BLOG: COP26 – The moment private finance promised to lead

25 November 2021

UNEP FI’s Climate Lead, Remco Fischer reviews the outcomes of COP26 and explains why ultimate climate success or failure depends on leadership from the private and the public sectors coming together, synergising, feeding and boosting each other to create a determined drive of economic decarbonisation. He also highlights the important role of the net-zero finance alliances convened by UNEP FI.

Expectations were incredibly high going into COP26. Civil society – from school children to climate activists – was demanding that decision-makers take urgent action to halt the climate emergency. Emotions were running high as well as heavy criticism of governments and the private sector, particularly financial institutions, came under intense scrutiny.

After a short-term COVID-related reduction in global CO2 emissions in early 2020, levels of all greenhouse gases hit record levels by the end of 2020 according to the latest report from UN’s World Meteorological Organization. There is no expectation that the COVID crisis and the ensuing stimulus will reduce emissions. This of course is in stark contrast to what is needed: ensuring global heating does not exceed 1.5 degrees requires an annual reduction of global emissions of roughly 7 percent, starting now – we need to halve emissions by 2030 to avoid the most catastrophic climate impacts.

Ahead of the COP, many countries had submitted their updated short- to medium-term country climate plans (the so-called Nationally Determined Contributions or NDCs), and though many of these contributions were more ambitious than the first generation, they were still not ambitious enough. UNEP’s Emissions Gap Report, launched just ahead of COP, confirmed that current NDCs put the world on track for a temperature rise this century of at least 2.7°C – almost triple the amount of warming that we have now: 1.1 degrees.

However, we do see silver linings; important parts of the global economy at COP stepped up, promising to lead on reducing emissions at the pace and scale required and in line with what the science tells us.

PUBLIC SECTOR LEADERSHIP

Net-zero commitments from national Governments increased during COP to 120 nations

To date, over 120 countries, covering a significant majority of global emissions, have communicated – many of them during COP – their net-zero targets. Most of these carbon-neutrality targets are to be attained by 2050. But some major emerging economies have given themselves more time, such as China whose net-zero target date is 2060, and India whose target is 2070.

If all those net-zero objectives, which are longer-term and hence often vaguer than the more short-term NDCs, were fulfilled, the expected temperature outcome would still be too high, but a lot lower than without those net-zero pledges: 1.9 degrees, according to preliminary and approximate calculations.

The main challenge, however, is that countries’ shorter term, more concrete NDCs are not yet synchronized with those long-term, net-zero objectives, which of course raises questions. Ambitious long-term objectives are commendable, but both their feasibility and credibility are put into question if the nearer-term targets, strategies, and plans do not add up in the long term.

The Glasgow Climate Pact

The formal, political outcome from COP, the Glasgow Climate Pact, was the most important agreement to emerge from the summit. Unlike the last major climate conference, in Paris in 2015, the pact is not a new treaty, but a series of decisions to further and strengthen implementation of the Paris accord. These decisions are legally binding, making this a powerful document agreed by all parties.

The pact delivers, among others, three important outcomes:

  • Specific language around targets and pathways. The Pact contains very strong reference to 1.5°C as the necessary target for limiting global warming – a graduation from the language of the Paris Agreement, which only referenced 1.5°C as an aspirational target. It also contains very strong emphasis on the need to follow the best available science, including the need to reduce emissions by 45% by 2030, relative to 2010 levels.
  • Acceleration of ambition for Nationally Determined Contributions (NDCs) is badly needed. Despite 130 countries committing to ‘net-zero by 2050’, they are not yet consistent with a 1.5°pathway. The Glasgow Pact requests countries to arrive at next year’s COP27 with updated NDCs that are aligned with a 1.5° pathway. This is a vital provision of the Pact – it shortens the delivery date of new NDCs from 2025 to 2022, accelerating countries’ net-zero transition by a few but extremely crucial years.
  • Explicit call for action on coal and fossil fuels. In a departure from previous climate agreements, the Pact specifically refers to coal power and fossil fuel subsidies and calls on countries to accelerate the “phase-down” (though not the “phase-out”) of these sectors and activities.

Groups of countries, often together with the private sector, formed ‘coalitions of leaders’ making ambitious commitments on more specific decarbonisation challenges

  • The world’s two largest emitters, China and the US, announced that they would immediately resume close collaboration to reduce emissions on both sides of the Pacific in line with their corresponding net-zero commitments. This is a huge political signal to the rest of the world.
  • On deforestation: over 100 countries, representing about 85% of the world’s forests, promised to stop deforestation by 2030. This commitment was boosted by an announcement by more than 30 financial institutions committing to fully stop investing into activities linked to deforestation.
  • On methane: More than 100 countries agreed to reduce methane emissions by 30% by 2030. The big emitters China and Russia haven’t joined this.
  • On coal: More than 40 countries – which include major coal-users including Poland, Vietnam, and Chile – agreed to shift away from coal. Other countries though who rely on coal, either for their own electricity or for exports, are not a part of this. This includes Australia and China among many others.
  • On the internal combustion engine: 24 countries and a group of car manufacturers committed to ending the era of fossil fuel-powered vehicles by 2040, by starting to sell only zero-emissions vehicles from this time onwards. China, Germany, and the US are not part of this commitment.

PRIVATE SECTOR LEADERSHIP

Private sector stepped up commitments to net-zero, including near-term pledges from the finance sector

More than 4,000 businesses have now committed to align their business models with 1.5 and net-zero emissions by 2050 by signing up to the UNFCCC’s Race to Zero campaign. On finance day at COP, the Mark Carney-led Glasgow Financial Alliance for Net Zero (GFANZ) announced that more than 450 financial institutions representing US$130 trillion in capital are now members of the coalition of coalitions. Three of those groups are convened and facilitated by UNEP FI: i) the Net-Zero Banking Alliance with over 90 members and representing more than US$60 trillion in assets; ii) the Net-Zero Asset Owner Alliance, co-convened and facilitated with the PRI, with 61 members and US$10 trillion; and iii) the newly-launched Net-Zero Insurance Alliance which now has 15 members.

Five key characteristics make these net zero finance commitments ground-breaking and promising:

  • Systemic: Financial portfolios often reflect countries’ full economies. They are not yet backing 1.5°C since the overall system isn’t there. However, the commitments imply that financial institutions will now thoroughly lead, support, and be at the core of the systemic change needed.
  • Comprehensive: Aligning capital with net-zero and 1.5°C goals requires financial institutions to view their portfolios and holdings in a holistic manner – managing their full carbon-footprint, across sectors, geographies and asset types.
  • Science-based & time-bound: Decarbonising financial portfolios does not happen in an random way. It needs to happen based on the scenarios laid out by the Intergovernmental Panel on Climate Change, among others. These scenarios are time-bound, so must be the transition of financial portfolios.
  • Measurable and transparent: The commitments that financial institutions have made will require them to report on progress methodically and periodically. This reporting is particularly important in a world that is increasingly sceptical and concerned with greenwashing.
  • Immediate: Intermediary targets are for attainment by 2025, or 2030 at the latest, only 4 to 8 years from now. This first milestone requires net-zero committed financial institutions to take immediate and concrete action starting from day one. The first step that all net-zero committed stakeholders need to focus on is not making the situation worse by stopping the expansion of infrastructure, technologies, and business models that we well know are incompatible with the commitments at hand.

In conclusion, unlike the net-zero pledges of countries, financial institutions having joined one of these net-zero finance groups have committed to near-term intermediary targets that do add up to the long-term objective of net zero. Notably, two weeks ahead of COP, 29 members of the Asset Owner Alliance had published their science-based, 1.5-aligned portfolio decarbonization targets, to be achieved by 2025 and outlined in the inaugural Credible Ambition, Immediate Action progress report. Setting these near-term targets represents the first tangible and concrete output of the financial institutions’ groups convened by UNEP FI and members of GFANZ.

PUBLIC AND PRIVATE COMING TOGETHER

One of the successes of COP26 was again that an unprecedented number of public and private sector actors stepped forward with a promise to lead.

The next important step now is for all actors who have made promises to translate them, into concrete, consistent and near-term targets for these to then translate into determined, impactful actions.

Another important step is that public and private sector leadership combine and synergise to effectively move the needle at systemic level. Fortunately, we are starting to see this happen through for instance:

  • The Asset Owner Alliance that included a call to all policymakers, national and regional governments, to align policy and actions with 1.5°C compatible pathways in its inaugural Progress Report. Stressing the importance of enabling policy environments and market mechanisms, the asset owners are advocating for strengthened carbon pricing regulations and instruments. The Alliance’s proposal of a legally-binding carbon price corridor was delineated in a discussion paper on Governmental Carbon Pricing and delivered to G7 and G20 policymakers.

With this, and the work of GFANZ and the UN-convened alliances, financial institutions and their stakeholders now have the guidance and support needed to start transforming their portfolios, and with them the real economy. As the Secretary-General reminded us as he made his final remarks at COP, “Success or failure is not an act of nature. It’s in our hands.”

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