The COP26 UN Climate Change ends. Did it live up to expectations or did disappointment over missed opportunities prevail? Thomas Höhne-Sparborth takes an initial assessment for finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
As COP26 draws to a close, it is time to take stock of what has and has not been achieved. Inevitably, the hope prior to the conference was that new pledges would put the world on track to limit warming to less than 1.5°C by the end of the century. That goal, as United Nations Secretary-General António Guterres put it, remains «on life support». As the conference concludes, countries such as China and India are targeting net-zero only by 2060 and 2070, 10% of global emissions are still not covered by a net-zero target at all, and a vast financing gap for developing nations is yet to be fully addressed.
But there is cause for optimism too. The International Energy Agency (IEA) estimates that new pledges would suffice to limit warming to 1.8°C, the first time this figure has fallen below the 2°C thresholds of the Paris Agreement.
«Key coal users including the U.S., China, India and Australia failed to sign on»
Of course, this assumes all government targets will be achieved, which may be unlikely. Ultimately, however, government policies are but one of the forces that will drive the world towards net zero. As regulatory support intensifies, investment in green technologies increases – driving innovation, improved competitiveness, and economies of scale. As costs fall, the roadmap to net-zero becomes clearer, enabling a further cycle in the ratcheting up of climate targets and ambition.
Going into COP26, Boris Johnson’s mantra of «coal, cash, cars and trees» highlighted the fourfold priority the U.K.’s presidency of the conference would pursue.
The phaseout of coal continues to be widely seen as the most immediate milestone to a cleaner economy. At COP26, more than 40 countries have pledged to quit coal by the 2030s for major economies and the 2040s for poorer nations «or as soon as possible thereafter». Aside from this self-defeating caveat, key coal users including the U.S., China, India and Australia also failed to sign on.
«Cash, at any rate, is likely to remain critical»
Once again, however, cause for optimism remains. Even during the previous U.S. administration, a series of American coal plants filed for bankruptcy, as cleaner forms of energy have taken hold. In China, renewables are expected to become cost-competitive with coal-fired power by the middle of this decade. And in a first-of-its-kind agreement, South Africa is to receive $8.5 billion to ditch its use of coal. It is a hefty price tag – but a small price to pay, and perhaps offering a model for similar such deals in the future.
Cash, at any rate, is likely to remain critical. As early as 2009, richer nations pledged to support developing countries to the tune of USD 100 billion a year by 2020 to tackle climate challenges. African nations believe the figure needs to be scaled up further still, to as much as $1.3 trillion per year by 2030.
Yet even those figures represent but a fraction of overall investment requirements. The IEA estimates that some $5 trillion per year in investment will be required in the energy system alone by 2030. McKinsey estimates that the full figure, including investment in land-use systems, might well run to $9.2 trillion per year. While these sums are vast, such investments offer a positive return when taking into account efficiency savings and avoiding environmental damage. As regulation and increased consumer awareness internalize these costs, investment in cleaner technologies will become an ever clearer investment opportunity.
«At COP26, more than 100 world leaders pledged to end and reverse deforestation by 2030»
As for cars and other key technologies, the transition will be driven by innovation. The Breakthrough Agenda of COP26 has sought to identify an initial set of five areas of focus including clean power, zero-emission vehicles, near-zero steel, low-carbon hydrogen, and sustainable agriculture. The identification of these priority areas seeks to channel public and private investment towards these technologies, with a view to making them more attractive and affordable.
Trees, finally, remain the undisputed golden child of the transition. Offering a nature-based form of carbon sequestration, improved forest management may offer one of the most cost-effective strategies to reversing climate change. At COP26, more than 100 world leaders pledged to end and reverse deforestation by 2030. Recognizing the role of the financial industry in driving improved supply chain monitoring, 30 financial institutions signed on to a parallel pledge to halt deforestation across investment portfolios by 2025 through intensified engagement and stewardship.
Few of the numbers that have come out of COP26 have been larger than the $130 trillion of assets committed under the Glasgow Financial Alliance for Net Zero (GFANZ), chaired by Mark Carney. As with any big number, it has been subject to confusion and misinterpretation. The figure almost certainly comprises some significant double-counting. It represents a stock of financial assets for which owners and managers are expressing an ambition to work towards the decarbonization of underlying assets (one key priority of the transition) rather than a new flow of capital into green solutions (the other key priority) – but both are important.
«This realization carries an important implication for the financial services industry»
As of November 2021, Lombard Odier has estimated that only 25 percent of large caps are today on a credible trajectory towards alignment with a scenario keeping warming below 2°C. Recognizing that setting a net-zero target in itself is not necessarily the same as having a credible plan for implementation backed up by further interim targets, Lombard Odier also estimates that only 6 percent of large caps today are already aligned to keeping warming below 1.5°C.
This realization carries an important implication for the finance industry. As only a fraction of investable assets in the world today is already aligned to net zero, the challenge becomes less about pouring all of the world’s sustainably-minded capital into this subset of the economy than about bringing the remaining portion of the economy into alignment – and it is here where the GFANZ alliance can potentially be impactful.
The remaining carbon budget that would allow us to keep the 1.5°C goal in sight is being rapidly depleted. While the new pledges that have emerged out of COP26 are bringing us closer, the gap remains significant.
«Decarbonization has, for decades, been seen by governments and skeptics alike as a net cost»
Yet perhaps the more urgent milestone is not that of carbon neutrality, but that of carbon mentality. Decarbonization has, for decades, been seen by governments and skeptics alike as a net cost. Yet, taking into account the very real cost of our present economic model not only on the environment but on society and the economy itself, investments in decarbonization must be seen as a net gain offering a positive economic return.
This realization must gain hold to unlock the race to net zero. Much like the space race of the 20th century featured an unprecedented period of innovation – and economic rivalry – so too may the race to net-zero of the 21st century unlock green technologies. While today governments may drag their feet, recognition of the new competitive advantage offered by greener forms of production may gain sway. As it does, the race to net-zero will intensify.
Thomas Höhne-Sparborth is Head of Sustainability Research at Lombard Odier.
Previous contributions: Rudi Bogni, Peter Kurer, Rolf Banz, Dieter Ruloff, Werner Vogt, Walter Wittmann, Alfred Mettler, Robert Holzach, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Richard Egger, Maurice Pedergnana, Marco Bargel, Steve Hanke, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Oliver Bussmann, Michael Benz, Albert Steck, Martin Dahinden, Thomas Fedier, Alfred Mettler, Brigitte Strebel, Mirjam Staub-Bisang, Nicolas Roth, Thorsten Polleit, Kim Iskyan, Stephen Dover, Denise Kenyon-Rouvinez, Christian Dreyer, Kinan Khadam-Al-Jame, Robert Hemmi, Anton Affentranger, Yves Mirabaud, Katharina Bart, Frédéric Papp, Hans-Martin Kraus, Gerard Guerdat, Mario Bassi, Stephen Thariyan, Dan Steinbock, Rino Borini, Bert Flossbach, Michael Hasenstab, Guido Schilling, Werner E. Rutsch, Dorte Bech Vizard, Adriano B. Lucatelli, Katharina Bart, Maya Bhandari, Jean Tirole, Hans Jakob Roth, Marco Martinelli, Thomas Sutter, Tom King, Werner Peyer, Thomas Kupfer, Peter Kurer, Arturo Bris, Frederic Papp, James Syme, Dennis Larsen, Bernd Kramer, Ralph Ebert, Armin Jans, Nicolas Roth, Hans Ulrich Jost, Patrick Hunger, Fabrizio Quirighetti, Claire Shaw, Peter Fanconi, Alex Wolf, Dan Steinbock, Patrick Scheurle, Sandro Occhilupo, Will Ballard, Nicholas Yeo, Claude-Alain Margelisch, Jean-François Hirschel, Jens Pongratz, Samuel Gerber, Philipp Weckherlin, Anne Richards, Antoni Trenchev, Benoit Barbereau, Pascal R. Bersier, Shaul Lifshitz, Klaus Breiner, Ana Botín, Martin Gilbert, Jesper Koll, Ingo Rauser, Carlo Capaul, Claude Baumann, Markus Winkler, Konrad Hummler, Thomas Steinemann, Christina Boeck, Guillaume Compeyron, Miro Zivkovic, Alexander F. Wagner, Eric Heymann, Christoph Sax, Felix Brem, Jochen Moebert, Jacques-Aurélien Marcireau, Ursula Finsterwald, Claudia Kraaz, Michel Longhini, Stefan Blum, Zsolt Kohalmi, Karin M. Klossek, Nicolas Ramelet, Søren Bjønness, Andreas Britt, Gilles Prince, Salman Ahmed, Stephane Monier, and Peter van der Welle, Ken Orchard, Christian Gast, Jeffrey Bohn, Juergen Braunstein, Jeff Voegeli, Fiona Frick, Stefan Schneider, Matthias Hunn, Andreas Vetsch, Fabiana Fedeli, Marionna Wegenstein, Kim Fournais, Carole Millet, Ralph Ebert, Swetha Ramachandran, Brigitte Kaps, Thomas Stucki, Neil Shearing, Claude Baumann, Tom Naratil, Oliver Berger, Robert Sharps, Tobias Mueller, Florian Wicki, Jean Keller, Niels Lan Doky, Karin M. Klossek, Ralph Ebert, Johnny El Hachem, Judith Basad, Katharina Bart, Thorsten Polleit, Bernardo Brunschwiler, Peter Schmid, Karam Hinduja, Zsolt Kohalmi, Raphaël Surber, Santosh Brivio, Mark Urquhart, Olivier Kessler, Bruno Capone, Peter Hody, Lars Jaeger, Andrew Isbester, Florin Baeriswyl, and Michael Bornhaeusser, Agnieszka Walorska, Thomas Mueller, Ebrahim Attarzadeh, Marcel Hostettler, Hui Zhang, Michael Bornhaeusser, Reto Jauch, Angela Agostini, Guy de Blonay, Tatjana Greil Castro, Jean-Baptiste Berthon, Marc Saint John Webb, Dietrich Goenemeyer, Mobeen Tahir, Didier Saint-Georges, Serge Tabachnik, Rolando Grandi, Vega Ibanez, Beat Wittmann, David Folkerts-Landau, Andreas Ita, Teodoro Cocca, Michael Welti, Mihkel Vitsur, Fabrizio Pagani, Roman Balzan, Todd Saligman, Christian Kaelin, Stuart Dunbar, Fernando Fernández, Lars Jaeger, Carina Schaurte, Birte Orth-Freese, Gun Woo, Lamara von Albertini, Philip Adler, Ramon Vogt, Gérard Piasko, Andrea Hoffmann, Niccolò Garzelli, Darren Williams, Benjamin Böhner, Mike Judith, Gregoire Bordier, Jared Cook, Henk Grootveld, Roman Gaus, Nicolas Faller, Anna Stünzi, and Philipp Kaupke.
