The outcome of the COP26 global climate summit left many disappointed about efforts to stop global warming. After desperate last-minute changes from India and China, the summit ended with a compromise that agreed to a “phase down” of coal and subsidies for fossil fuel development, rather than plans for their “phase out”.
If we lived in an ideal world, COP26 would have ended with firm commitments from every country to make absolute emissions reductions every year from now until 2030 that would guarantee global warming is kept within 1.5oC. The harsh reality is that it’s politically impossible to deliver that kind of united, global commitment.
That said, there is much good to celebrate from the eventual messy political compromise reached at COP26. Key rules for carbon markets were agreed, marking a vital step in climate action in the next decade. We also welcome the explicit requirement for all countries to “revisit and strengthen” their commitments to action on a more regular basis. We see this as opening the door to more ambitious progress.
In addition, COP26 showed that climate change ambitions are accelerating. Disappointment about its outcome shows the strength of popular appetite for meaningful action. This sends crucial signals to financial markets that will influence the operating environment for companies and, in turn, the potential options for charities looking to reflect climate change concerns in their investments.
Commitments, Co-operation and Cash
Before the event, we established three criteria for judging whether COP26 would go down as a ‘good COP’ or a ‘bad COP’. These ‘three Cs’ were commitments, co-operation and cash. How did COP26 deliver?
India’s commitment to cut its emissions to net zero by 2070, together with China’s pledge to hit this goal by 2060, took the total amount of global emissions covered by some form of net zero commitment to 90%. And, as outlined above, COP26 explicitly urged countries to “review and strengthen” this commitment.
It’s tricky to gauge absolute levels of success, but key deals include:
- Notwithstanding India and China’s refusal to phase out coal, more than 40 countries committed to shift away from using coal-fired power. And more than 100 countries signed up to slash methane emissions by 30% by 2030.
- More than 100 countries promised to reverse deforestation by 2030: roughly 85% of the world’s forests are covered by this pledge.
- Twenty major economies, including the US, Canada, the UK and Denmark, committed to end public financing of fossil fuel projects abroad by the end of next year. In a significant step forward, 450 financial institutions, accounting for roughly 40% of the world’s financial assets under management, are now committed to net zero. We expect this to amplify an existing trend: all else being equal, companies that display good corporate social responsibility on matters material to their business models are benefiting from lower costs of capital and higher returns on capital.
So what’s likely to be the effect of all this when combined with countries’ pledges to get to net zero? If interpreted optimistically, COP26 marked the first time that any collation of agreements got anywhere near the Paris agreement goal of limiting global warming to well below 2oC (though we recognise that this optimistic statement requires numerous caveats).
It’s vital for developed countries to step up on promises to invest in climate finance in developing countries after failing by some margin to deliver on a pledge to send $100 billion a year to the developing world by 2020. Disappointingly, things fell short before COP26 even began. Developed countries announced a plan that would push the $100 billion a year figure forward to 2023 at the earliest. However, there is real hope that the figure could be exceeded past 2025.
(Just barely) good (enough for now) COP?
Taken in aggregate, balancing the possibilities and retaining the right to check on progress, we consider COP26 to have been just barely good enough for now.
Though the watering down of plans to transition from coal was disappointing, commitments on coal and methane will breathe new life into our discussions with many high emitting companies and give fresh impetus to every dialogue we have with them.
Taken in aggregate, the statements and commitments that came out of COP26 serve as a powerful signal to the global financial industry. They matter for the investment world's engagement work on climate change.
We recognise not only that our business and those businesses in which we invest are impacted by climate change, but also that the choices we make as stewards and allocators of our clients’ wealth have the potential to either exacerbate, or alleviate, the climate crisis. Rathbones is among a number of wealth managers that have announced specific net zero commitments, which take into consideration the role our investment decisions play in the transition to net zero.
Whatever governments do or don’t do, there will be investment opportunities in well-run companies helping the world on the road to net zero or to cope with the physical effects of climate change already with us.
Company engagement has been an important part of our stewardship activities for many years. We will continue to use our voice, on behalf of our clients, to be an influence towards better, more sustainable long-term performance.
Matt Crossman is stewardship director at Rathbones