COP26: success or failure?
It could be argued that this is an accurate summary of what happened at COP 26 in Glasgow. On many levels the event was a disappointment. Yet in hindsight, maybe our expectations were too high for what could realistically be achieved? First and foremost, we must remember that any outcome from COP must be a compromise. Decisions must be unanimous across its 197 members and, to put it diplomatically, this is hard to achieve. So maybe we need to reconsider what COPs should be about? Rather than expecting them to provide clear decisions to all the issues raised, perhaps they just be a forum for generating compulsion on critical matters, catalysing new ideas, opening new fronts for fighting climate change and uniting those who are willing to commit to the necessary changes?
So rather than dismissing COP 26 as a failure, maybe we should also consider its successes and build on the undoubtable momentum it created across wider society to ensure future COPs can achieve more.
- Raising ambitions and setting targets for carbon neutrality.
Here, nations were asked to present their latest (and best) net zero pledges – or nationally determined contributions (NDCs). While numerous commitments were made in the run up to, and during, the event, it is fair to say that the collective outcome of these was disheartening. Current NDCs are simply not enough to reach the net zero targets of the Paris Agreement. In fact, based on these pledges the global average temperature is set to rise about 2.7°C by the end of the century2. Hardly a successful outcome.
- Accelerating climate action and widening the scope to encompass the destruction of nature and biodiversity.
This is an area where a significant number of announcements were made. More than 100 countries, including the US, Japan and Canada, pledged to cut methane emissions significantly. 40 countries also committed to stop developing new coal power plants. While both of these initiatives are significant, neither China nor India are part of these deals. The Beyond Oil and Gas Alliance saw 20 countries agree to stop giving licences for new oil and gas production projects – again a positive step forward but none of the major oil and gas producing countries were part of this deal. Significantly, however, China and the US announced their own climate cooperation agreement, albeit without much detail.
- Honouring the climate finance commitment to mobilise USD100 billion a year.
Arguably the biggest disappointment of this COP was the ongoing failure for developed nations to meet this commitment and therefore support emerging nations adapt to climate change. Such broken promises not only damage efforts to mitigate climate change overall, but they also severely taint the credibility of COP itself.
- Strengthening the role of non-state actors in the race to net zero.
This final objective was undoubtedly the most successful. There were a series of major announcements by cities, companies (including BNP Paribas Asset Management) and investors that they would work together to reach carbon neutrality. While such commitments are to be applauded, there remains a major weakness that cannot be ignored – these pledges are not accompanied by concrete measures or short-term objectives. There are no measurable ways to hold such commitments to account. At present they are merely words.
Coal represents energy security for many countries that don’t have much else. Importantly, the energy demands for many emerging countries are growing at a time when energy production is expected to be decarbonised. In this light, persuading many of these nations to ‘phase down’ coal should be seen as a triumph. Yes, more is needed but the developed world must step up its leadership role in decarbonising energy, as well as honouring its climate finance commitments, before it can ask too much of the emerging world.
Whether this new phase will result in an extension of their geopolitical rivalry by trying to outdo each other in terms of climate change or shifting to a genuine era of cooperation by sharing knowhow and technology remains to be seen. However, it will be important from an environmental investment perspective to thaw their currently frosty relationship, as ongoing uncertainty and pressure on supply chains are impeding progress efforts.
That said more action in the race to net zero – including on the ground policy – is urgently needed if we are to truly make a difference. National ambitions will need to be ratcheted up quickly and governments will need to act more decisively than they have so far.
So what will this mean for investors and will they be exposed to greater transition risk such as stranded assets?
To investigate the best answers to these questions, BNP Paribas Asset Management has joined a climate transition forecasting consortium, the Inevitable Policy Response (IPR), as a strategic partner. This project will put together a forecast policy scenario laying out the major climate policies likely to be implemented in the 2020s and quantify the impact of this response on the real economy and various sectors4.
In essence, it aims to consider what the transition will look like specifically, which regions, which sectors and which timelines, so that we as investors can help our clients navigate that transition in an optimal way and put capital to work in profitable, interesting and dynamic high growth opportunities.