COP26 has come to a close, with an exhausted conference president Alok Sharma banging down the gavel with diplomats huddled in heated negotiations running till just minutes before the close. With the eyes of the world watching, the expectations were running high.

 

Did COP26 go far enough to resolve the climate crisis? No. Did it make progress? Unequivocally, yes. The hope of 1.5C is still alive, just, according to Abbie Llewellyn-Waters, Head of Sustainable Investing and Rhys Petheram, Head of Environmental Solution at Jupiter.

 

There were several breakthrough aspects, in our view.

  1. The fossil fuel term “coal” entered the official documentation for the first time since climate talks began in 1995.
  2. The two largest emitters continued their co-operation (first brokered earlier this year on Chinese soil – a topic we have spent much time discussing previously).
  3. Just Transition – climate and equity gap featured heavily in the negotiations, with the most vulnerable countries given better representation.
  4. Coal – the ‘phasing down’ of coal (not ‘phasing out’) was agreed. The imperfect text was changed minutes to the final hour but it is a step forward.
  5. Methane – eighty times the warming impact of carbon – has been targeted for significant reduction.
  6. Deforestation – broad agreement by the key countries on stopping deforestation, which has been running at an equivalent acreage rate of 30 football pitches every minute.
  7. Loss and damage – those who have profited at environmental expense are going to subsidise those less mature economies to support their transition.
  8. Carbon markets – article 6 of the Paris Agreement had been unresolved, until now. We have clarity that better supports reduced emissions and removes risks of double counting emission reduction.
  9. Climate Finance – new tools, such as the Capital Markets Mechanism, have been introduced which are more focused on additional contributions rather than simply a risk management approach.
  10. Ratcheting pressure – Governments have been urged to revisit their climate plans by the end of 2022, heightening pressure on nations to deliver further improvements next year at COP27 in Sharm El Sheikh, Egypt. In the words of the UN Secretary General: “COP 27 starts now”.

 

Given the gravity of scientific evidence pointing to the immediacy of climate change in recent months, many hopes were pinned on the outcomes of the delayed COP 26 conference for the future of our planet. In our view, the summit represented not only a historical milestone, but one with genuine potential for positive outcomes. No longer are environmental considerations at the fringe of political and financial agendas, but front and centre. During the conference, nations have made pledges to stop public investment in coal power, end deforestation, reduce carbon and methane emissions and do it all in a shorter timescale than previously intended.

 

The direction of travel is clear. Countries have been pledging to reduce emissions for some time, but throughout the course of the conference more countries have been raising their ambitions. There were 14 new or updated climate pledges at COP26. Several large economies, including India, the world’s third largest emitter after the US and China, have announced pledges to reach net zero emissions. The pledges have stretched beyond carbon, with more than 100 countries targeting methane reduction within this decade. The way nations plan to achieve emissions reductions vary, from nations like Iceland focussing on ramping up carbon capture technologies while the UK plans to incentivise the use of low-carbon home heating systems. Decarbonising road transport is another area of emphasis. Thirty countries have agreed to work together to make zero emission vehicles the new normal by making them accessible, affordable, and sustainable in all regions by 2030 or sooner. Countries are pushing companies to reduce, rather than offset, carbon emissions and we anticipate further standardisation of carbon pricing globally.

 

With the conference now behind us, we focus on the implementation of policy and how companies can address and adapt to the vital challenges of climate change and biodiversity restoration.

 

Abbie Llewellyn-Waters hoped to see an acceleration of policy measures which encourage businesses and individuals to decarbonise. “Real world decarbonisation is the only way to address the climate emergency; we believe it is inevitable that climate related externalities will become internalised costs to businesses. With carbon pricing trading around €60, the highest it has ever been, and policy rapidly transitioning, businesses need to reduce their total carbon output. Running a low carbon portfolio is a key component of our fiduciary duty, in my view”

 

We need corporate strategies to demonstrate clear intentionality, actionability and irreversibility in order to tackle these long-term challenges, but that is difficult to align with a shorter political and corporate cycle. We anticipate carbon costs will internalise, when, not if, we have alignment at the policy level and further global coordination around carbon markets. There are Carbon Mechanisms being designed to prevent the risk of carbon leakage – a company producing in a country with more financially favourable carbon pricing.

 

According to Rhys Petheram all of the policy levers we’re seeing now are there to ramp up climate solutions in the real world. “What is encouraging is that about two-thirds of the emissions reductions we need to see to keep a 1.5-degree scenario alive can come from existing and already commercial-ready technologies,” he said. While we do have the technologies in place today to reach these targets, without irreversibility of action, these policy pledges are not enough, in our view.

 

Collaboration is key to meeting Net Zero targets and while many of the world’s leaders were in attendance at COP26, including US President Joe Biden, there were some notable absences. What does add credibility to the outcomes is the reiteration of a joint commitment between the US and China which was first signed in May 2021. In the declaration, both countries further recognized the seriousness and urgency of the climate crisis. They are committed to tackling it through their respective accelerated actions in the critical decade of the 2020s, bringing the previous timeline forward, as well as through cooperation in multilateral processes, including the UNFCCC process, to avoid catastrophic impacts.

 

Beyond carbon emissions, the discussions around biodiversity are encouraging. More than 130 countries, including Brazil, the Democratic Republic of Congo and Indonesia, have pledged to end and reverse deforestation by 2030. These countries are home to 90% of the world’s forests with the Amazon rainforest alone housing roughly 10% of the world’s biodiversity. With over half of global GDP dependent on biodiversity yet we continue to use nature’s resources much more quickly than they can be replenished.

Conclusion

There has been progress. The warning from Barbados that 2C degrees was a death sentence for island nations was stark – this COP has kept a sub 2C warming trajectory possible, but we need further positive momentum for us to successfully reach 1.5C. Given the humanitarian crisis we find ourselves in, the precedent for global collective action has come through but it needs to go further.

 

Civil society showed up to COP26, loud and clear – these issues have fast become critical to the democratic cycle and to commercial success. The world recognises that greenhouse gases like viruses care little for borders and we need to act as a global community and adjust our current business as usual with greater ambition and delivery of our targets. Put more simply, the global economy needs to execute within its planetary boundaries. Sharm El-Sheikh, COP27, will serve as an important weighbridge for the actionability of the targets set.

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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