COP26: A New Reality for Business?

January 10 2022 Ayoub Rahmouni

Sustainable Development

COP26: A New Reality for Business?

Between October 31 and November 12, more than 130 heads of state along with many more business and industry leaders, gathered in Glasgow for the United Nations Climate Change Conference, or COP26, with the aim of accelerating action towards the goals of the 2015 Paris Agreement and the 1992 UN Framework Convention on Climate Change.

Going into the conference, scientists and experts had warned that nations must make an immediate and decisive turn away from fossil fuel energy, with many describing it as the last chance for countries to reach consensus on two goals: reaching net zero emissions by 2050 and limiting global warming to 1.5C above preindustrial levels. The commitment to aim for 1.5C is important because every fraction of a degree above that figure is expected to result in the loss of many more lives and livelihoods, due to the resultant climate-related consequences.

The talks ultimately led to various important and significant pledges from nations and companies to commit to new targets for cutting emissions, and otherwise act to avert severe climate change. In this article, we examine some of the more significant such agreements reached at the conference, as well as the implications they are likely to hold for businesses.

Agreements Reached at COP26

The agreements reached at the conference can be divided into five broad categories of change:

Phasing out Coal

More than 40 countries agreed to phase out their use of coal-generated power while 23 countries signed the Coal to Clean Power Transition Agreement, committing themselves for the first time to halt the issuance of new permits for unabated coal-fired power generation projects. Notable hold-outs to the agreement include Australia, India, Russia, and the US. China, which was responsible for 54% of global coal consumption last year, was also absent from the agreement

Major international banks and lenders like HSBC, Fidelity International and Ethos, also made landmark coal-related commitments at COP26. HSBC, for instance, has pledged to phase out financing of coal-fired power and thermal coal mining by 2030 in the EU & OECD, and worldwide by 2040.

Cutting Methane

The Global Methane Pledge was signed by more than 100 countries, representing 70% of the global economy and nearly half of its methane emissions. These signatories committed to a collective goal of reducing global methane emissions by at least 30% from 2020 levels, by 2030. The top three emitters of methane globally – China, Russia, and India – did not sign up to this pledge.

Ending Deforestation

The Glasgow Leaders’ Declaration on Forests and Land Use was signed by more than 140 leaders, representing over 90% of the world’s forests. Signatories committed to halting and reversing deforestation and land degradation by 2030, with $19.2bn already committed to the facilitation of these goals.

New Net-Zero Pledges

One of the main objectives of COP26 was to secure governmental and company commitments to reach net-zero emissions by 2050. Countries answered the call in Glasgow, with 29 making such commitments at the conference, bringing the total count to 74.

India’s Prime Minister Narendra Modi added his country to the list, to the surprise of many, albeit with a deadline of 2070. His pledge included a promise to secure 50% of India’s energy from renewable resources by 2030.

More than 450 banks, insurers, and other firms with more than 130$ trillion under collective management acted similarly, committing to the use of their funds to reach net-zero emissions by 2050.

China-US Climate Cooperation

The US and China – the two largest emitters of CO2 – signed an unexpected joint declaration promising to boost climate cooperation over the next decade, with the specific aims of reducing methane emissions, tackling deforestation, and regulating decarbonization.

As outlined in the text of the declaration, the two powers are slated to share policy and technology development, announce new national targets for 2035 by the year 2025 and revive a working group to ‘meet regularly to address the climate crisis and advance the multilateral process’.

Although the commitment has been welcomed by many, it lacks concrete steps to meet the 1.5C Paris Agreement goal. U.S. special climate envoy John Kerry has acknowledged as much but nevertheless defended the agreement, pointing to its expected contribution to enabling mutual accountability and action.

How will COP26 Impact Companies and businesses?

Implications for companies and businesses can be divided into 4 main categories:

Carbon Offset Market

The Paris Agreement laid down a framework for a carbon offset market, wherein states and private entities could generate and trade carbon offset credits. After five years of unsuccessful deliberations, negotiations at COP26 reached a breakthrough on the rulebook for this market.

For businesses, this agreement provides an opportunity to strengthen their green credentials, ensures offsets, and gives them the opportunity to reduce the cost of reaching their emissions targets.

Heightened ESG Standards and Expectations

The set of deals made and agreements reached, at COP26, mean that businesses will have to reconsider their carbon footprints and business strategies if they hope to continue generating profits. This is due mainly to the imperative of these agreements on investors and industry leaders to bring in check the emissions associated with their businesses.

Of the many deals announced, one includes plans to establish a standards organization that will inspect corporate climate disclosures and challenge boardrooms on the basis of its findings.

Companies that do not align their strategies with COP26’s carbon level targets’ regulations are likely to suffer in terms of ESG-based credit ratings, attracting investment, and their ability to attract and retain talent.

A Turning Point for Companies’ Sustainable Business Practices

According to a March 2021 global survey conducted by IBM on the topic of sustainability, 73% of respondents said that addressing climate change was very or extremely important to them. In the wake of COP26, this consumer pressure will only continue to mount.

Sustainability will also be increasingly important from an investment perspective, owing to the agreements reached and the resultant pressure on investors. According to a study at the Chicago Booth University, causal evidence suggests that investors, market-wide, already strongly value sustainability, to the extent that sustainability is viewed as positively predicting future performance. With the ratcheting up of pressure brought on by COP26 agreements, companies can expect investors to be even more reluctant to invest in companies that don’t make net zero an organizing principle of their business.

Finally, by focusing on reducing their carbon footprint, businesses may be able to take advantage of opportunities arising from the regulatory changes governments are expected to make in accordance with their new COP26 commitments.

There will be Winners and Losers

Countries’ climate goals and their road maps for achieving those goals will pave the way for public spending plans that will boost green stocks. Given the domestic nature of these goals, many of the changes felt by companies will vary on a country-by-country basis.

Companies’ fortunes will also vary by sector, as a result of agreements reached at COP26. Many stocks are set to benefit from decarbonization trends, including those of sectors such as renewables, hydrogen power, green mobility, and carbon capture, utilization and storage (CCUS). High-carbon sectors, on the other hand, like power generation, steel, cement, mining, airlines and shipping, can expect to face significant challenges.

Looking Beyond COP26

The COP26 pledges announced on methane, coal, transport, and deforestation are expected to nudge the world only 9% closer to a pathway that keeps heating to 1.5C, according to Climate Action Tracker, one of the world’s most respected climate analysis coalitions. As such, the achievements of the conference, taken alone, appear to be insufficient with respect to the goal of limiting global warming to the extent needed to avert severe climate consequences.

The conference was, nevertheless, an unprecedented step in the fight against global climate change and has ushered in agreements that will have broad-ranging effects, and be widely felt by consumers companies, and governments alike.

Companies, in particular, will be forced to make significant changes to the way they do business and would be well advised to keep ESG-related consumer and investor sentiment at the forefront of all strategy considerations. Moreover, they can expect to face serious challenges if they fail to adjust their strategies in accordance with the new reality emerging in the wake of COP26.

As the U.N. High-level Climate Action Champion, Nigel Topping, puts it “If you haven’t got a net-zero target now, you’re looking like you don’t care about the next generation, and you’re not paying attention to regulations coming down the pipe.”