What COP26 means for Finance
The United Nations climate summit, COP26, takes place in Glasgow this week.
Whilst there were multiple setbacks in the lead up to the event, including Scottish Rail strikes and the absence of the Queen, a successful outcome of COP is ‘critical to averting climate catastrophe’, the UN Secretary-General has said. Greenhouse gas emissions need to be halved by 2030 and reach net zero by 2050 in order to limit global warming to 1.5℃, the goal set out at in 2015 Paris Agreement.
One of the four main goals of COP26 is to mobilise finance, suggesting significant implications for business and financial services. So, what can we expect to see next?
Reporting is a long-standing feature of the UN’s financial strategy, now calling for companies and institutions to align with TCFD (Task Force for Climate-related Financial Disclosures) recommendations. These involve the disclosure of how organisations identify and manage climate-related risks and opportunities. Whilst the UN seems optimistic about voluntary take-up (sustainability reporting has increased by 85% since 2019), this seems less likely for non-public facing businesses, for example, who are less influenced by optics. It is hoped that TCFD recommendations will be made mandatory by numerous countries present at COP26. Reporting is prioritised with the ethos of ‘what gets measured gets managed’ which does create an important sense of accountability, but it can only take us so far.
Finance will also need to look at risk management - assessing resilience to both the physical and ‘transition’ risks of climate change, including changes in policy, tech and investor attention. These risks are described by the PM’s COP26 financial advisor, Mark Carney, as ‘far- reaching, unprecedented, foreseeable’ and long-term. Nearly every financial asset will need re-evaluation, with particular emphasis on future projections, in order to account for rapid change. This level of reassessment, although overwhelming, is necessary, with insurance company Swiss Re estimating that 2℃ of warming would lead to an 11% reduction in global GDP.
Recognising the huge opportunity for returns will also be key to gaining investment for a sustainable future. Companies must offer realistic plans to achieve their net-zero commitments. Comprehensive analysis, paired with consumer-friendly metrics, will provide optimal ESG evaluation, allowing investors to make informed decisions. Investors are increasingly going green. $21 billion was invested into ESG funds in Q1 of 2021, compared with $51 billion for the entirety of 2020. Although it is arguable whether ESG funds outperform, there is undoubtedly serious financial gains to be made during this transition, for those environmentally concerned or otherwise.
Finally, expect to see much more of developing and emerging economies. Carbon offsetting, which will prove crucial in meeting net-zero targets, is typically cheapest in these economies and reporting will incentivise decarbonisation throughout supply chains. Improved financial capabilities will also be needed, such as better insurance provision in countries susceptible to extreme climate events. The Insurance Development Forum (IDF) has announced multiple initiatives to improve insurance protection for the Vulnerable 20 (V20) countries, to be launched at COP26. Whilst it’s easy to get lost in the numbers, this is a clear example of how the private sector can directly contribute to climate justice, by providing protection and security to those who need it most.
With many viewing COP26 as our last chance to take sufficient action on climate, the stakes are higher than ever. "To achieve our climate goals, every company, every financial firm, every bank, insurer and investor will need to change" says Carney.
Is finance ready?