News

COP26: Five reasons why the summit is going to be critical

The COP26 climate talks are scheduled to be held in Glasgow and Italy in November. The countdown has started to the beginning of these landmark discussions on 1st November, which will be critical for the future of the planet, and the ongoing evolution of the alternative energy industry.

But what does COP26 mean in reality, both for the world and for the investment industry? Here are Prestige ClimateInvest’s five key take aways for COP26:

The US is back!

Following the US election last year, it now seems the US has performed a U-turn and is back on track with assisting the planet in meeting carbon emissions reduction targets. New president Joe Biden has said he hopes to be able to address the COP26 conference in person in November. Regardless, the US reset has raised hopes that 2021 could prove to be landmark year on climate policy.

The US remains one of the world’s biggest polluters and the Biden Administration’s commitments will be seen as important for getting the whole process onto an even keel. China – another big polluter – will also be a key factor and there will be plenty of attention on China’s next five-year plan and what that aims to achieve in the environmental stakes.

Private finance will be an important contributor

Private finance is expected to be a key mover in the drive to reduce carbon emissions. According to Mark Carney, UN Special Envoy for Climate Action and Finance, “mainstream private finance will help all companies realign their business models for net zero. It will fund the initiatives and innovations of the private sector and turn billions committed to climate investment through public channels into trillions of total climate investment.”[1]

Carney has already made it clear that private finance will have to redirect its efforts on a fundamental and massive scale if it is going to be effective: according to the International Energy Agency, USD 3.5 trillion in infrastructure investment alone will be needed every year, for decades to come[2]. It represents a massive and substantial re-think of the way private capital works will go beyond impact investment and development finance.

New goals to be established

COP26 is the first event of its kind to take place since the 2015 Paris COP21 meeting. Beyond any high-level strategic agreement between heads of state, it will deliver more detail on some key mechanisms which will be needed to help to address climate change. Many of these were left unresolved by the last big high level climate summit in Madrid in 2019.

Key areas of focus will include carbon market mechanisms (how these will work in practice and what the mechanisms will look like), funding for loss or damage caused by climate change, especially to developing countries, and the target of USD 100 billion of financing needed to help deal with the damage already caused by climate change.

The UK is a prime mover in helping to meet climate goals

The UK is co-hosting the summit this year with Italy. As the EU will act as a single delegation in the negotiating space, this will be the first time the UK will attend climate talks as a nation state. Apart from hosting, the UK also brings a lot of solutions-based technical expertise to the table.

The UK has been able to demonstrate its technical abilities in the fight against the COVID pandemic, with the development and roll out of vaccines and deploying 50% of the world’s genome sequencing capacity. The country is also a leader in the development and deployment of clean energy technology and engineering and British firms are playing an active role in exporting that knowledge around the world.

The UK has some of the most ambitious net zero targets in the world and is already developing the infrastructure and policy goals to achieve this. The UK government has also reiterated its commitment to the USD 100 billion financing goals and wants to see all countries submitting more ambitious Nationally Determined Contributions that will commit them to further emissions cuts by 2030.

A new approach to risk and reporting

Although there will be much ink spilled over the high-level commitments made at COP26, at the investment level it will help to pave the way to a different way of risk reporting. The Bank of England has already said it will be stress testing financial institutions including banks and insurers against climate risk pathways. There is an expectation within the City of London that financial institutions will be adhering to the Network for Greening the Financial System (a coalition of over 50 central banks representing half of the world’s emissions).

Asset owners are being asked to disclose where client money is being invested in line with their values. An economic transition of this scale will not just be funded by ‘deep green’ activities or screening out the worst offenders. Private capital will have to evolve from old ways of thinking to embrace the fact that there must be change, and that transition plans will need to be developed and disclosed. COP26 is the catalyst for this.

[1] Mark Carney, ‘Building A Private Finance System For Net Zero’ – COP26-Private-Finance-Hub-Strategy_Nov-2020v4.1.pdf (ukcop26.org)
[2] https://www.iea.org/news/deep-energy-transformation-needed-by-2050-to-limit-rise-in-global-temperature