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Demystifying the outcomes of COP25

Demystifying COP25

Find out what the key takeaways were from our recent COP25 webinar debriefing.

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Mark McKenzie

Head of KPMG Global Center of Excellence for Climate Change & Sustainability Services

KPMG International

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COP 25 attendees

Photo credit: UNFCCC / Flickr

Our recent webinar, Debriefing on the 25th UN Climate Conference (COP25): Lessons from leaders, brought together global experts in climate policy, project finance and investment: Ramon Pueyo Viñuales, Partner, KPMG in Spain; Michael Hayes, Global Leader of Renewables, KPMG International; Matthias Berninger, Senior Vice President of Public Affairs and Sustainability at Bayer; and Stefano de Clara, Director of International Policy at the International Emissions Trading Association (IETA) shared their high-level takeaways for business from the biggest COP yet. Keep reading to find out what these key takeaways were from our COP25 debriefing webinar.

Three takeaways from COP25

Three key takeaways from COP25 are:

  1. The global climate negotiation process and the Paris Agreement are still alive despite setbacks and policy disagreements on the pace of emissions reductions;
  2. There is a growing disconnect between the actions required to address climate change and what many governments are prepared to do. Governments that are currently lagging may be forced to bring in stronger policies in the future in response to extreme weather events, food systems breakdown and other manifestations of climate risk;
  3. Countries that have committed to reduce their carbon emissions to net zero by 2050 represent two-fifths of global gross domestic product (GDP), around US$35 trillion in economic output [1]. The technology-driven trend towards decarbonization of energy and transport systems is unstoppable.

Recent events, including wildfires in California and Australia and record high temperatures in the Arctic, have put climate change at the top of the global news agenda. The steady stream of climate news combined with youth activism from Greta Thunberg and her global peers have renewed policymakers' commitment to the targets set in the Paris Agreement [2]

Michael Hayes from KPMG International emphasized that “financial instability and stranded assets are actually becoming a key discussion point for financial regulators and companies around the world.”

In order to achieve Paris Agreement emissions reductions targets, all participating countries are required to set national greenhouse gas emissions (GHG) emissions reductions targets  - nationally determined contributions (NDCs). The next review of the NDCs will take place in 2020 and it will be necessary for countries to significantly increase ambition in order to meet the goals of the Paris Agreement, recognizing that this would significantly reduce the risks and impacts of climate change. 

Stefano de Clara from the IETA noted that “developing countries and non-OECD countries have already started to look at carbon-pricing as a way to implement their NDCs.“ Investors and the companies they invest in need to be aware of this shift towards carbon-pricing and related tools to ramp-up emissions reductions in 2020. 

Why was COP25 important?

The discussion opened with a summary on the negotiations at COP25. Ramon Pueyo Viñuales, reporting from KPMG in Spain's office, highlighted that this round of negotiations was meant to reach an agreement on the details needed to bring the Paris Agreement fully into force; set the stage for next year's COP26 when governments are expected to make more ambitious emissions reductions commitments; and develop guidelines on how international carbon-trading markets will work under Article 6 of the Paris Agreement [3].

Determining sources of finance for climate adaptation and answering the question of who should pay for the loss and damage suffered by developing nations due to climate change were also key topics [4].

Lots of work to do heading into COP26 to catch up with the High Ambition Coalition

At COP25, a `High Ambition Coalition' of the European Union, the UK, many smaller nations and business called for stronger action but were opposed by a group of high emitting countries [5].

According to Matthias Berninger from Bayer, the need for climate buy-in from a larger coalition creates an opportunity to move on from the G7 group to “re-energize G20 processes in the area of sustainability” towards more inclusive international business action on climate targets. 

In the end, the high-emitting nations did agree to bring improved emissions reduction plans to COP26 next year. But these countries disagreed on how robust the rules should be for setting up an international carbon market. As the International Monetary Fund (IMF) joins global central banks in responding to financial stability and stranded assets risk, 2020 will see progress on the regulation of market-based mechanisms like emissions trading, offsets and carbon taxes [6].

A business leadership opportunity across supply chains and sectors

The outcome of COP25 indicates that government agreement on international carbon-trading is delayed, but that companies should still expect this to happen in the future. The volume of climate regulation and the level of ambition of carbon reduction targets around the world continues to increase. 

According to Michael Hayes, this “government policy and regulation is going to help the businesses” who want to lead the global transition. The EU and UK are leading the way with ambitious net zero targets. As the realities of climate change become increasingly apparent, the world's largest investors expect an inevitable policy response [7]

Companies like Bayer are leading on policy action and are already leading the way on emissions reductions in agriculture, creating a new “hybrid rice strain that needs much less water and most importantly emits significantly less methane” than conventional rice, said Matthias Berninger.

The question for investors and companies is not if governments will act, but when they do so, what policies governments will implement, and where the impact will be felt through the corporate value chain. Speakers agreed that getting ahead of the curve is the best option.

In the meantime, businesses will have to navigate an increasingly complex regulatory landscape that will include multiple carbon markets, possible carbon border taxes in Europe and diverging emissions standards around the world [8]. For Bayer and other leading innovation companies, “the paradigm shift we all have to make in our minds is that we have to continue to focus on reducing emissions but we have to put a lot of creative energy in measures to take carbon out of the atmosphere,” said Matthias Berninger.

In parallel with government action, investor coalitions like Climate Action 100+ will increase pressure on companies to set absolute emissions reductions targets [9]. Ramon Pueyo Viñuales highlighted how “supply chains will be a critical focus area” in 2020 as pressure to reduce emissions feeds down to suppliers. 

Indeed, some customers and investors may abandon brands that they perceive as not taking sufficient action on climate targets [10]. In order to manage these risks, global businesses participated in COP and have indicated clear positions on all key elements of the negotiation [11]. Global businesses like Bayer recognize that climate leaders have “to talk about biodiversity, we have to talk about water, we have to talk about all the other connected elements that are linked to...planetary boundaries.”

Business leadership needs enhanced transparency, trust and new KPIs

Because they are not weighed down by politics, businesses can move more quickly and more ambitiously than the countries where they operate. As climate action drives change across sectors, business must have a nimble innovation pipeline and anticipate how existing products will respond to a rapidly changing world. 

IETA's Stefano de Clara highlighted how carbon-trading and the associated offsetting market will have to strive for greater transparency in order to maintain credibility. According to Stefano, “the EU is implementing an emissions trading system that will reduce emissions by 40 percent by 2030” and offers a model to be replicated in other jurisdictions. Yet there is a risk that if offset and carbon credit markets are not deemed credible by companies as climate ambition ramps up, most corporate commitments to net zero targets will not be met. 

In order for companies to align operational and financial decision-making with climate targets, ESG-related (environment, social, and governance) compensation metrics should be considered. In some executive compensation formulae at least a fifth of the overall compensation could be linked to climate targets to strike a balance between traditional KPIs (key performance indicators) and new sustainability and climate change KPIs [12]

According to Matthias Berninger, in order to be relevant for investors, these new KPIs will “need to be audited in the same way and with the same rigor as all the financial KPIs.”

As the world sets its sights on COP26, investors and companies will be expected to play a major role. The transition to net zero emissions by 2050 is a tremendous business opportunity. Now is the time to get ready for big year of action heading into the Glasgow COP. 

For more information, refer to the webinar recording.

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