Need to know
- COP26 did not enshrine 1.5°C as the limit for global warming - but the Glasgow Climate Pact and expected ratcheting-up of commitments in 2022 have kept the ultimate climate goal alive
- Separate pledges and initiatives - to preserve and harness nature, phase out coal and mobilise decarbonisation financing in hard-to-abate sectors - will help accelerate the net-zero transition
- As commitments are followed by action, investors must be alive to the opportunities and risks caused by the market forces, creative destruction and innovation driving the climate transition
The Glasgow Climate Pact instilled measured optimism for many in the private sector and government, but disappointed others, including NGOs. The agreement does not seek to keep global warming below 1.5°C, but its commitments to decarbonisation and nature ensure the global economy after COP26 will be significantly different from the one preceding the summit.
The direction of travel for the global economy through the climate transition is becoming clearer, and the investment risks and opportunities are now beginning to crystalise. To arrive at net zero, the International Energy Agency has projected that annual clean-energy investment needs to increase from USD 1.2 trillion today to USD 4.3 trillion by 2030.
There is now an urgency for the private sector to describe credible transition pathways and roadmaps. The financial sector recognises it must rise to the occasion. Mark Carney is leading a USD 130 trillion alliance within the industry focused on aligning investment portfolios to net zero, recognising the two-way relationship between global warming and the climate transition on the one hand, and portfolio performance on the other.
COP26 and the Glasgow Climate Pact form another milestone on a much longer journey. Over the coming 12 months, further progress before reaching the next waypoint at COP27 in Sharm El-Sheikh. Countries are expected to ratchet-up decarbonisation commitments and integrate the many pledges into formal targets: the so-called Nationally Determined Contributions. Our expectation is that this next wave of revisions will bring us closer to the key goal of 1.5°C.
In parallel, notable international summits will take place, such as COP15, the UN Biodiversity Conference at Kunming. It will seek to provide a new framework for the preservation of biodiversity and there are hopes will achieve for nature what the Paris Agreement has for climate change.
Beyond global diplomacy, GFANZ will rally private finance for the net-zero transition. Member institutions are expected to define and begin implementing specific targets, while adopting and promoting temperature-alignment metrics for investment portfolios. A key challenge will be to look past sectors already on track for net zero and seek accelerated emission reductions in the majority of the economy, while mobilising financing to scale-up green technologies.
Indisputably, the ambition of climate pledges and commitments increased at COP26, but the hard work of implementation remains. Under the frameworks of the pact and separate initiatives announced at the summit, market forces, innovation pathways and creative destruction will drive decarbonisation in the real economy. However, leeway in the various agreements leaves room for interpretation, and there is always the risk that countries may seek to backtrack.
Ultimately, however, it is undeniable that the transition to a lower carbon economy is not only an environmental but an economic imperative. As the cost of green technologies fall and economies of scale improve, enthusiasm is likely to grow. This, at least, is the spirit of the ratcheting mechanism. COP26 has demonstrated that this process may be slow - but it is moving, at last.
To find out more about the seven key outcomes of COP26 from an investor's perspective please click here.
This post was funded by Lombard Investment Mangers
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