The UN’s annual flagship meeting on climate change, which kicked off this week, could yield major agreements on net-zero emissions targets, climate finance, carbon trading, and more. All could change the ways in which companies do business
What is COP26?
The signatories to the United Nations Framework Convention on Climate Change (UNFCCC) gather annually to discuss climate change at what is referred to as the Conference of the Parties (COP). This practice began in 1995, and today the yearly get-together is the biggest of its kind, during which global leaders attempt to forge agreements on critical climate-related issues.
COP21, which took place in France in 2015, was a milestone event that gave birth to the landmark Paris Agreement. COP26, taking place in the Scottish city of Glasgow from October 31 to November 12, represents another milestone. At this year’s summit, countries must submit updated Nationally Determined Contributions (NDCs). These are the country-level emissions reduction plans first developed in 2015 by the parties to the Paris Agreement. Under the terms of the Paris Agreement, every five years each signatory must revise their NDC with the aim of reducing greenhouse gas emissions so that global warming is limited to 1.5°C above pre-industrial levels, or at the very least to well below 2°C. NDCs are one key element for businesses to watch, but not the only one.
How could COP26 impact businesses?
COP26 has the potential to determine the course of global climate action for years to come, and could therefore impact every aspect of society: the public sector, non-profit organizations and, of course, the business world. Four areas of negotiation, in particular, could have seismic ramifications for businesses, big and small:
I. Climate Ambition and Emission Reduction Targets
COP26 will host discussions on how countries can raise their climate ambitions and allow leaders to negotiate the policies and measures needed to accelerate action towards the goals of the Paris Agreement.
Taken together, the NDCs submitted to date don’t cut emissions enough to limit warming to meet the goals set in the Paris Agreement (i.e. well below 2°C, with a target of 1.5°C above pre-industrial levels). In fact, according to the latest UN International Panel on Climate Change (IPCC) findings, current plans will lead to a temperature increase of around 2.7°C by 2100.
The new NDCs and the hoped-for an increase in climate ambition that accompanies them, will influence public sector spending decisions and national and international regulations for many years. In turn, these will affect the decarbonization pathways taken by companies and the speed at which they transition to low- or zero-carbon business models.
II. Carbon Markets and Pricing Mechanisms (often referred to as Article 6 negotiations)
COP26 may see countries reach an agreement on the international systems needed for trading emissions and carbon offsets. Article 6 of the Paris Agreement laid out a series of mechanisms for “voluntary cooperation” between countries in pursuit of their climate goals, but getting consensus to operationalize these mechanisms has proven to be difficult.
Demand for voluntary carbon offsets has skyrocketed as more and more companies have pledged to reduce their carbon footprints and achieve net-zero emissions by 2050. Agreement on Article 6 would set a course for the rules that govern carbon markets, which in turn could give rise to a new era in carbon trading.
If we don’t see consensus on Article 6, certain countries may elect to go their own way — and design their own emissions trading platforms and rules without the buy-in of all Paris Agreement signatories. Either way, COP26 is likely to signal big changes in the development of carbon markets.
III. Climate Finance
Climate finance is critical to meeting the goals of the Paris Agreement. The public and private sectors each play important roles in mobilizing funds, both towards reducing emissions and preparing vulnerable communities for the worst impacts of climate change, like more frequent and intense extreme weather events.
Under the Paris Agreement, developed countries committed to spending at least USD$100bn annually from 2020 through to 2025 to help developing countries transition their economies to a low-carbon future and harden them to physical climate risks. Expert analysis suggests this target will not be met until 2023.
This spending, even if achieved, is not enough to fulfill the Paris Agreement’s objectives. COP26 is therefore likely to see robust debate on how to direct larger amounts of public and private investment towards climate mitigation, adaptation, and resilience. The outcome of this debate could reshape financing flows across borders and throughout markets.
IV. Sectoral Alignment to Paris Goals
COP26 may also help define the pathways that different sectors of the economy should take in order to achieve the overarching goal of limiting climate change to 1.5°C.
Businesses should pay particularly close attention to key debates on:
- The phase-out of fossil fuels and public and private divestment from the coal industry
- The increased adoption of Zero Emission Vehicles
- The format of climate-related disclosures and compulsory reporting requirements for private companies, especially among the G7 countries, which came out in support of mandated climate-related financial disclosures earlier this year
- Enhancing capital flows towards climate mitigation and adaptation activities
- The alignment of net-zero emissions campaigns with 1.5°C-aligned targets at the sector level
- Initiatives and spending on climate adaptation, including on the protection of natural habitats, upgrading infrastructure to be resilient to extreme weather events, and early warning systems for physical climate risks
What would make COP26 a success
In our view, for COP26 to be considered a success, four conditions must be met.
First, all signatories to the Paris Agreement must commit to making the emission cuts necessary to reduce emissions in line with the goals of the Paris Agreement and pledge to revise their NDCs accordingly. This is especially true of countries in the G20, which account for 80% of global GHG emissions.
Second, signatories must lay out credible low-carbon transition plans, which phase out the use of coal within the next 20 years, reduce reliance on other fossil fuels for energy purposes, accelerate the take-up of zero-emission vehicles, and turbocharge innovation when it comes to climate mitigation and adaptation technologies.
Third, developed countries must recommit to increase climate spending to hit the USD$100bn targets under the Paris Agreement, with a clear roadmap to higher spending post-2025.
Fourth and finally, the conference must end with a path forward on rules for a fair and
equitable carbon market and agreement on the other Article 6 mechanisms.
Manifest Climate’s Role
Manifest Climate will have boots on the ground at COP26 and will take stock of key developments during the summit. Our focus will be on translating the impact of COP26 negotiations and developments for businesses and our customers. If you have any specific, business-related questions or topics, please reach out to our team.
Manifest Climate is a global leader in empowering companies to improve learning, governance & disclosure. Powered by world-class climate expertise & leading TCFD datasets, our SaaS platform brings clarity, efficiency, and knowledge to organizations on all climate-related matters.
