BOARD MEMO 2022
What Happened at COP26 - and What it Means for Business
The presence of business leaders and investors at the latest UN Conference of the Parties in Glasgow (the gathering of 196 nations to advance the goals of the Paris Agreement) was a marked change and gave what the UK Prime Minister Boris Johnson called “purpose and unprecedented agency” to the effort to tackle climate change.
On the whole, COP26 was deemed a qualified success in moving the global community towards stronger climate action and “keeping 1.5C alive.” The conference resulted in several achievements that have been shaped by, and will have clear impact on, the business community. We discuss six key outcomes below.
The first week of COP featured a Finance Day chaired by the former Governor of the Bank of England (and now UN special envoy for climate action and finance), Mark Carney. Ahead of the summit Mr. Carney launched the ‘Glasgow Financial Alliance to Net Zero’ (GFANZ), a forum for leading financial institutions to accelerate the transition to a net-zero global economy. Its members currently include more than 450 financial firms across 45 countries, which together are responsible for over $130tn of assets. The formation of the alliance is further evidence of the critical role the finance community will play in the transition to a low-carbon future.
COP also saw progress around the challenges of supporting developing countries to build more sustainable economies. Pledges made over a decade ago by developing nations to provide $100bn-a-year of climate finance towards this goal have not yet been met, but with new commitments from the US, the UK and other OECD nations it is possible the threshold will be achieved by 2023.
2. Accounting standards
The run-up to COP saw a significant number of net-zero commitments from companies in all sectors, strengthening calls from political leaders, investors and civil society groups for businesses to provide tangible evidence of how they are delivering against those pledges. This will only be possible if we develop better ways to assess and disclose progress against climate targets; in pursuit of this goal, one of the leading players in ESG reporting, the IFRS Foundation, has announced the International Sustainability Standards Board (ISSB), which aims to create a single standard to meet investors’ information needs and drive more accurate disclosure.
If it succeeds, it will not only help counter accusations of greenwashing but also establish a framework for assessing climate risk that would enable a more transparent approach to corporate valuations in the context of investments and acquisitions. (More information about the impact of legal risk on asset valuation can be found in our ‘Heating up’ report).
3. Carbon price increase
The price of carbon has doubled in 2021. At COP there was movement on the need to create, expand and strengthen carbon pricing mechanisms to ensure the right incentives are in place to encourage businesses and consumers to reduce their carbon footprint. This will lead to new carbon markets (potentially regulated by domestic or international bodies), greater scrutiny of voluntary systems that are currently in place and more impactful carbon tax regimes, supported by clear border adjustment mechanisms to minimize the risk of carbon “leakage.”
4. China–US deal
The United States and China set aside their strategic differences to issue a joint climate announcement at COP recalling their “firm commitment to work together” to keep emissions below 1.5C. The statement was short on detail but is likely to include an emphasis on technology to reduce methane emissions. Despite the broad-brush approach, an announcement that the world’s two largest emitters were collaborating was universally welcomed.
5. The role of technology
Technology will be critical to achieve global emissions targets and was discussed in various fora at COP. But while there is significant attention on innovations that don’t yet exist, the reality is that current technologies – particularly in energy generation and storage – can keep global temperature rises below the 1.5C threshold provided they are scaled up. We can expect to see nuclear energy back in favor as a way to keep emissions in check.
6. Deforestation agreement
Although agreements around the fringes of COP do not typically pack the same environmental punch, this year’s deforestation deal (which saw 100 world leaders agree to end and reverse deforestation by 2030) was hailed as genuine step forward. Importantly, £14bn in public and private funds has already been pledged to achieve the goal.
While the developments above were among COP’s “official” outcomes, the summit highlighted a series of broader trends for business that deserve mention. First, the need for collaboration, both within and across industries, to accelerate climate progress, which in turn is driving antitrust regulators to look for ways this can be enabled within the boundaries of competition law. Second, the growing call from concerned citizens (across generations, geographies, and political boundaries) for political and business leaders to take tangible and sometimes radical action. When this concern changes voting, investing, and purchasing behavior, companies will need to adapt.
Key takeaways for boards
- Boards need to drive improved data collection and analysis to better assess climate-related financial risks to assets and operations. They also need to understand how COP-related regulatory reforms could affect valuations.
- They should conduct a litigation horizon-scanning exercise to assess whether post-COP regulations provide additional sources for claims by investors or other stakeholders.
- Finally, boards will need to review their current climate-related disclosure practices and ensure they align with their company’s messaging strategy, while also preparing for the likely post-COP shift to a more uniform and detailed standard, whether as adopted by the International Sustainability Standards Board or otherwise.