments, taking the overall commitment to 190 countries globally. Financial institutions (including HSBC and Fidelity) signalled their commitments to reduce/remove their funding support for such activities. These acts align with 25 of the major economies including the US and Canada and led by the UK to stop public support for such initiatives by the end of 2022.
• A global investor coalition managing almost $12trn is calling on G20 nations to disclose specific targets for reducing agricultural emissions alongside their Nationally Determined Contributions (NDCs) at COP26. Investors urge fund managers to sell shares with poor ESG records. 
• The #ClimateShot campaign, focused on agricultural research and innovation, has allied with over 20 investors, funders and initiatives within the impact investment community to mobilise over $5bn to transform agriculture for people, nature and the climate.

The ‘So What’ for financial services

What are the implications for financial services off the back of COP26? 

• The commitments to end international fossil fuel finance could redirect around $17.8bn p.a. of public finance from fossil fuels into the clean energy transition, which calls private finance to follow with climate-friendly investments. The exact balance of redistribution may not follow this rationale exactly, but conditions have been set to aid this funding movement. 
• Moreover, the sophisticated goals towards mobilising funds to finance agricultural transformation indicate investment and lending opportunities. The rise of funds, alternative investments and specific bank debt products may see a burgeoning opportunity for the funding streams for smarter ‘eco aware' farming schemes, for both consumers of capital and providers.
• A fundamental reassessment of risk management models and procedures is inevitable to account for proper consideration of opportunities, physical (e. g. asset damage) and transition risks (e. g. technology changes) arising from climate change. Large asset owners will need to increase the level of sophistication of their traditional risk models, looking not just at-Risk Framework models but also thematic exposure models and temperature impact models (portfolio target alignment methodologies). 
• The challenge, however, lies in the reliable identification of such investments given the fragmented and often unreliable nature of current metrics, criteria, and standards – underlining the critical importance of enhanced data capture, aggregation and analysis moving forward to drive effective investment decisions and risk management. Undoubtedly there will continue to be a proliferation of FS data providers for new science based and climate related measurement metrics.
• The sooner financial institutions master navigating through challenges to identify climate-resilient and sustainable investments and selecting the convincing companies in the form of private equity, venture capital or securities, the more competitive edge they will gain through transparency and credibility. Climate and wider ESG is no longer an edge investment or loan opportunity for FS firms but a core tenet of all distribution strategy going forwards. 

Way ahead

The negotiations to mobilise much-needed climate finance (beyond $100bn a year) from 2025, efforts to scale up strategies to assist developing nations who often find themselves at the frontline of climate change and an agreement on “phasing down” (if regrettably watered down from the original “phasing out”) of coal are all positive steps as the Glasgow Climate Pact is signed by participating countries. Now, it is time to act.  

To learn more about the data-related challenges around ESG, we invite you to join our global webinar Delivering a Greener Future through Better Data on 24 November 2021 - register here.

AUTHORS

Charles Sincock, Managing Principal
Nishikant Gupta, PhD, Consultant
Antonia-Ivana Kljaic, Senior Consultant

CONTACTS

Charles Sincock, ESG Lead UK
+44 7967 631514
charles.sincock@capco.com

Olaf Clemens, Global ESG Lead
+49 69 9760 9076
olaf.clemens@capco.com