COP26: Overview and outcomes

Catch up on the terminology of COP26 here.  

The main objective of COP26 was to follow up on the pledges made by world leaders during the 2015 Paris Agreement. 2021 was the year countries were supposed to submit their new long-term goals to address the global climate emergency. COP26 was also decisive in implementing the Paris Agreement pledges.

With a record number of attendees, almost 40,000 participants registered for the event, the Glasgow event was the biggest COP to date. Despite the high number of attendees, the negotiations were marked by difficulties, as world leaders struggled to find a deal. The Glasgow Climate Pact was the final agreement adopted by the parties.

COP26: Pledges, agreement, and targets 

End of deforestation, fossil fuel subsidies and methane 

During COP26, countries agreed to phase-out fossil fuel subsidies, which artificially reduce the price of oil, natural gas, and coal. Further commitments were made by leaders concerning deforestation. More than 100 countries, with about 85% of the world’s forest, pledged to stop deforestation by 2030.

More than 100 countries also committed to cutting down methane emissions by 30% by 2030. It is estimated that methane is responsible for one-third of human-generated warming. Yet, major emitters, such as China, India, and Russia, did not pledge to cut their methane emissions.

To read more about the crucial role of forests in absorbing CO2 and reducing climate change, please see here.

Financial commitments

An initiative by financial organisations agreed to back “clean” technology and direct finance away from fossil fuel-burning industries. This, as an attempt to involve the private sector in meeting climate targets.

US-China Agreement 

Two of the world’s biggest emitters of CO2, the US and China, agreed to cooperate over the next decade to reduce methane emissions and to switch to clean energies. Together, they produce more than 40% of global carbon emissions.

Additionally, India pledged to achieve carbon neutrality by 2070. The US aimed for net-zero by 2050. The Glasgow Climate Pact reaffirmed the target to limit temperature rise at 1.5°C. More interestingly, the pact also recognises that the current NDC would not be able to maintain the 1.5°C.

The Paris rulebook

In the Glasgow Climate Pact, the Paris rulebook adopted fixes the transparency and reporting requirements for all countries parties to track their progress in their reduction emission targets. The rulebook also contains Article 6 mechanisms, which set out an international carbon market to support global cooperation on emission reduction.

New EU commitments 

The EU pledged to invest €1 billion to fund the Global Forests Finance Pledge. The fund will help countries to protect, restore, and sustainably manage forests. €250 million will help countries in the Congo Basin, home to the second-largest tropical rainforest region in the world.

Despite those promising pledges, few countries made them legally binding. Progress made towards those commitments will mostly be self-policed.

Missed opportunities

Climate finance 

No agreement was found to deliver climate finance to developing countries. The finance agenda was the most challenging, especially after the commitments to raise $100 billion annually for climate finance by 2020 were not fulfilled.

Still, an agreement to double climate finance for adaptation by 2025 was secured. Under the current agreements, a quarter of financing goes to adaptation. Additionally, developed nations pushed to provide funds for loss and damage, which would allow compensation for people enduring climate devastation. Currently, such compensations are paid by the insurance sector for insured assets.

The Scottish government set an example to other nations by pledging invest £1million into helping developing countries mitigate disasters such as wildfires and flooding.

The difficult negotiations around coal

COP26 is the first COP to explicitly target fossil fuels, notably coal which is responsible for 40% of global C02 emissions. The final agreement negotiated in the last few days of the event planned to “accelerate efforts” to phase out “inefficient” subsidies for other fossil fuels. While the inclusion of this provision in the final agreement is positive, the deal initially planned to phase out coal.

A last-minute deal between the US, EU, China, and India changed the wording of the agreement. It led to critics around the “watering down” of commitments around fossil energies. Many believe that phasing out coal by mid-century is essential to maintain the 1.5 targets alive. Hence, the change is considered by many as a missed opportunity to reduce global emissions.

It does not mean that the issue around coal is left unaddressed, especially by the private sector. The investment sector has plans to reduce, and ultimately stop their investment towards fossil energies, one of them being coal. Lloyd of London notably planned to reduce by 30% their current investments in companies with business models that derive 30% or more of their revenues from carbon-producing activities by 2025.

POST COP26: What’s next?

The role of the private sector 

According to Carbon Brief, under the current agreement, the planet is on its way to a 2.7°C warming by 2100. If both the conditional and unconditional NDCs are met by 2030, the increase is projected to 2.4°C. If countries meet their long-term net-zero targets, temperatures will rise by 1.8°C.

Such an increase will have devastating effects on small island countries and many coastal cities around the globe. With temperatures rising, achieving climate resilience and climate mitigation and adaption is more crucial now than ever.

As current governments pledges and targets seem to be insufficient to maintain the 1.5°C, the role of the private sector needs to be emphasised.

The acceleration of the implementation of climate solutions

At a decisive moment when large financial institutions declared their commitment to ending the fossil fuel economy and the need for resilience, COP26 delivered admirably.

As Rowan Douglas, Head of Willis Towers Watson’s Climate and Resilience Hub said on BBC World News, “Whereas Paris will be known for the politics, in ten years’ time people will refer to Glasgow as the economics and finance COP. The moment when people accepted mainstream markets moved in one direction, due to regulators requiring those companies to disclose these risks, also because of incentives.”

Since climate risks transfer through the economy and eventually land on the government’s balance sheet, impeding efforts to affect the transition to a low carbon and more climate resilient economy via implementation of adaptation measures is now no longer seen as a viable option.

With strengthening regulatory and incentivisation measures soon to be in place, markets will now be actively ensuring that emissions from invested companies and infrastructure projects are cut.

Ambiental – Supporting firms on their journey to Net Zero

Commitments from companies, such as Ambiental, a company of Royal HaskoningDHV, to support the reengineering of the economy for net-zero are crucial. Ambiental data is used by the financial sector for measuring climate risk, and is therefore a vital component in risk management, insurance / mortgage underwriting and enhancing resilience.

Lloyd's recently announced its new ESG strategy and commitment to continue diversity and change within the market by setting regularly measured targets. It includes a range of initiatives to support the net-zero transition and to increase the percentage of its income-driven from sustainable insurance products.

Further pledges from the private sector are needed to support the economy throughout the climate emergency, notably when it comes to adaption, mitigation, and resilience. Incentives are already in place to support companies that seek to reduce their emissions. 

Climate risks transfer to the economy 

Climate risks transfer through to the economy and impact:

• Mortgage availability
• Loan to value rate
• Insurability
• The value of property and asset
• Portfolio management
• ESG considerations
• Insured losses

Climate change will also have an impact on the insurance sector. Increased risks will likely lead to proactive insurance risk selection and a rise in pricing. It will also have an impact on capital management and regulatory stress testing. The financial services sector more widely will also be impacted, from mortgage origination assessment to property and asset analysis / investment and planning.

To help mitigate the effects of climate change, governments need to prepare emergency and mitigation strategy plans and designs and to increase the resilience of key infrastructure and assets. To do so, Ambiental’s data is crucial to understand the potential risks of flooding, and other climate-related hazards and to prepare accordingly.

Ambiental’s work to support climate change risks

According to Andy Bord, CEO of Flood Re, flood resilience can only be achieved by reducing carbon emissions to net-zero by 2050. He adds that adapting homes and communities to be flood resilient is an urgent priority. Governments will need to balance investments to cut emissions with the need to fund climate adaptation and resilience.

To support this transition, Ambiental’s physical climate risk data and analytics are an essential tool. One of the most devastating climatic risks is flooding. The severe flooding events in Western Europe this summer and forest fires across Europe and North America demonstrated how climate change effects are becoming increasingly costly, both in terms of human life and property damage.

Ambiental provides crucial data on climate resilience scoring and measurement to mortgage lenders, governments, and the financial sector. Even if COP26 pledges are met, the planet is still warming, and the effects of climate change are on the rise. Hence, the private sector, and Ambiental, have a crucial role to play in ensuring economies are building resilience to changing climate.

Analytics tools developed by Ambiental make the flow of information more efficient to inform relevant actors and help reorient capital. It supports the public sector and the private sector in their transition and their ability to adapt to climate change. The data help to integrate risks into the decision making process so as to help build systemic resilience.

Ambiental notably works with the Bank of England in an advisory capacity, contributing to reports for the financial market on available tools for managing climate change risk and preparing for climate risk stress testing. Hence, despite mixed feelings around COP26 achievements, commitments made by states will be supported by the private sector. By building resilience, stopping investments in fossil energy, and aiming for net-zero, the role of the private sector in reducing global heating and the impact of climate change will be crucial in the next few decades.