COP26: Business takes the lead on climate action

As the clock ran down on the conclusion of the COP26 conference in Glasgow— and on the planet – the global climate change meeting made some progress towards dealing with the damage caused by global warming, but significantly tougher action was yet again postponed for the future. However, where governments held back, businesses more readily accepted the need for action.

What is COP?

COP stands for conference of the parties under the 1992 United Nations Framework Convention on Climate Change — a treaty that binds every country to “avoid dangerous climate change” and reduce greenhouse gas emissions globally in an equitable way. The meeting in Glasgow, postponed from last year, was the 26th such meeting. Along with leaders and officials, hundreds of business leaders, NGO representatives and journalists attended.

Environmental imperative

At the Paris climate conference in 2015, COP21, nations committed to holding global temperature rises “well below” 2C above pre-industrial levels, while pursuing efforts to limit heating to 1.5C. Since then, the imperative to reduce emissions and global warming has increased.

In August, the UN Intergovernmental Panel on Climate Change (IPCC) issued a report (ipcc.ch/report/ar6/wg1/#FAQ) warning that global warming of 1.5°C and 2°C will be exceeded unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades.

“Human-induced climate change is already affecting many weather and climate extremes in every region across the globe,” the report stated, adding that the number of extreme weather events such as heatwaves, heavy rain, drought and tropical cyclones have increased since 2014.

2030 targets

To meet the Paris goals to limit global warming, many countries agreed on non-binding national targets to cut emissions or — in the case of developing countries — to curb the growth of emissions in the near term (known as nationally determined contributions or NDCs) mostly by 2030. Even if those NDCs were met, they would still result in 3C or more of global warming, so to prompt deeper cuts, the Paris conference built in a ratchet mechanism by which countries will have to return every five years with fresh commitments. These were the targets discussed at COP26.

However, the Glasgow summit didn’t ultimately set new 2030 targets. Instead, the Glasgow Climate Pact set a challenge for nations to come back next year with improved 2030 targets in line with the Paris Agreement’s goal of keeping warming well below 2 degrees and closer to 1.5 degrees.

Jacki Johnson FAICD, co-chair of the Australian Sustainable Finance Initiative, notes that a central reporting register has been established to allow for the five-yearly Global Stocktake. “In my view this is a significant next step as it will agree on consistent definitions, measures and improve transparency across all countries,” she says.

Where Australia stands

Prime Minister Scott Morrison said in the lead-up to COP26 that his government would stick with Australia’s current 2030 target of reducing emissions by 26–28 per cent below 2005 levels, which were adopted at the Paris conference. The government has committed to a target of net zero carbon emissions by 2050.

Australia’s targets are well below many other industrialised nations. The US has committed to 2030 reductions of between 50–52 per cent and Britain has pledged to cut emissions by 68 per cent below 1990 levels. Even before the conference began, Australia was widely criticised. “It would be really helpful to see Australia step forward with a more ambitious effort,” said Jonathan Pershing, the US President's deputy special envoy for climate change, in August. “I would submit that Australia could be much more aggressive.”

While nations are expected to come back with more ambitious targets next year, Morrison said after the conference that Australia’s current 2030 targets are fixed.

Article 6

While 2030 targets garnered much of the media attention, a key development was the introduction of a central carbon trading mechanism. Carbon trading allows countries that are struggling to meet their emissions reduction targets to purchase emissions reductions from other nations that have cut their emissions more than the amount they had pledged.

“It will now be possible for credits from emission reduction projects to be traded through a central UN mechanism. However, this will require significant work to finalise the detail. The real risk is if accounting standards are not put in place and practices are not consistent,” Johnson says.

Indeed, it has been an area of significant contention. Carbon trading was included in Article 6 of the Paris agreement, but until now conflicts impeded its introduction. Johnson says a finalised carbon trading mechanism “could be an amazing opportunity for our economy”.

Climate reporting standards

COP26 made significant progress towards developing standardised accounting treatments for carbon emissions and performance. International Financial Reporting Standards Board Foundation Trustee chair Erkki Liikanen announced the formation of the International Sustainability Standards Board (ISSB). The ISSB will develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. The new board will see the consolidation of the Climate Disclosure Standards Board and the Value Reporting Foundation

Jane Diplock AO FAICD, a director with experience on companies and regulators, and a board member of the Value Reporting

Foundation, described the move ahead of the meeting as “the most remarkable change I’ve ever seen”.

“The balance of financial and non-financial elements in a company’s business model has flipped — it used to be you'd have 80 per cent in your financial reporting and perhaps 20 per cent in your intangibles, including branding and sustainability,” she says. “However, the tech giants and companies such as Tesla have business models that no longer look at the traditional business models of extraction. They've also developed a number of ways of reporting, measuring and aggregating data.”

Three key points

Finance for poor countries

Pledges were made to increase support to developing countries to achieve net zero. The aim is to direct US$100b annually from developed to developing countries. This ambition was first set at the 2009 Copenhagen climate talks, when wealthy nations promised US$100b a year in climate finance to developing nations by 2020. That goal hasn’t been met and is likely to fall short in 2021 and 2022.

Coal

COP26 reached a last-minute deal on coal after the conference agreed to drop wording calling for the “phase-out" of coal-fired power, replacing it with “phase-down" following an intervention from India.

Deforestation

More than 100 world leaders promised to end and reverse deforestation by 2030. The countries who have signed the pledge — including Australia, Canada, Brazil, Russia, China, Indonesia, Democratic Republic of the Congo, US and UK — have around 85 per cent of the world's forests.

What it means for directors

Company directors need to rethink their time horizons when they consider their responses to climate change and move away from the two to three planning cycle, says Geoff Summerhayes GAICD, faormer board member of the Australian Prudential Regulatory Authority (APRA), now a non-executive director and adviser, noting that COP26 will further lift expectations on directors.

“If you're sitting around a board table and not having conversations about climate risk, physical transition liability risk and how that's embedded into your strategy, your governance and risk management, and your metrics, then I'd be raising a question as to why not,” he says.

Responding to climate change puts the focus on directors as to how they balance risk and strategy as they consider the transition risks in decarbonising the economy, but also the opportunity, says Johnson. “Post-COP, those three areas of tension in terms of short term versus long term, strategy versus governance, and then thinking through our societal value as companies, really need to come to the forefront for directors.”

High expectations

COP26 got underway with high — and quite probably unrealistic — expectations of progress because of the year delay caused by the COVID-19 pandemic and the feeling that another year has been lost at the same time as the climate crisis has accelerated. But from the outset, those expectations looked like being dashed. Even before the conference began, a bloc comprising China, India, Russia and Brazil took the lead in stymieing any meaningful consensus at the G20 leaders’ meeting in Rome.

However, political leaders aside, the commercial sector, investment markets and firms, activist groups, regulators, courts, investors, consumers and employees have all moved significantly since the last COP in 2019. “The story of Glasgow was the raft of announcements by the corporate sector and corporate sector alliances,” says Summerhayes. “The weight of money has taken over and the huge economic structural shift to decarbonise the economy is underway and accelerating.”

Johnson agrees, saying, “What differentiated this COP from previous COP events was the strong involvement of the private sector and the level of commitment and leadership shown by global companies.” In fact, over 450 financial institutions committed to ensuring a total US$130 trillion in assets under management is directed towards achieving net zero by 2050.