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    COP26 – Failures & Small Successes

    Stockholm (NordSIP) – As the COP26 ended last Saturday, no one was under any illusion as to the achievements of the 26th conference of the parties. Even the official statement could no muster the energy to add much beyond a statement on the need to fight climate change, while acknowledging the frailty of global warming targets.

    “Climate negotiators ended two weeks of intense talks on Saturday with consensus on urgently accelerating climate action,” the COP26 official statement said. “We can now say with credibility that we have kept 1.5 degrees alive. But, its pulse is weak and it will only survive if we keep our promises and translate commitments into rapid action,” COP26 President Alok Sharma warned.

    To understand what the market made of the COP26, NordSIP went back to its network of asset managers to hear what their assessment of the conference was. The consensus seems to be that it was indeed not a resounding success. The failure to close the temperature gap, to provide financial climate assistance to developing countries or to phase out coal appear to have been sore points within the sustainable investment community. However, aid to South Africa, progress on fighting deforestation, the IFRS’ ISSB new sustainability framework, and agreement on a rulebook for international cooperation in the context of the Paris Agreement did provide some green shoots.

    Not a Resounding Success

    The overall consensus was that the COP26 was not a success. “It was not a complete failure, but to call it a success – no,” Hans Stegeman, Chief Investment Strategist at Triodos commented.

    “I would say that this was a qualified success, meaning that it was a slight failure from an overall perspective with some strategic bright spots that may help humanity going forward,” Robert Vicsai, Portfolio manager, Sustainable investments at SEB, agreed.

    “To a large degree, that overarching goal of this COP wasn’t met,” says Andy Howard, Global Head of Sustainable Investment at Schroders. “In some ways the headline ambition of COP, which was really to ratchet up the levels of ambition of individual countries, has been somewhat deferred through to next year and next year’s COP in Egypt,” Howard continues.

    Others struck a less pessimistic tone. “COP26 was neither success nor failure, it was a compromise,” argues PKA’s Dewi Dylander, Head of ESG. “It did not meet our highest hopes, but we believe there are several reasons for optimism. Furthermore, the spectacle and hype surrounding the COP made the world talk about climate, the road ahead and the obstacles we face for weeks – that alone is a feat,” adds PKA’s Dylander.

    “In my view, while as yet not achieving the 1.5°C goal, COP26 was successful in many respects. It maintained, and perhaps even accelerated, the momentum towards net zero by 2050. The trend toward decarbonisation is clear for companies and investors,” says Julie Delongchamp, Climate Transition Risk Analyst at Wellington Management.

    “COP26 may have achieved more than what expected but it was still less than hoped for,” Kamil Zabielski, Head of Sustainable Investments at Storebrand Asset Management argued.  “So much was expected from COP26 and as many feared, it fell short. However, it could have been worse, as some progress was made,” Vishal Hindocha, Global Head of Sustainability Strategy, MFS Investment Management adds.

    Failing to Close The Temperature Gap

    “The gap between where we are and where we need to be is nowhere near the ambitions of the Paris agreement, and there are very few signs that we will get to the set 1.5 scenario any time soon,” Vicsai continues.

    “There were commitments to cut methane, end deforestation, and provide financing for developing countries most at risk from climate change. However, this progress was not sufficient to put the world on course to limit the rise in temperatures to 1.5C (or even 2.0C) as per the Paris Agreement, which is ultimately what’s needed,” MFS’s Hindocha says

    “We had low expectations for COP26. We knew China wouldn’t be in attendance and that the US had limited scope for action. So in our view, it’s no surprise that it didn’t achieve the step change necessary for 1.5C,” says Craig Mackenzie, Head of Strategic Asset Allocation at abrdn.

    “It is clear that if you look at the pledges currently on the table, they are still some distance short of a 1.5-2 degree path long-run temperature rise. We need to cut emissions very rapidly to meet that goal. We didn’t really see an awful lot of new progress at the conference in terms of actual commitments being put on the table. (…) Overall, the picture appears to be one of some steps forward in areas, and certainly some positive momentum, but probably weaker than many people had hoped for originally,” Howard adds.

    “Glasgow did not manage to close the emissions gap in 2030, which is vital to keeping 1.5C target and the Paris agreement alive. The current lag between ambitions and actions are taking us on a dangerous route towards 1.8 or even 2.4-degree temperature rise scenario. We need governments to strengthen commitments to end coal use and fossil fuel subsidies,” Zabielski argues.

    However, some did find the progress made at the COP26 encouraging. “The central conclusion is that the world is making considerable progress on climate, but not nearly enough to achieve the 1.5C goal agreed in 2015. Given the state of geopolitics, this goal now seems unlikely to be achieved. But, in reality, it is not 1.5C or nothing. A below 2C world would be a lot better than the current 2.4C projection. There are good reasons for hoping 2C is achievable with more work in the years ahead,” says Craig Mackenzie, Head of Strategic Asset Allocation at abrdn.

    Failing Developing Countries

    One of the main disappointments of COP26 was the inability to find an agreement on climate financing for developing countries. This was one of the main items on the COP26 agenda that sustainable investors were looking for.

    “Before the meeting, I hoped that our business and political leaders would be courageous and accountable. I was disappointed that this was not the case. The lack of agreement on the US$100bn p.a financing to developing countries to finance mitigation and adaptation to climate change-related challenges is my biggest disappointment and an obvious example of failure to be accountable. Considering the world’s overall subsidies to fossil fuel are 7% p.a of the world’s GDP, this should have been a no-brainer, especially considering that 100 bn USD p.a is still not enough. We have a long way to go for courage and accountability” Vicsai adds.

    “Rich countries still haven’t followed through on their promise to provide US$100 billion a year to nations that need help to both adapt to climate change and switch to cleaner energy sources. The final text of the agreement ‘urges’ developed countries to follow through on their promise, which was supposed to be met by 2020, but will likely not be reached until 2023,” Stegeman adds.

    Developments on international climate cooperation were also encouraging. “Many countries unveiled new pledges to cut their emissions, and for the first time since the Paris Agreement was signed, those commitments – if actually followed through on (and that’s a big ‘if’) – would lead to 1.8 degrees C of global warming, Triodos’ Stegeman said. “The conference also reached a final agreement on Article 6, a technically difficult part of the Paris accord that would allow countries to effectively work together to reach one nation’s climate goals,” Stegeman added.

    Coal Misgivings?

    However, not all was bad. Although it does not take the radical steps necessary to end all pollution, “the final agreement is remarkable for its recognition of the need for ‘accelerating efforts to phase down unabated coal power and phase out inefficient fossil fuel subsidies’. Higher ambitions are clearly needed,” Zabielski says.

    Focusing on the nitty-gritty of policy wording, MFS’ Hindocha was less convinced by this commitment. “The last-minute wording change watering down the need to ‘phase out coal’ to ‘phase down coal’ was the biggest disappointment, given the impact burning coal has on global warming,” Hindocha says.

    On the coal front, South Africa did seem to provide some encouragement. “We were really hoping for some sort of deal for South Africa coal exit and we actually got that. It is quite important to get successful landmark transaction for winding down coal quickly and in a just transition way,” adds Ulf Erlandsson, CEO of the Anthropocene Fixed Income Institute.

    GFANZ Misgivings

    Although all noted the scale of the ‘Glasgow Financial Alliance for Net Zero (GFANZ)’, some were disappointed by parallel investments in fossil fuels.“The way the private sector stepped up at COP26 is a source of reassurance. The sheer scale of the GFANZ pledge makes the financing gap seem bridgeable, though of course it is not as simple as just announcing a pledge, regardless of how ambitious it is,” PKA’s Dylander added.

    “A significant minus on the scorecard was seeing some of the financial institutions leading GFANZ and other initiatives while at the same time news were hitting the headlines that they were in the final bidding process for a large lease-back transaction for fossil infrastructure in Saudi Arabia. The South Africa deal amounted to around USD8bn, the Saudi deal around USD15 billion. That is not how we get the maths to work out in terms of the energy transition,” Erlandsson notes.

    The Good: Rulebook, ISSB and Deforestation

    “Although it was insufficient to get the world on a below 2 degrees trajectory, COP26 provided a breakthrough on the rulebook of the Paris Agreement, and [made] good progress on more ambitious policies for 2030,” Robeco’s Kenny Robertson and Lucian Peppelenbosch commented on this occasion.

    “After 6 years of negotiation, governments agreed on the rulebook for implementing the Paris Agreement. It was a surprise that this agreement was reached since the first week of COP26 was quite disappointing, but perhaps the US-China climate deal helped to streamline the negotiations in the last few days. The rulebook covers 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, and may support investments in forests and other natural carbon sinks,” Robertson and Peppelenbosch add.

    Vicsai chose to highlight two other positive developments. “From a success perspective, there are two things that I want to highlight. The new ISSB board will promote further transparency and be an essential tool for investors and other stakeholders to engage corporates and measure progress and performance toward net-zero emission commitment. Secondly, the general agreement regarding deforestation, including Brazil and Indonesia, countries reluctant to agree on the topic in prior years,” he said.

    Pessimism was not unanimous. Wellington management focused on the progress made rather on the failure to meet ambitious targets. “The Glasgow Climate Pact marks the first time that all parties acknowledge the contribution of fossil fuels to climate change. Commitments were more tangible than ever with agreements to mitigate key emissions sources including methane and coal, even if some of the large emitters have not joined yet,” Delongchamp comments.

    “The commitments were also more immediate than ever, in most cases focusing on 2030 rather than only 2050. The result of these incremental pledges put the world on a temperature trajectory between 1.8°C and 2.4°C, down from 2.7°C before COP26. Clearly, much will depend on the actual implementation of these pledges and the next COP meeting will be important in helping to ensure adherence to those commitments,” Delongchamp says.

    However, enthusiasm should be tamed by realism. “At the same time, looking at COP 26 from a macro perspective, there are several new agreements and commitments between parties (China and US, GFANZ, Deforestation/Biodiversity, the new International Sustainability Standards Board (ISSB) among some examples) that could lead to more significant decarbonization, better mitigation, and more transparency, if delivered. It is important to remember that all agreements are voluntary commitments and as the years show, it’s time to stop talking about intent and start delivering,” says Vicsai.

    What Role for the Financial Sector

    Given that so much remained to be done, some noted that this financial sector was left to pick up what the politicians could not do.

    “Given COP26 fell short of what’s required, there is an even greater need for the financial sector to pick up some of the slack by thoughtfully influencing change in the real economy and allocating capital to its most sustainable uses. Given the complexity and importance of the situation, we need to consider whether our current approach is best suited to achieve not only attractive returns, but also our wider goals,” Hindocha says.

    “We are now at the point where there is certainty that we will see radical changes to our energy, transport, buildings and industrial systems. This creates huge opportunities for the companies with the products and services that are driving the transition. From an investor perspective, climate-focused strategies are well placed to benefit,” abrdn’s Mackenzie argues.

    Others were less optimistic. For Triodos Stegeman, “it is clear that states did not deliver in Glasgow on what is needed to avert a climate catastrophe. Should we then turn to business instead? The narrative I hear quite a lot: if states would derisk climate investments, a lot of private capital would go into solutions, also in emerging economies where they are most needed. In this way, we would reinvent the financial system. I personally doubt if this works. Yes, blended finance can help. And yes, the risk of the fossil industry becoming a stranded asset increases since more investors will divest. But if we’re talking about long-term solutions and large-scale climate mitigation (which is more than renewables alone), private capital will not fix it all,” Stegeman concludes.

    Image courtesy of COP26
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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