COP26: What matters for business

• The COP text for the first time recognizes the role of fossil fuel use in climate change, calling for the “phase down” of coal-fired power and the elimination of “inefficient” fossil fuel subsidies.
• The rules of the game have been set for the international transfer of carbon offsets:
  • Article 6 of the Paris Agreement aims to strengthen the integrity of carbon markets and support a mechanism for global emission trading; however, agreement on the terms has been elusive.
  • Decisions in Glasgow provided a draft structure and operational rulebook for such a global trading mechanism, though implementation may reveal further challenges.
• Financial sector climate pledges are real: through the Glasgow Financial Alliance for Net Zero (GFANZ), over $130 trillion in private capital from 450 financial groups has been committed to achieve Net Zero.
  • The GFANZ process calls for the setting of short-term, sector-specific targets — for example, through the Net Zero banking alliance, banks will have to make industry-specific emission reduction targets for their loan books. GFANZ also hosts Net Zero alliances for insurers, asset managers, asset owners, and other sectors of the financial industry.
• Sector-specific approaches are the next big thing, as are the increased data demands and scrutiny that come with them.
• The US-EU led Global Methane Pledge focuses on a 30 percent reduction in methane emissions by 2030 in several key sectors, including oil and gas, waste, and agriculture.
• Leaders representing over 85 percent of the world’s forests committed to halting and reversing deforestation and land degradation by 2030.
• An agreement was made to work towards all sales of new cars and vans being zero emission by 2040 or earlier, or by no later than 2035 in “leading markets.”
• Saying “Net Zero” alone is no longer enough, moves by voluntary reporting organizations — including the launch of the International Sustainability Standards Board and the SBTi Net Zero Standard — add momentum to the push for increasing transparency and rigor around corporate climate commitments.

What to watch for

• Increasing country ambitions — countries are to come to COP27 next year with new pledges for emissions reductions; with 131 nations now committed to Net Zero, look for a focus on how countries will actually achieve those goals, as well as achieve significant, near-term emissions reductions.
• What is an “inefficient” fossil fuel subsidy? In 2020, the value of fossil fuel subsidies globally was about $6 trillion according to International Monetary Fund (IMF) research.
• Companies need to understand Article 6 and how carbon credits will be applied and accounted for in order to avoid potential risk management and reputational issues.
• Approximately $12 billion of public funds and $7.2 billion of private investment has been committed to protect and restore forests — but how will the money be spent to do this? In addition, what does success look like?
• The Global Methane Pledge aims to limit methane emissions by 30 percent compared with 2020 levels, but being a voluntary, non-binding statement with no enforcement provisions, its implementation will be challenging.

What to do now

• Have in place an internal review mechanism through a stakeholder committee and a board of directors reporting agreement on climate data and disclosures.
• Determine how and where you will invest the money and resources needed to meet Net Zero
• Get smart about carbon offsets that integrate operational and financial objectives.
• Look for opportunities in sector-specific approaches to mitigation.