Summary of the UN Climate Change Conference (COP26) 2021
Over five years on from the 2015 Paris Agreement, and with scientific evidence all pointing to the urgent need for climate change mitigation and adaptation, COP26 was a critical summit for global climate action, and more specifically, Global Climate Finance.
With the greater focus on environmental regulation, investor demands and decarbonisation strategies, a clear understanding of the regulatory and political landscape is vital for the financial industry to effectively enact and engage with Green & Sustainable Finance initiatives.
Following the COP26 Agreement being finalised over the weekend, this blog seeks to highlight the event’s key takeaways.
What is COP26?
This year Glasgow hosted the 26th UN Climate Change Conference of the Parties (COP26). This is the 26th iteration of the annual summit, aimed at bringing a multitude of parties together to accelerate climate action and bring climate change under control.
Going into the conference, the four main goals for COP26 were to:
- Secure global net zero by mid-century and keep 1.5 degrees within reach with ambitious 2030 emissions reductions targets. To meet targets, countries need to accelerate the phase-out of coal, curtail deforestation, expedite the switch to electric vehicles and encourage investment in renewables.
- Protect communities and natural habitats through the preservation and restoration of ecosystems alongside building resilient infrastructure to avoid loss of homes, livelihoods and lives.
- Mobilise finance in order to deliver on the first two goals. Developed countries must ensure the mobilisation of at least $100bn in climate finance per year and both private and public sectors must work towards unleashing the trillions required to secure global net zero.
- Work together to deliver climate goals. Accelerate the collaboration between governments, businesses and civil society while tightening up the ‘Paris Rulebook’.
The Glasgow Climate Pact
The agreement reached at the conclusion of the summit – the Glasgow Climate Pact – asks countries to republish their climate action plans by the end of 2022, including strengthened emissions reduction targets for 2030. The agreement also re-emphasises the need for developed countries to increase the climate finance available to vulnerable countries, beyond the current $100bn target.
Furthermore, Ministers and negotiators have signalled a shift away from coal (the ‘dirtiest’ of the fossil fuel groups) with a deal calling for efforts to escalate the “phase down” of unabated coal, as well as the phasing out of inefficient fossil fuel subsidies.
Separately, at least 20 countries including the US, Italy and Canada together with public finance institutions promised to stop public finance to overseas fossil fuels by the end of 2022, diverting the cash into clean energy instead.
At the final stages of the agreement the language of Glasgow Pact was watered down following interventions from China and India. Modifying the language used from a “phase out” of unabated coal, to a “phase down” prompted much criticism, with many legislators and activists concerned about the lack of severity. Nevertheless, this is the first explicit mention of fossil fuels in a UN climate agreement.
UN Secretary General Antonio Guterres summarises these thoughts with his comment that the approved texts from COP26 were a compromise that took important steps towards the conference’s goals without fully realising them, “but we have some building blocks for progress.”
COP26 and Climate Finance
Something that was firmly recognised during this year’s COP26 event was the role of Finance as the key to the massive economic transformation required to move away from fossil fuels and reach net zero.
To achieve the climate goals set by the conference, every company, financial firm, bank, insurer and investor will have to adjust their business models by developing and implementing credible plans for the transition to a net zero economy.
The scale and speed of the changes needed will require all forms of finance: public finance for the development of infrastructure we need to transition to a greener and more climate-resilient economy; private finance to fund technology and innovation, and to help turn the billions of public money into trillions of total climate investment.
Climate finance from both public and private sources is to be provided through loans, guarantees, export credits, bilateral funding and funding from donor governments via multilateral bodies. These bodies can be specific in purpose such as the Green Climate Fund, or more general in their mission e.g., World Bank.
With awareness of the importance of finance in climate mitigation and climate change resilience, COP26 has sought to advance this through the below initiatives and commitments.
Meeting the $100bn Climate funding target
International climate finance is key to managing overall climate risk. Countries need to manage the increasing impacts of climate change on their citizens’ lives and require the necessary financial support to do so.
The Glasgow Climate Pact notes with regret that the previously agreed-upon target of providing $100bn of climate finance a year by 2020 to developing countries has been missed but reaffirms the commitment of developed countries to raise at least that amount annually through to 2025.
Alok Sharma, the UK COP26 President, has said that while $100bn is a small part of the climate investment needed, delivering it is essential in maintaining the level of trust that developing nations have in developed countries. This again raises issues of a just transition as more vulnerable developing countries are being asked to cut their own future emissions, in turn curbing their own development, while suffering the effects of climate change that they are not responsible for.
The Coalition for Climate Resilient Investment (CCRI)
As both a United Nations Climate Action Summit and COP26 flagship initiative, The Coalition for Climate Resilient Investment (CCRI) consists of over 120 finance firms across 45 countries, jointly managing $20 trillion, to foster the more efficient integration of physical climate risks (PCRs) in investment decision-making and create more resilient economies. Through this initiative, investors will now be encouraged to build infrastructure that is more resilient and capable of withstanding the present and future impacts of climate change.
Glasgow Financial Alliance for Net Zero (GFANZ)
Perhaps the most significant finance initiative of COP26 is the Glasgow Financial Alliance for Net Zero (GFANZ). With members including over 450 financial firms across 45 countries responsible for assets of over $130 trillion, this pledge will mean that by 2050 all of the assets under management by the institutions involved will be aligned with net zero emissions.
The initiative is an attempt to involve private companies in meeting net zero targets, and GFANZ has said it could be on track to deliver as much as $100tn of financing to help economies transition to net zero over the next three decades through financing “clean” technology, such as renewable energy, and directing investments away from fossil fuel-burning industries.
GFANZ is focused on 7 key areas critical to the net zero transition:
- Sectoral pathways: accelerating alignment between financial institutions and major global industries on sector-specific pathways to reach net-zero emissions
- Real economy transition plans: advancing decarbonisation in the real economy by describing financial sector expectations of transition plans from the companies the sector engages with and finances
- Financial institution transition plans: driving convergence around sector-wide best practices for financial institutions in designing and implementing credible net-zero transition plans
- Portfolio alignment measurement: supporting the development and effective implementation of portfolio alignment metrics for financial institutions and driving convergence in the way portfolio alignment is measured and disclosed
- Mobilising private capital: supporting the mobilisation of private capital to emerging markets and developing countries through private sector investments and public-private collaboration
- Policy: advocating for the public policy needed to accelerate investment in net-zero aligned activities and organizations
- Building commitment: broadening the nature and number of financial firms that are credibly working towards net-zero
Other COP26 Successes
Alongside greater climate finance commitments, COP26 saw the creation of a number of other initiatives and agreements all aimed at helping to mitigate the climate crisis:
US and China cooperation – The US and China have pledged to further their climate cooperation through to 2030. The agreement includes a range of issues such as methane emissions, clean energy and de-carbonisation. With these countries being the world’s two largest CO2 emitters, cooperation between the two is viewed as critical in keeping below the 1.5C temperature target.
Stopping deforestation – Over 100 countries, representing approximately 85% of the world’s forests, promised to stop deforestation by 2030. It is underpinned by £14bn ($19.2bn) in public and private funding and so it is hoped that this key initiative will be fully realised.
Cutting Methane Emissions – A scheme to cut 30% of current methane emissions by 2030 has been agreed by more than 100 countries. Methane is currently responsible for a third of human-generated warming.
Green technology – More than 40 world leaders have agreed on a UK-led plan to speed up affordable and clean technology worldwide by 2030. The first five goals have been dubbed the “Glasgow breakthroughs” and cover more than 50% of global emissions. They include power, road transport, steel production, hydrogen and sustainable agriculture.
COP26 and its surrounding coverage has shown that climate change has never been higher on the public agenda. This is because it’s increasingly viewed as not just an environmental issue but one that affects social and economic stability.
Above we have primarily focused on the climate finance agenda during COP26. By modifying the financial system and mobilising climate finance, the hope is that the trajectory of every economic sector, from energy to clothing, how we live to what we consume, will decarbonise of their own accord.
The question that arises from most of these climate finance campaigns is whether such fundamental ecological, economic and social change can really be achieved through financial initiatives alone, without the company of a robust legal framework that demands obligation and commitment.
As we look ahead, there is a need to understand the issues enterprises are facing in constructing and executing green strategies, as well as to consider the obstacles they may encounter going forwards. There is still no universal framework under which all financial firms adhere to and, with shifting policy and regulation, this risks causing confusion when implementing more sustainable strategies. It is crucial then that firms maintain an awareness of the changing regulatory landscape, be well informed of the growing risks and have a deeper understanding of how they may mitigate them.
COP26 has been vital in drawing global attention to the role of finance in climate change mitigation and adaptation, the next step is to ensure the continued mobilisation of climate finance long-term.