Overview:
We have just seen the finish of COP 26 in Glasgow. COP26 as we know was the 2021 United Nations climate change conference.
This is the largest and most important set of conferences globally on climate.
It was billed as the second most important COP in history after the historic 2015 COP in Paris, where world leaders agreed to keep global warming to within 2 degrees above pre-industrial levels.
The Verdict:
Whilst many of us had high expectations, in retrospect COP26 was never going to achieve and meet everyone’s wishes with that many countries, politics and self-interest present.
We like the summary below which gives an indication of some achievements and disappointments:
The Upshot?
In any case we can debate the effectiveness of the COP forum, whether it achieved enough and what was positive and negative, however, we wish to look at 5 key take-aways as directly related to Sustainable Finance
Key Takeaways (Our Top Half a Dozen):
1. Sovereign Issuance:
Rapid and further increase in Sovereign: Green Social and Sustainability Bonds issuance. More climate commitments generally means more spending hence issuance needed. We have seen a rapid increase in 2021 sovereign issuance and can see this accelerating going forward.
2. Transition Credibility:
More focus on Transition plans, strategies and commitments for Companies regardless of what type of sustainable Finance instrument they issue or format they borrow in. This is here to stay and strategies must align to the direction of overall goals or they will be deemed out of step.
3. Just Transition:
This is the concept of having a fair and equitable transition to a low carbon economy with nobody left behind.
In the context of COP there is ongoing major discussion between developed (lets call them those countries who caused most of the climate problem) and developing countries (lets call them the countries most impacted by climate change and in the main with the smaller amount of recourse to deal with this) about levels of funding that can be provided to developing countries.
Overall, this means we will see this concept intensify, with use of proceeds and linked instrument KPIs be developed around this concept – so watch this space.
4. Methane Pledge:
COP pronounced a pledge for 30% reduction by 2030 which was agreed by a number of countries. There is overall a huge amount of focus on de-carbonization in relation to the transition to a low carbon economy. Whilst this is justified, too often we miss one of the climate elephants in the room and that’s methane.
Whilst is doesn’t last as long in the atmosphere (vs Co2) it is more potent than CO2 and warms the atmosphere faster.
It is regarded as the second largest contributor to global warming. There must be more focus on this – we expect to see more use of proceeds categories and projects to tacking methane issues, and also more KPI/Targets in linked instruments specifically addressing this.
5. More Net Zeros in the Finance Sector:
During COP26 U.N. climate envoy Mark Carney, assembled the Glasgow Financial Alliance for Net Zero (GFANZ). The Alliance is aimed at, Banks, insurers and investors with $130 trillion at their disposal to put combating climate change at the centre of their work.
Financial sector players such as Banks are more and more at the heart of climate change and must act to influence their customers.
Recently tools such as PACTA, PCAF, and SBTI (FI guidance) is ramping up the pressure on banks and giving them the tools, they need to focus on driving decarbonization in their portfolios.
This repaid acceleration will support Sustainable Finance for many years to come as banks put more resources, focus and articulate very specific strategies on this of which Sustainable Finance will be the center piece.
6. Beyond Carbon (Adaptation):
With the additional commitments at COP to stop deforestation by 2030 this clearly puts conservation, bio-diversity and resilience planning (adaptation) mote firmly on the Sustainable Finance Map.
Funding to these areas is too small and the commitments from COP will assist and drive more focus.
Resilience ie. adaptation or funding expenditures on projects aimed at reducing the impact of climate change (ie., from wildfire, flooding, coastal defense) will grow) rapidly.
