What is UN COP26 Glasgow summit and why should Financial Institutions and risk managers care?

The big United Nations Climate Change Conference of the Parties (COP26) in Glasgow is just behind the corner. The conference will host representatives from close to 200 countries for 2 weeks (31.10 -12.11) with the main focus being on reviewing of the Paris Agreement plans and country carbon reduction commitments.

The Paris Agreement – looking back where it all started

In 2015, representatives of 196 governments have agreed to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.?The impact of 2 degrees vs 1,5 degrees warming does not increase linearly but rather grows substantially.

“The difference between 1.5C and 2C is a death sentence for the Maldives,”

Ibrahim Mohamed Solih, president of Maldives.:?

Achieving Paris targets translates to achieving Carbon Neutrality by reducing global carbon emissions to Net Zero by 2050 or sooner. By 2020 all signature parties had to submit their plans for achieving this reduction, which are known as Nationally Determined Contributions (NDCs) .??????????????????????????????????????

?? NDC Inventory – where are we now?

According to the UN's NDC Synthesis Report published in September as preparation for the COP26 discussions, the nations must urgently redouble their climate efforts if they are to prevent global temperature increases beyond the Paris Agreement’s goal of well below 2C – ideally 1.5C – by the end of the century (Figure below) . The NDCs of 191 countries summed together still imply a sizable increase in global GHG emissions in 2030 compared to 2010, of about 16%.?According to the latest IPCC findings, such an increase, unless actions are taken immediately, may lead to a temperature rise of about 2.7C by the end of the century.

Source: United Nations, NDC Synthesis Report

??????????????????????????????????IPCC report?- what are the latest news on Climate?

In its Summary for Policymakers report published in September,?The Intergovernmental Panel on Climate Change (IPCC) presented results of the updated simulations for the COP26 policy makers.?These represent more up-to-date Paris Scenario simulations that reflect the recent observations of the fast temperature increases, increase occurrence & severity of extreme events. Using the latest data, the IPCC estimated that limiting global average temperature increases to 1.5C requires a reduction of CO2 emissions of 45% in 2030 or a 25% reduction by 2030 to limit warming to 2C. This is clearly far off the current NDC plans and thus will be the key focus of the upcoming discussions at COP26.

Source: IPCC, Summary for policymakers

????????????????????????????????????????????Glasgow Summit – moving ahead

Clearly the discussions now are moving from?“by when should we become net-zero” to “how?should the decarbonization curve & path towards the 2050 Net Zero look like”. Setting clear carbon reduction targets for 2030 requires much more immediate & tangible actions now compared to more hypothetical 2050 “who knows when “ or “ I will no longer be around” timelines.

Securing global net zero by mid-century and keep 1.5 degrees within reach is the number one goal of the COP26 summit. Taking in the latest data this means turning 2030 CO2 increase of 16% into a decrease of 45%. Clearly, achieving this would require significant reshuffling of the proposed country decarbonization plans and rewriting of their current NDCs. Therefore the?negotiations during COP26 are expected to be rather heavy, with the big countries obviously playing a major role. The G20 Leader Summit on 30.10-1.11. will be the place where first big decisions could be made already.

But the discussions will not be only about pushing for stronger decarbonization plans but also about securing climate financing for supporting of these plans particularly in less developed countries.

As part of the Paris agreement, the developed countries committed themselves to provide at least $100bn in climate finance per year by 2020, unfortunately similarly to the NDCs also here the reality is falling short of these commitments. According to the OECD estimates, $78.9bn of climate finance was mobilized in 2018. Thus, securing the climate financing is also an important goal of the COP 26.

Impact on Financial Services and Risk Managers

“TO ACHIEVE OUR CLIMATE GOALS, EVERY COMPANY, EVERY FINANCIAL FIRM, EVERY BANK, INSURER AND INVESTOR WILL NEED TO CHANGE”

The COP26 team

The results of this summit can have potentially significantly impact on how seriously governments respond to climate change. Increasing their decarbonization efforts will immediately impact certain industry sectors, in particular the more brown ones. In concrete terms, this could translate to e.g. strengthening some of the already aggressive carbon pricing policies that governments plan to put place in different parts of the world.?All these new policy initiatives will translate into increased Transition Risks faced by financial institutions in their?loan and asset portfolios.?The updated IPCC report provides much more clarity on the magnitude of physical risk to be expected in the 1,5 C and 2C world and this new information needs to incorporated into physical risks assessment processes of financial firms.

The newly updated IPCC & agreed NDC scenarios will form the basis for Climate Risk Stress Testing & Scenario Analysis?going forward and will play crucial role for both climate risk management processes and also for the various portfolio Net Zero decarbonization initiatives within the financial sector.

Furthermore, there is the climate financing side of things, we will have to see how this will impact the day-to-day activities of financial firms.

“Financial institutions must play their part and we need work towards unleashing the trillions in private and public sector finance required to secure global net zero”.

The COP26 team

And last but not least we are likely to see an immediate impact of the COP26 on the ESG investment assets markets globally which are estimated already to have reached beyond 40 trillion USD. A strong message from COP26, being it a positive or negative one can potentially create lot of volatility in these markets.

Parting thoughts

All in all, there are number of reasons why one should pay special attention to COP26, especially and if you work for financial institution and in the risk management areas.

I personally have high hopes for this summit, because clearly the time is running out and we need to take action, and we need to it now and big time.?But at the same time we also need to be aware of the consequences of such actions and of the risks that come with them and we should be prepared to deal with them once they arrive. And that is what Climate Risk Management is all about.

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