Green Finance: High Hopes for COP26
By James Whyte
The appointment of business minister Alok Sharma as the full-time president of the UN Climate Change Conference (COP26) earlier this month is a timely reminder of how important this November’s meeting in Glasgow is, both to the UK and to the global community. As world leaders are beginning to recognise, it is essential that we accelerate our transition to a zero-carbon future. We have high hopes that COP26 can deliver this step change in the international response to the climate crisis.
In order to meet the challenges of climate change, we need to transition the whole economy, not just individual sectors, and Green Finance is central to these aspirations. We need financial markets that support climate objectives and ensure that all private finance decisions automatically take climate change into account, just as they already consider credit worthiness or interest rate risk. Rather than a restriction on economic growth, the transition to zero carbon should be seen as offering real returns and opportunities, but there are several requirements needed to make that a reality.
COP26 gives a clear target to make major strides forward:
At present the top 1,500 companies across the G20 are voluntarily disclosing a variety of climate-related standards, but this needs more than a private sector driven initiative. Securities regulators, stock exchanges and legislators need to introduce a mandatory system based on global standards.
Existing government frameworks are clearly not sufficient but often for different reasons. US regulators need to urgently catch up with their more progressive corporations; while the EU, having set bold targets, needs to recognise and develop a clear glidepath for investors and corporations to transition to those goals.
COP26 can build on a wide body of work, such as the TCFD Implementation Report, in developing a clear, comprehensive and consistent approach, to have a fair and level playing field. One planet — one standard.
It must help to forge the necessary compromises on the pathway to mandatory.
As the pandemic has taught us, we cannot wait until calamity strikes before preparing for known risks.
The Bank of England has been leading the way in the development of Climate Stress Tests, responding to the Huw van Steenis report on the Future of Finance. These tests are designed to explore a bank’s strategy and its resilience to different climate pathways, for example over a ten, twenty or even thirty-year timeframe. Such tests are essential in assessing sensitivity to risk, avoiding sudden shocks and ensuring a smooth transition to Zero Carbon.
COP26 should see further commitments to climate stress testing by central banks and regulators.
Carbon pricing mechanisms have gained momentum with some 40 countries and more than 20 cities, states and provinces already using them. However, currently only 22.3% of greenhouse gas emissions are covered by carbon pricing and only 5% of those are anywhere near a price necessary to meet the 1.5 degrees target set by the Paris Agreement.
A global carbon price can facilitate the transition to Net Zero and countries have a collective responsibility to agree on common rules for a global carbon market. We need COP26 to speed us towards a fully-fledged international market and reference price.
The challenge for COP26 is how to develop existing proposals, such as the recommendations from the Taskforce on Scaling Voluntary Carbon Markets, and turn them into reality.
Investments and Returns
A solution that encompasses both developed and developing economies, and which drives investment in emerging markets is therefore essential.
It is estimated that we require around $3.5 trillion per annum of sustainable infrastructure investment globally, over the next three decades to meet Net Zero targets. That’s roughly twice the pace of all current infrastructure investment. 70% of that investment will be in emerging economies.
This means that COP26 needs to approach the challenge of sustainability at a global systemic scale, all the way up and down the value and supply chain.
Progress on metrics, tracking and a comprehensive and accurate taxonomy to demonstrate the climate impact of investments is urgently needed from COP26. There is clearly support for climate goals from many parts of industry, but governments must help by setting clear policies and show clear pathways. Such trajectories will need to be developed for individual industries too, such as for cement or airlines, as these differ substantially.
Significant progress at the COP26 in Glasgow this November may be one of the precious upsides from the trials and tribulations of the pandemic. We’ve all experienced how a known threat can quickly become a devastating reality but the international cooperation over vaccines provides a clear illustration of the importance of a global response to shared challenges. We need similar effort towards the climate crisis. In 2020, every company had to take a hard look at their strategy with a renewed focus on resilience and sustainability. If anything, the global economy could emerge from the pandemic slightly ahead of its anticipated progress on net zero targets.
It’s vital to maintain that momentum through 2021.