Four Sustainable Finance Takeaways From COP26
COP26 closed with a whimper late last Saturday when negotiators settled on an agreement that fell short in many respects — few new binding targets and no foreseeable end to coal (much less fossil fuels).
If the event isn’t remembered for an ambitious deal (like Paris or Kyoto), it might be remembered as the finance COP. Businesses and bankers were more present, visible, and vociferous than at any previous COP. And although the primary goal of the negotiations was international alignment and concrete progress on the IFCC’s 1.5˚C target limit, there were interesting and important outcomes for sustainable finance.
Here, we summarize four of the key sustainable finance outcomes from the two-week summit and suggest how they will impact leaders.
1. Net-zero commitments alone aren’t going to cut it starting next year. Many nations and businesses have promised to get to net-zero emissions by 2050 or earlier; far fewer can demonstrate sensible and sober plans for how they’ll get there. A study by WWF found, for example, that 81% of FTSE 100 companies had failed to publish credible transition plans. COP26 signaled an end to unbacked net-zero boasts. The UK announced it would require large firms to publish their transition plans, and the current UN secretary general announced efforts to police net-zero pledges in 2022. These are but two of many indications that world and business leaders will need to show they’ve done their homework.
What it means for sustainable finance leaders: Lenders and financiers who are currently relying on net-zero promises alone will need to go one step further and become credible judges of transition plans to net zero. And plans full of overoptimistic prognoses, like new energy sources (that get delayed or sidetracked nationally) and low-carbon steel (which will get scarce in a hurry), will need to be down-rated through effective analysis.
2. Accounting and disclosure standards will improve in 2022. During COP26, the International Finance Reporting Standards Foundation (IFRS) announced the creation of the International Sustainability Standards Board, unifying earlier work by two other groups. This doesn’t mean that the competing standards dilemma will go away entirely, but it does mean that the environmental, social, and governance (ESG) reporting and data picture will begin to improve next year.
What it means for sustainable finance leaders: Business leaders could reasonably pick and choose among manifold, repetitive, and even contradictory disclosure requirements; it’ll be harder for them to do this with more coordinated standards. Finance leaders should expect to see, and aim themselves to create, a bevy of more rigorous analyses against better, more coordinated, and holistic data categories. And asset managers may have to dig deeper to uncover novel sources of investment alpha.
3. Coal abatement pressure shifts to the private sector. The UK government was determined to make COP26 the death knell for coal power. When that didn’t happen, the UK changed its tune to one of “perfection is the enemy of the good” and compromised. While public coal commitments underwhelmed, commitments from public actors won headlines. Brands like HSBC, Lloyds Banking Group, and NatWest, for example, made public commitments through the Powering Past Coal Alliance to arrest their coal financing.
What it means for sustainable finance leaders: Coal financing looks like it will come out of COP26 as the private market poster child for environmental malfeasance. HSBC’s turn, for example, came about after shareholders pressured it to drop coal financing. Expect to see “percent of companies using coal power” and similar reports to become a more sought-after fund criteria for investors in 2022.
4. Commitments to finance adaptation efforts in developing countries will jump. Mitigation finance to reduce emissions in the developing world has significantly outweighed adaptation finance to address climate impact for years. Finally, however, public purses in the US and Canada have pledged adaptation finance. This will help stimulate additional funding from the private sector as well.
What it means for sustainable finance leaders: ESG data and analysis from developing countries has not been a strength for many banks and investment houses. As such, investment in local capabilities and ESG data platforms with this kind of data will become an increasingly important differentiator.
This blog post is part of Forrester’s COP26 series. For more Forrester insights on sustainability, see the full set of Forrester’s climate action blogs.