COP26 closed last week. Here's what lies ahead for big business

COP26 is over. The Glasgow Climate Pact has been struck. Yet, the jury is still firmly out on whether this particular climate summit was the best or the worst of all time. Just over a decade ago, the energy transition was launched. It was subsequently accelerated as a result of the focus on renewable energy following the 2015 Paris agreement. However, despite this initial effort to propel the economy on the path to net-zero, disappointingly, our world remains heavily reliant on fossil fuels (roughly 80% of our energy depends on it.)

The cold, hard fact of the matter is that since 2015, global emissions have increased by 16%. At this current level (approx. 40Gton per year) in less than 3000 days, our carbon credit expires. The decarbonisation of our economy – i.e the moment when our CO2 emissions start to reduce at a meaningful rate - has not yet begun.

However, it is not all bad news. One of the most promising outcomes of COP26, was the flurry from global leaders to renew existing and commit to new net-zero pledges. Both the US and European Union have promised to reach net-zero by 2050, China by 2060 and India by 2070. With 74 countries under pledge (representing 80% of global emissions) it appears that the whole world is now entering into net-zero commitment. This represents a monumental step in the right direction.

That being said, few of these net-zero commitments are currently codified into law. It is also important to bear in mind that these still reflect promises of long-term action as opposed to binding commitments. The ability to meet those targets will depend on our willingness to set meaningful near-term commitments and achieve them. Unfortunately, the lack of strong commitments for emissions cuts by 2030 and the inability to deliver past National Determined Contribution (NDC’s) leaves us with a very big credibility gap.

Despite the fact that these commitments were renewed at COP26, the underlying issue is that the 2030 NDC’s are only stabilising the current rate of CO2 emissions as they stand today. This is 50% higher than what the 1,5c target implies and 25% more than a scenario that would stabilise global warming at 2c. To further exacerbate this issue, public perception is still unclear on the difference between long term net-zero targets and short term emission reduction commitments. Indeed, most people fail to make the crucial distinction between the two.

Clearly some grey areas remain around the issue, however thanks to the IEA (International Energy Agency) the path to net-zero is clearer than ever. It relies on energy efficiency, electrification of the end use, low carbon mobility and acceleration of renewables. These are the four critical mega trends of the decade.

IEA figures tell us we need $4tn per year to mobilise these sectors and halve our CO2 emissions in less than 3000 days. This requires partnership and collaboration between the public, policy makers, corporates and the finance industry. The good news is this is happening now and COP26 has proved that. On the flip side of the coin, we were disappointed not to see stronger, more ambitious wording in the Pact, but fortunately in terms of the main negotiations, big strides were still made on the three main contributors to net-zero:

1. Methane emission reductions

A fact that is frequently overlooked is that methane leakage and emissions are the second largest contributor to global warming after CO2. For the first time during this COP, 103 countries led by EU, US & UK pledged to cut methane emissions by 30% before 2030. However, the problem is that too much focus is directed at the energy sector even though most methane emissions come from animal agriculture. This is an imbalance we sincerely hope will be addressed before COP 27.

2.???Deforestation ?

The other major step forward from this COP is the declaration on forest and land use made by 114 leaders aiming at reversing deforestation and land degradation by 2030. It is the first time that the critical and interdependent roles of forests, biodiversity and sustainable land use has been emphasised to achieve a balance between greenhouse gas emission reduction and removal by natural sinks.

3.???Investment in the private sector

Possibly the most remarkable event of COP26 is one that is noticeably absent from the Pact. This is the extraordinary momentum that is now underway in the private sector.

Glasgow has made its mark in the history books of COP as the tipping point that propelled the private sector into action. Companies from all sectors are now launching their decarbonisation strategies. These strategies are interrelated in that momentum in one sector triggers growth in another. Early adopters will certainly be the winners of this emerging mega-trend and the example they set will inspire confidence in their supply chain.

Underpinning this momentum is the fact that the finance industry is now finally stepping up to the mark and taking responsibility for its role in the path to net-zero. Alongside the Glasgow Financial Alliance for Net Zero, the financial sector has now committed over $130 trillion to shift its investment and lending activities to net-zero by 2050 at the latest. It is the first time that a sensible figure has been committed to match the required investment of $4 trillion per year as set by the IEA. Thankfully, this is an indication that the industry has finally woken up and realised that now is the time to act and redirect global savings towards the real economy.

The shift occurring in the corporate world has not escaped the attention of global regulators. The IFRS has created a global anti-greenwashing taskforce called the International Sustainability Standards Board (ISSB). The new body has been established to develop higher quality and universal disclosure on ESG performance indicators. Its purpose is clear: deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors with information about companies’ sustainability-related risks and opportunities to help them make informed decisions. This is a commendable move and arguably long overdue.

Simultaneously, thirty of the central banks of the NGFS (Network for Greening the Financial System) coalition are carrying out climate stress testing on their respective economies. However, the first results are being reviewed and they are far from promising. “La Banque de France” estimated that between 5 -20% of GDP could be at risk due to climate inaction. A logical next step for the regulators would therefore be to focus on climate when determining the prudential rules for application.

A final word

The world is about to change at an unprecedented rate. The economy is about to make the paradigm shift from a flawed value system that prizes infinite growth at the expense of our natural ecosystem, to a more sustainable version that respects planetary limits. Companies who are already engaged in this shift will have the usual first mover advantage on this massive opportunity.

What does this look like in practice? A coalition of 20 consumer goods businesses, including Unilever, Mars and Nestle, who have all unveiled a portfolio of forest restoration schemes as part of a commitment to become 'forest-positive' by 2030. An estimated 100 high-profile UK companies have agreed to work towards halting and reversing the decline of nature by 2030 and becoming “nature positive” including Co-op, M&S, Sainsbury’s, Tesco and Waitrose. These businesses have all pledged to cut their environmental impact across climate, deforestation and nature in a “retailers commitment for nature” with WWF conservation organisation.

Prior to COP26, the big question for these companies was how to finance the transition toward a low carbon economy. Until now the financing gap was vast and it was widely believed that we needed to rely on public money whilst the IEA was telling us that 70% of the gap could be filled by the private sector.

COP26 identified climate as a massive systemic risk and threat to the financial stability of our economy. Leaders of the summit called on the financial sector to invite disruption and innovation into boardrooms and support climate-focussed corporates in developing imaginative, future-proofed business models that are supported but not defined by regulation. This is the responsibility of our industry- to accelerate the net-zero movement through the engine of corporate growth.