Why business should pay close attention to COP26

What is COP26?

The Conference of Parties (COP) is the decision-making body responsible for monitoring and reviewing the implementation of the United National Framework Convention on Climate Change, an international environmental treaty signed by 196 countries and the EU that entered into force on March 21, 1994. Its aim is to avoid dangerous climate change and reduce greenhouse gas (GHG) emissions globally and in an equitable way. For over 25 years, the COP has met annually to negotiate how to best tackle climate change (except 2020, due to the COVID-19 pandemic). A key task for the COP is to help governments set their own climate change targets to limit the global temperature increase to less than 1.5°C and reach net-zero emissions by 2050.

Why is the Paris Agreement the world’s greatest commitment to climate action?

During COP21 in Paris in December 2015, more than 190 nations reached a landmark agreement that was historic, becoming the first legally-binding international climate agreement. The Paris Agreement committed countries to bring forward national plans and outline targets to reduce their emissions – known as Nationally Determined Contributions (NDCs). Its purpose was also to establish mechanisms to hold nations accountable and to strengthen the ambition for objectives to be met in the years ahead. The inclusion of 1.5°C as an aspirational limit on global temperature rise was considered a decisive step among climate negotiators and advocates. Three years later, the Intergovernmental Panel on Climate Change (IPCC) Special Report on Global Warming of 1.5°C reinforced the difference that half a degree would make to nature and people. This same panel recently announced that we have very little time to make it happen, via their Sixth Assessment Report (AR6) - Climate Change 2021: The Physical Science Basis.

Where do we stand now?

In the past years, we have seen an increasing commitment across the globe. The UK became the first major economy to pass a net-zero emissions law. The European Union adopted the European Green Deal, aiming to make Europe climate neutral by 2050, with an interim target of cutting GHG emissions by at least 55% by 2030. The US and China — the world’s two largest economies — have announced net-zero carbon emission commitments. However, global GHG emissions continue to grow. The UN first assessment of countries’ pledges to cut their GHG emissions by 2030 was published in February 2021. It shows that current NDCs amount to an emissions reduction of just 1%. Advanced economies are not cutting emissions fast or consistently enough, despite the temporary fall in emissions due to the COVID-19 crisis. Countries responsible for about two-thirds of global emissions have declared long-term targets to reach net-zero emissions by 2050, but many don’t have clear plans on how they will deliver. Only 75 of the 197 signatories to the Paris Agreement have submitted their national action plans for reducing emissions between now and 2030.

How can we measure COP26 success?

• More nations making net-zero commitments by 2050 or even before, as Finland (2035), Germany (2045) or Uruguay (2030) have already done. More than policy positions, what must happen rapidly is countries putting their climate commitments into law, as the UK, France and Sweden have done.

• More decarbonization plans beyond governments: If sectors like agriculture, transport, construction, finance or insurance are not on board, any net-zero goal will be unrealizable. To make this happen, representatives from government, central banks, development finance institutions and the private financial sector must mobilize finance and agree on the distribution of fiscal stimulus packages. Major investment is needed to decarbonize sectors over time, with a strong focus on investing in carbon capture or reduction technologies. Cross-sector collaboration will also be crucial for successful long-term decarbonization strategies.

• A compromise on Article 6 of the Paris Agreement: Outlined in the last hours of the COP21 negotiations, this article is one of the most complex, as it deals with how countries can trade emissions reductions via an international carbon market. Countries striving to meet their emission reduction targets or looking for less expensive emission reductions can purchase emissions reductions from other nations that have already reduced their emissions more than the amount they committed to. To date, Article 6 rules remain undefined and without agreement. According to the International Emissions Trading Association (IETA), $250 billion per year for climate action by 2030 can be saved with the right rules in place. It can also bring additional public and private finance and accelerate sustainable development in lower emitting and potentially less developed nations. If Article 6 remains unsolved, we can face challenges such as emissions double-counting (both countries claiming reductions) or additionality of emissions reduction (putting reduction measures in place that were already planned), which would mean the carbon market does not offer a clear climate benefit.

• Financial support for developing countries: Rich nations need to fill the finance gap to support the least developed countries in mitigating and adapting to the impacts of climate change. COP26 must ensure that these nations maintain the $100 billion-per-year pledge made in 2009 in Copenhagen at COP15.

• Plans for resilience to improve early warning systems, flood defenses, build infrastructure and improve agricultural practices must be forthcoming to avoid further loss of life, livelihoods and natural habitats. These plans need to foster the connection between people and nature through nature-based solutions, and will be key in addressing climate change and human wellbeing.

• Mandatory climate risk disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations: The 2017 TCFD best practice framework advises companies to disclose the potential financial impacts of climate change while helping them embed resilience within their strategies. The purpose is to inform investors and relevant stakeholders of the risks associated with climate change and guide investment into more sustainable organizations. COP26 should be the catalyst for national governments to consider enforcing mandatory climate risk disclosures in line with the TCFD recommendations, as this can boost GHG emission reductions and help companies meet the 1.5°C target.

Companies and organizations have a vital role to play in helping society achieve the transition needed to meet the objectives of the Paris Agreement. They can change the way we do business, implement transformative climate action strategies and drive the decarbonization of global supply chains — all of which is essential to reaching a net-zero economy.

According to Data-Driven EnviroLab and NewClimate Institute’s 2020 report on Accelerating Net Zero, 1,500+ companies have set net-zero targets which account for 3.5 gigatonnes of GHG emissions — an amount greater than India’s annual carbon footprint.

COP26 is an opportunity for companies to demonstrate to their peers and governments that they have ambitious climate action plans in place and that they are leveraging innovation to provide the low-carbon solutions required to reach net-zero in all sectors, even high-polluting ones. If the COP26 success parameters listed above become a reality, companies and investors can be reassured on their transition strategies to a low-carbon economy.

Developing net-zero roadmaps can be challenging, but organizations and companies are well-positioned to adjust to the net-zero transition. They can also benefit from the opportunities it provides, such as capitalizing on the growing market for low-carbon products and services and building more efficient and resilient supply chains. It’s clear in the lead-up to COP26 that investors increasingly want companies to tackle their value chain emissions and include climate-related financial disclosures in their annual reporting. Companies now realize that managing their carbon footprint, setting science-based emission reduction targets and engaging suppliers and customers to achieve these targets can lead to stronger climate action that benefits every business, sector and geography.

If you want to learn how to get started with your net-zero strategy, read our previous blog post on how to build the business case for net-zero.

Topics

Decarbonization

Net-zero

COP26