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What can we expect from COP26 in Glasgow?
Article published in Le Temps, 11 October 2021
The Paris Agreement1, signed in December 2015, defined a set of goals to be pursued at a global level to respond to the threat of climate change. More precisely, Article 2.1 of the Agreement specifies three interdependent objectives:
a) Limiting global warming "to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels";
b) Increasing the ability to adapt to climate change and fostering climate resilience;
c) Aligning finance flows with the first two objectives.
Six years later, the world's eyes are on Glasgow in the run up to the twenty-sixth Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change (UNFCCC). Although the exact form of the discussions at the summit in early November is not yet known, we believe that COP26 has a few pleasant surprises in store.
However, despite the significant progress over that past six years, we still have a long way to go before achieving the three goals of the Paris Agreement. In specific terms, we have successfully shifted our historical global warming trajectory from around 4.5°C to around 3°C by the end of the century. This is a considerable improvement, but achieving carbon neutrality by mid-century still requires a fundamental reorganisation of our economic system to limit global warming to 1.5°C. The report published by the Intergovernmental Panel on Climate Change (IPCC) in August 2021 estimates that we could reach the 1.5°C target by 2030. So, why do we think COP26 could offer up positive outcomes?
A few pleasant surprises?
The move towards carbon neutrality is rapidly gaining traction in the private sector, at a government level and in the financial world. Commitment to becoming carbon neutral is also at an unprecedented rate; we estimate that close to 80% of global GDP is now covered by net-zero targets, compared with just 16% two years ago. This is an impressive uptick. These commitments must now be translated into concrete, tangible actions. To achieve this, companies need to strike the right balance between reducing emissions and engaging in credible carbon offsetting, particularly through nature-based solutions. It is imperative that net-zero targets are based on scientifically backed objectives. To date, almost 1,600 companies have committed to setting scientific objectives, compared with fewer than 50 in 2015.
Governments are likewise stepping up their efforts. In the last quarter of 2020, under Joe Biden's presidency, the United States rejoined the Paris Agreement and President Xi Jinping promised that China's emissions will peak by 2030 and that the country will be carbon neutral by 2060. However, like carbon pricing, the intermediate targets and regulatory measures are still inadequate. COP26 will be a golden opportunity to intensify these efforts and governments will likely have the chance to announce new commitments, in particular:
- improved carbon pricing mechanisms;
- the establishment of credible carbon offsetting markets and nature-based solutions;
- accelerated phasing-out of coal and restrictions on deforestation;
- better guidance on the political direction chosen to achieve carbon neutrality;
- accelerated transition to electric vehicles and renewable energy;
- enhanced support for disruptive technologies, such as the hydrogen economy;
- improved resilience to physical risks.
The financial sector isn’t sitting on the sidelines. The European Central Bank and the Bank of England are setting the tone on how to amend collateral frameworks and monetary policy operations to bring them into line with climate objectives. There also needs to be greater consensus on what aligning with the climate change transition means for financial institutions. This will be made possible by the work of the Task Force on Climate-Related Financial Disclosures (TCFD), the presidency of COP26 and others.
We now have methodologies for evaluating portfolio alignment, including measures related to implied temperature rise, and a special working group set up under the COP26 committee will be responsible for their implementation as a much-needed complement to the binary taxonomies that serve more limited objectives.
1 https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/climate--international-affairs/the-paris-agreement.html
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