COP26: Looking Ahead

"A pivotal moment was not part of the schedule" 
Vincent Hamelink
Chief Investment Officer, CANDRIAM

How would you describe the outcome of COP26?

Let's start with the main goals defined at COP21, or 'Paris 2015'. Notably:

  • Limit global warming to well below 2°C, preferably to 1.5°C.
  • Firm up these commitments with updated and fact-based NDCs (Nationally Determined Contributions).
  • Provide $100 billion per year to help developing countries address climate change.
  • Introduce a carbon price and a market for emission permits.

On these measures, the results of COP26 were relatively feeble, but it did provide a few bright spots.

What were the important moments?

Fossil energy, the elephant in the conference room, finally received a mention in the conclusions –- for the first time ever. Yet without a commitment to phase out fossil fuels, the mere acknowledgment of the problem does not alone put us on a 2°C, let alone a 1.5°C trajectory.

The pledge to end deforestation was a highlight. Although without the attendance of the Brazilian leader, a critical element was missing.

The two top GHG emitters, the US and China, demonstrated a willingness to cooperate on climate action.

Perhaps the most important news of year was before the Glasgow Conference, last July, with the publication of the EU Roadmap 2050. This is the largest national or international effort to date to translate goals into a detailed action plan.

Why did the media call this Conference our last chance?

It's not news that we need to increase the pace of our energy transition. We need not just targets, but specific, detailed, and frequently-updated plans. The media is a relatively new participant in COP. For many years, this was a Conference attended primarily by NGOs. Of course the involvement of NGOs continues to grow, but with the dramatic increase in media participation, the 'noise level' in the popular press has increased.

The Conference is a now great media event. But it is perhaps not where the action is, and perhaps never actually was where the action took place. Negotiations for breakthrough 'moments', such as Kyoto in 1997 and Paris in 2015, were begun long in advance of the final agreements announced at those Conferences.

Where do we go from here?

Commitments made by governments that will be out of power before their self-imposed deadlines lapse need to be validated by more binding legislation. This is lacking for most commitments made at the COP26. The COP is first of all the forum where countries are supposed to provide their updated, more ambitious, national decarbonisation plans. On that front, few have delivered, and some have clearly disappointed – Australia and Russia, for example.

To date, any effective climate action has resulted either from binding government actions, or from market forces unrelated to environmental considerations. For example, the EU limits on CO2 emissions from cars and national subsidies for electric vehicles have been driving investments in electric cars. In the US, changes in the energy market have caused power generation to shift away from coal and toward lower-emitting natural gas.

We need more market signals, and we need governments to send those signals, to level the green playing field. This is not yet the case. We need action from governments, and broad sign-on from populations. While the EU and the UK have banned the manufacture of fossil fuel-based cars by 2035 and 2030 respectively, in the US, the 'invisible hand of the market' appears to be in charge when it comes to electric vehicles. Will populations sign on without economic incentives? More needs to be done by governments to change the cost structure of high-GHG energy sources. Charging users the full environmental cost of these products – carbon pricing – is one method.

It all boils down to scale. Can we scale up the right technologies quickly enough to continue to grow our economies, especially emerging economies, while cutting overall greenhouse gas emissions (GHGs)?

What does this mean for investors?

The trends and themes are unchanged, but are perhaps strengthened. As attendance by the media rises, the increased coverage in popular news outlets might lead to more emphasis on sustainable investing at the margin. Climate was an already rapidly increasing factor in investing before COP26, and that should continue.

The longer it takes to produce meaningful climate action, the greater the potential return to investments in mitigation and adaptation products and technologies. And equally, the greater the risk and the more sudden the reversal of fortune for some industries, especial those at risk of stranded assets.

So you are optimistic?

Yes, I am optimistic, because the momentum is gathering. But that does not mean we can afford any further delays. Every day is our best, last chance. We strive every day to use finance as a tool to a more sustainable world. And we must all strive to change the choices in our personal lives.

We have no right to stand still.

In July 2021, the EU 27 published its EU Roadmap 2050, specifying goals, models, and plans to achieve interim goals for 2030 and net zero carbon by 2050. Breakdowns of targets by countries will be forthcoming. This gives policy-makers, NGOs, corporates, investors, and all stakeholders an opportunity to examine the scenarios and assumptions, and become part of the progress.

Our ESG Research Team has reviewed and summarized the complex supporting documents and models in our paper, Sovereign Analysis: Is the EU on Track for 2050 'Net Zero' ?.  The EU is clearly leading the world in establishing concrete plans and steps to tackle the climate crisis. But these must be monitored, and governments and populations, not just investors and corporates, must buy in to the Roadmap. 

And the world as a whole? Take the ironies of the US emission figures, for example. Carbon emissions and coal usage declined during the administration of Donald Trump, the climate change-denier and pro-coal president! .....Why? Because the aggressive growth of the hydraulic fracturing ('fracking') in the US has improved the economics of natural gas relative to coal. Yet the far larger challenge for US is auto and truck emissions. It almost seems as if the largest polluter in the world is relying on the marketing success of Ford's new pickup truck and Tesla's SUV.

We all need concrete roadmaps to back national pledges.

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