COP26: What you need to know

As the United Nation’s COP26 conference has come to an end, here is a short summary of the key takeaways from two intense weeks of discussion and negotiations over the climate change challenge. While the conference provided a reaffirmation of the goal to limit global warming to 1.5°C, the policy decisions taken in Glasgow still fall short of what is needed for delivering that goal.

The Background

Global Temperature has already increased by 1.1 °C, compared to pre-industrial levels, due to human-induced activity. From 2010 to 2019, GHG emissions continued to grow by 1.3 percent per year on average and in 2019, emissions were ~60 Giga-tones CO2e including emissions due to land-use change (LUC), 2/3 of which are linked to fossil fuels. Despite a global pandemic with harsh restrictions on freedom of movement, 2020 GHG emissions are estimated to be just 5.4% lower than in 2019 in absolute level. Our Carbon Budget – the CO₂ humanity can still afford to emit over time to keep temperature from increasing beyond 1.5°C– is 400 GtCO2, equivalent to ~11 years of emissions at the 2019 level.

The Glasgow Climate Pact

In the final Glasgow Climate Pact, the 197 participating countries agreed to a number of pledges which – despite making the headlines – still fall short of what is needed to slow down global warming. Here is our view on the most newsworthy items.

1. The goal of limiting global temperature increase to 1.5 °C, or anyway well below 2°, was reaffirmed. This will require CO₂ emissions to be cut by 45% by 2030. Under current policies, we estimate end-of-century warming to be 2.7°C, and the Climate Action Tracker estimates that targets for 2030 remain inadequate: the current 2030 targets (without long-term pledges) put us on track for a 2.4°C temperature increase by the end of the century. Hence, governments will need to reconsider their emission reduction targets and plans (Nationally Determined Contribution, NDC) and increase ambition. The decision of China, Japan and Korea to set intermediate plans and goals for 2030 was a positive surprise, and today around 90% of emissions are now covered by net zero targets. Yet, even if all the announced net zero commitments were implemented, this would still leave temperature to increase by to 1.8°C by 2100, according to estimates by the Climate Action Tracker (figure 1).
   
   
   
2. The commitment on coal is positive, but weaker than required by IEA 2050 Net Zero Report. The Glasgow Climate Pact includes a commitment to “accelerating efforts towards the phase down of unabated coal power and phase out of inefficient fossil fuel subsidies.” It is a positive signal going in the right direction, but last-minute pushback by China and India resulted into a watering down of what initially was a much stronger commitment (to ‘phase-out’ rather than ‘phase-down’). Moreover, while the IEA Net Zero 2050 recommends that no new unabated coal plants and no new coal mines or mine extensions be approved from 2021 on, there is no precise timeline set out in the Glasgow Climate Pact.
3. The pledge to cut Methane emissions matters, but the holdouts are significant. In Glasgow, 105 countries committed to reduce Methane (CH₄) emissions by 30% with respect to 2020 levels. CH₄ emissions are the second largest contributor to global warming, but it degrades rapidly – remaining in the atmosphere for just twelve years, compared to up to hundreds for other gases. This means that a serious commitment to reducing CH₄ could show its effect on the planet’s temperature very quickly. The target put forward in Glasgow could shave 0.2°C off global warming by mid-century, which could make a significant difference in the severity and frequency of extreme weather events. The EU is expected to propose legislation on methane emissions generated by suppliers this year, and the US is reportedly working on regulations that will levy a methane fee on oil and gas producers. Yet, major emitters like China, Russia, and India – which combined generate about a third of methane emissions – have not signed the pledge.
4. While a lot of attention was devoted to developed countries’ financial support to developing nations, the climate finance gap is still unbridged. A decade ago, developed countries pledged to provide USD 100 billion annually to help developing nations transition and adapt to climate change. The pledge was supposed to be realised in 2020 but remains unfulfilled. The COP26 agreement entails a commitment to go beyond the USD 100bn target by “at least doubling climate finance money provided to developing countries” by 2025. So far Germany, Sweden and Denmark are the countries showing the largest progress towards committing their fair share of climate finance, while the US is a laggard in the list.Yet,despite widespread agreement that more money should be allocated to climate finance, we still lack a standard definition of what “Climate finance” should include, how money should get disbursed and how to assess if that money was spent well. (figure 2).
5. Banks have been rushing to join the Net Zero Banking Alliance ahead of COP26. The final text of the Glasgow agreement contains no major update for the sector – not even on the headline topic of banks’ coal and fossil fuels financing policies. However, we have major names rushing to join the Net Zero Banking Alliance (NZBA) ahead of COP26 – most notably JP Morgan, Goldman Sachs, Intesa Sanpaolo and Unicredit. The current 95 members of the NZBA now account for 43% of global banking assets, although the alliance still does not include any Chinese banks. The NZBA commitment requires banks to publish 2030 financing reduction targets for their key GHG intensive sectors, within 18 months of joining. BBVA, Morgan Stanley and KBC have already added to their disclosure by setting a Net Zero target for specific portfolios of assets. This reinforces the momentum we have been seeing in recent months, with more and more banks starting to provide colour on their financed emissions. As investors with a historical focus on the banking sector, we welcome these development – as they will allow us to have more visibility and data on the Scope 3 financed emissions of the banking names that we hold in our portfolios.

In conclusion, COP26 was an occasion to reinstate and reaffirm the goal of limiting global warming to 1.5°C, but policy announcements fell short of what is needed to deliver that goal. The first ever mention of coal in a UNFCCC documents is certainly good news, but the language is un-ambitious and the timeline unclear. The Methane pledge is important, but the biggest emitters are holding out. The commitment to climate finance is significant, but its effectiveness will depend on actual speed of deployment – which so far has been underwhelming. Banks have been feeling the heat and are taking action, but we need more on lending policies to the fossil fuels sector. As such, COP26 is leaving us with the bittersweet taste of a missed opportunity: as too often in the past, a lot was said but not enough was done. On to COP27, hoping leaders will realise that – borrowing from climate activist Greta Thunberg – there is no Planet B(-lah Blah Blah).

Silvia MERLER – Head of ESG and Policy Research, Algebris Investments

Ginevra BARGIACCHI – ESG Analyst, Algebris Investments

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Sources
Figure 1. Source: Climate Action Tracker – As at 15/11/2021
Figure 2. Source: OECD – As at 15/11/2021

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