Reflections on the COP26 Climate Summit

The COP26, the UN Climate Summit held in Glasgow, has ended. COP is the annual Conference of Parties that are signed up to the UN Climate Accord, also known as the Paris Agreement. Glasgow was the 26th time that the COP was organized, featuring two weeks of negotiations between 20,000 official delegates, and discussions and workshops amongst 20,000 non-state delegates. What are COP26’s key outcomes and how are these relevant to investors?

COP26 provided a breakthrough on the rulebook of the Paris Agreement, and good progress on more ambitious policies for 2030. Nevertheless, these are insufficient at this stage to get the world on a trajectory of below 2 degrees.

Check out our summary in the final video of our ‘Good COP, bad COP' series: COP26: The verdict on the COP26 summit.

After six years of negotiation, governments agreed on the rulebook for implementing the Paris Agreement. This was arguably the biggest surprise of the summit, given the disappointing progress made in the first week. The US-China climate deal (‘US-China Joint Glasgow Declaration on Enhancing Climate Action in the 2020s’), clinched towards the end of the summit, may have helped to streamline these negotiations in the final hours.

The rulebook covers critical topics like the reporting of emissions, the monitoring of policies and, most importantly, the trading of emission rights through carbon markets. This agreement allows the focus to shift from negotiation to implementation. It will facilitate international cooperation and cross-border investments into emission reduction. More serious carbon markets may emerge, which in turn could support investments in forests and other natural carbon sinks.

A number of new policy pledges for 2030 were made, including reducing methane emissions, halting deforestation, phasing out coal power, and stopping public financing of fossil fuel abroad. Though some of these pledges are vaguely framed and not signed by the major emitters, they still have good potential to reduce emissions before 2030. Moreover, the US-China climate deal complements these pledges as the world's two largest emitters commit to collaborate and take urgent action in this decade. Overall, the temperature score for policy pledges up to 2030 is now between 2.4 and 2.7 degrees. Taking 2050 pledges into account, the score is between 1.8 and 2.1 degrees.

Significantly, nearly 90% of global emissions is now under a net zero commitment.

There was unprecedented private sector participation. Hundreds of corporates and investors committed to net zero in the run-up to COP26, and several ‘real-world deals’ were announced to accelerate low-carbon transport, building, industry, etc. Among banks, asset owners, asset managers and insurance companies, there is now USD 130 trillion committed to net zero, though that figure was rightfully criticized for including double-counting.

Robeco is among the 43 asset managers that announced concrete short-term targets and actions for achieving net zero; 180 peers will follow in the course of next year.

Industrialized countries were under strong pressure from developing countries to live up to their promises of providing climate finance (USD 100 billion per year) and supporting adaptation and a just transition. Though industrialized countries reinforced their commitment, the actual delivery will likely remain a thorny issue and may undermine progress in other areas. A positive example of progress in this area was provided by the USD 8.5 billion deal through which US, EU and UK will support Eskom, the South African state-owned power utility, to accelerate the transition of its coal-power fleet.

Governments have now formally adopted 1.5 degrees as their official target. Further ratcheting of policy ambition is inevitable. We believe investors ought to follow these developments closely, as climate policy has become a macro issue. The EU will be determined to implement its Green Deal / Fit for 55 package swiftly, so that it can demand more ambition from other countries.

Investors should also take note of the UN’s announcement that it will set up an expert group to develop a standard for credible net zero commitments. The response to investors’ net zero commitments has been skeptical, due to the limited scope of some of these commitments and the lack of concrete targets. Robeco’s approach has been to create a net zero roadmap with concrete targets and actions, and significant assets in scope (40%). Our net zero strategy is based on international standards, and we will continue to monitor closely how these standards develop.

Another important development, which has significance for investors, is the establishment by the IFRS of the International Sustainability Standards Board (ISSB). This is with the purpose of developing a global standard for climate disclosure in the course of 2022, which is to be embedded in legislation worldwide.