The focus of this year’s gathering at the 26th UN Climate Change Conference of the Parties (COP26) held in Glasgow, Scotland, on October 31-November 12, was to strengthen countries’ emissions reduction goals to limit global temperature rise to 2°C and ideally closer to 1.5°C.
Kroll Bond Rating Agency (KBRA) was in Glasgow to monitor the proceedings because of the importance of countries’ commitments on international climate investment and the transition to a low-carbon economy.
In this report, we highlight the increased climate pledges coming out of the summit, as well as discuss the Glasgow Climate Pact, the Global Methane Pledge, and youth climate activism, among other signs of environmental progress from the event.
COP26: Background and Key Themes
The first COP took place in Berlin in 1995 when governments involved in the development of the United Nations Framework Convention on Climate Change at the Rio Earth Summit in 1992 met to strengthen global environmental efforts. At COP3 in 1997, countries negotiated the details of the Kyoto Protocol, which was the first global pact aimed at reducing greenhouse gas emissions (GHG). At COP21, the Paris Agreement was ratified, committing countries to binding commitments that limit global warming to below to 2°C and ideally closer to 1.5°C. As the effects of climate change continue to intensify, there has been increasing public pressure for countries and corporations to accelerate the transition to a low-carbon economy and speed their alignment with the goals of the Paris Agreement. COP26 was a highly anticipated event and there was immense pressure on governments to strengthen climate pledges and increase climate financing.
Enhanced Environmental Pledges
During the proceedings, one of the boldest announcements came from Prime Minister Narendra Modi who committed India to a net-zero emissions goal by 2070 and aggressive expansions in renewable energy. The UK, US, EU, and others also pushed for countries to accelerate the timeline of new climate commitments to the end of 2022, up from the 2025 Paris Agreement deadline. In the final text of the Glasgow Climate Pact, countries agreed to revise their climate plans by the end of 2022.
President Joe Biden made no additional climate pledges for the US but emphasized his administration’s focus on climate mitigation and announced more stringent limits on methane emissions from U.S. oil and gas production. The updated rules proposed through the Environmental Protection Agency could reduce emissions by 75% in covered sectors.[1] The US and China also vowed cooperation on global climate mitigation efforts, with US Special Presidential Envoy for Climate, John Kerry, noting that cooperation was the only way forward.
Another focus of the proceedings was limiting further damage to the natural environment and ecosystems. Importantly, more than 100 world leaders pledged to end and reverse deforestation by 2030. The countries that signed the pledge cover around 85% of the world’s forests and include Brazil, Canada, Russia, and Indonesia. Automakers Ford, Mercedes-Benz, General Motors, Volvo, and others also pledged with 30 governments to phase out fossil-fuel vehicles by 2040. While the US was not part of the deal, California, New York, and Washington State were signatories on a state level.
Fossil-Fuel Phaseouts and Emissions Reductions
One of the most notable accomplishments during COP26 was the additional signatories to the Global Methane Pledge, which was started in partnership between the US and EU. More than 100 countries have joined, a sizable achievement that will help limit one of the most potent GHGs. Importantly, these countries also represent 70% of the global economy.[2] Under the pledge, countries commit to reducing methane emissions by at least 30% by 2030. However, China, Russia, and India, three of the world’s largest emitters, have yet to sign on.
More than 20 countries, including the US, UK, and Canada, have also pledged to stop funding overseas fossil-fuel projects by 2022. In addition, the Asian Development Bank will launch a new fund to buy coal-fired power plants in Asia with the goal of shutting down these facilities earlier than currently scheduled. More broadly, the UK-sponsored Global Coal to Clean Power Transition Statement was backed by 190 countries and organizations that have committed to phasing out coal. The U.S. was notably absent from the agreement.
The Glasgow Climate Pact included commitments to “phase down” unabated coal power and also limit “inefficient” subsidies. It also pushes countries to consider further actions to reduce their non-CO2 GHG emissions by 2030, including methane. Although the language on coal use was softened from “phase out” to “phase down,” the inclusion was still significant as this is the first time that fossil fuels were included in a formal COP text.
Carbon pricing and carbon market rules were also a controversial topic at the event. However, rules on international carbon trading were finally agreed, under Article 6. Further, Germany’s outgoing Chancellor Angela Merkel urged world leaders to adopt a global price on CO2 emissions.
Counter Climate Mitigation Efforts
COP26 was a highly anticipated global event and many in the public were critical that it did not go far enough or make enough progress in limiting global warming. Critics cited the continued government investment in fossil fuels as a serious inhibitor to climate mitigation. Though they have made extensive climate commitments and net-zero pledges, Bloomberg estimates that G20 countries invested $600 billion in fossil fuels in 2020. Additionally, Global Witness, a human rights group, accused COP26 organizers of hosting over 500 delegates involved in fossil fuel lobbying.
The United Nations published an addendum to the Emissions Gap Report 2021, highlighting that the emissions pledges countries have made, including new or updated nationally determined contributions, fall short and that emissions “would need to be roughly halved by 2030 to become consistent with a 1.5°C least-cost pathway.”
The Developed Versus the Developing World
Ahead of the summit, there was increasing tension between developing countries and the developed world that has driven much of the planet’s increasing temperatures. For example, as part of the Paris Agreement, wealthy countries pledged annual funding of $100 billion from 2020 to 2025, a goal that is not likely to be reached until at least 2023. The economic shortfall between what developed countries are pledging and what developing countries need negatively colored much of the discussions at COP26. However, it is also important to note, that President Xi Jinping of China and President Vladimir Putin of Russia were heavily criticized for not attending the conference in person.
The Like-Minded Developing Countries, a group that includes China and India, in conjunction with many African nations issued a statement pressuring wealthy nations to pledge $1.3 trillion in climate finance by 2030, with 50% in the form of clean energy investment and the remainder focused on protection against climate change threats. Over the course of the proceedings, many developed countries voiced their frustrations over a lack of funding and that climate commitments made before and at COP26 had fallen short. The chair of the Least Developed Countries group, Sonam Phuntsho Wangdi of Bhutan, called the progress made at COP26 “frightening.” Iran also voiced frustrations over economic sanctions that are heeding its progress on climate goals and hindering the country from ratifying the Paris Agreement goals. Iran is one of four countries that has yet to ratify the agreement.
In response to this tension, multiple countries including Japan, Australia, the US, Switzerland, and Canada, announced increased climate mitigation and adaptation financing and pledged to mobilize additional climate financing to better support developing countries. The US, the UK, and other industrialized nations announced $8.5 billion to speed up South Africa’s energy transition. Contributions to the Adaptation Fund, an organization that aims to protect vulnerable communities from the effects of climate change, raised a record $365 million from 16 donors, with EUR100 million pledged by the EU. Similarly, donors pledged over $600 million to the Least Developed Countries Fund. The Glasgow Climate Pact also urges countries to double their collective share of climate funding for developing countries from 2019 levels by 2025.
Private Sector Climate Commitments
Though much of COP26 was focused on the public sector, there was much discussion on the role of the private sector in international climate mitigation. The one area viewed as a real success this year was the movement made and planned within the private sector. Technology and innovation as well as corporate commitment to making changes were a highlight of the event. Importantly, the International Financial Reporting Standards (IFRS) Foundation announced that it would produce a uniform framework for sustainability disclosure with the creation of the International Sustainability Standards Board (ISSB), which will consolidate other internationally recognized frameworks. Mark Carney, the UN Special Envoy for Climate Action and Finance, also announced that 450 firms, representing $130 trillion in assets, have signed on to the Glasgow Financial Alliance for Net Zero, which requires signatories to commit to net-zero carbon emissions by 2050 and establish interim goals for 2030.
Larry Fink, the Founder, Chairman, and CEO of BlackRock, also cautioned that the heightened focus only on public companies to publish environmental disclosures and make net-zero pledges is allowing private companies to continue to cause environmental damage and will lead to market arbitrage.
Youth Engagement and Climate Activism
Youth engagement and climate activism were also important themes at this year’s COP. Climate marchers rallied in Glasgow during the event proceedings, accusing governments and companies of greenwashing, the process of exaggerating positive environmental impact. Climate activist Greta Thunberg called COP26 a greenwashing festival and said COP26 commitments are not going far enough. She and other activists also urged the UN to declare climate change a Level-3 emergency, its highest emergency designation. Former US President Barack Obama urged young people to use their power to get involved and advance climate causes during his speech at the event.
Conclusion
Despite the progress made at COP26, there is still public skepticism about whether countries and global corporations would be able to work together to limit global warming closer to 1.5°C or if the goals of the Paris Agreement will be achieved. However, it is also noteworthy that at the conclusion of COP26, nearly 200 countries agreed to limit global fossil fuel use under the Glasgow Climate Pact. Corporate activity was also highlighted as the greatest potential for climate action as companies look toward new and innovative technologies and work on improvements in their supply chain.
KBRA will continue to closely monitor how the momentum around COP26 accelerates climate financing and international investment in the transition to a low-carbon economy. Additionally, as pressure increasingly mounts on governments and corporations to better assess, disclose, and mitigate environmental risk exposure, KBRA will continue to track the influence of stakeholder preferences on financial revenues, costs, and growth strategies, as well as the potential for reputational risk and claims of greenwashing.
[1] https://www.whitehouse.gov/wp-content/uploads/2021/11/US-Methane-Emissions-Reduction-Action-Plan-1.pdf
[2] https://ec.europa.eu/commission/presscorner/detail/en/statement_21_5766
Contacts
Emilie Nadler, Associate Director, ESG
+1 (646) 731-3386
Andrea Torres Villanueva, Associate, ESG
+1 (646) 731-1238
andrea.torresvillanueva@kbra.com
Gordon Kerr, Managing Director, Head of European Research
+44 20 8148 1020
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