The world is at a critical point in the fight against climate change, and COP26 was considered the most significant climate talks since the 2015 Paris Agreement. During the conference, there were notable successes and some setbacks — both have implications for businesses, globally.
KPMG professionals reflect on the progress made during the climate change conference and provide insights on how to help accelerate toward net zero, together.
- COP26 made progress toward delivering on the Paris Agreement goals of limiting global warming to ‘well below’ 2 degrees Celsius (C) on pre-industrial levels, but the world is definitely not on track to limit the increase to 1.5C on the basis of plans submitted to date.
- In a scenario where all the climate pledges announced to date were met in full and on time, then the International Energy Agency (IEA) estimates that global warming could be kept to 1.8C. However, the lack of firm plans for 2030 means the actual increase could be 2.4C.1
- These commitments must be delivered upon if these temperature goals are to be achieved. This still represents progress since Paris, where the world was heading for 3C-4C of warming, and COP26 should be seen as part of that ongoing process that started nearly 30 years ago and now plans to continue indefinitely to tackle climate change.
- Over that period, there has been a marked shift from ‘top down’ reliance on governments taking the lead to ‘bottom up’ action by businesses, investors, NGOs and consumers.
- COP26 has energized a raft of initiatives including:
- The Glasgow Financial Alliance for Net Zero (GFANZ).
- The Glasgow Breakthroughs on technology innovation.
- Powering Past Coal and shifting to clean power.
- Nearly 100 countries committing to cutting methane emissions.
- A commitment to end and reverse deforestation by 2030.
- H2Zero - A pledge to accelerate use of decarbonized hydrogen.
- A new requirement for net-zero transition plans for listed companies in the UK.
- Establishing a new International Sustainability Standards Board (ISSB), globally.
- Good progress was made on Article 6 — the rulebook for carbon accounting.
- But there were also a number of setbacks:
- The US$100 billion per year climate finance target — due by 2020 — was delayed to 2023.
- Many of the new net-zero targets announced have limited detail on near-term plans to help reduce emissions — which is essential if we are to have a chance at limiting global warming to 1.5C.
- Questions remain regarding the follow through and implementation, with the final call to action requesting all parties to update their Nationally Determined Contributions (NDCs) ahead of the next COP in November 2022.
- It’s becoming increasingly clear that the institutional investment world is starting to exercise real influence through investment policy and are starting to demand increased climate focus from investee companies. Importantly, these investors are focused on private companies as much as public companies.
- The shift to net zero is the next great industrial revolution and businesses that seize the opportunity are expected to thrive — those that don’t, may not.
Reflections on COP26
In the run up to Glasgow, UK Prime Minister Boris Johnson called for COP26 to be a “turning point for humanity” that could put the world on track to meet the goals set out in the 2015 Paris Agreement of limiting global warming to “well below” 2C on pre-industrial levels — with an aspiration of keeping it to 1.5C.
By contrast, Greta Thunberg predicted it would just be more “blah, blah, blah” with politicians not following through on their commitments and lacking real action.
So, which was it? KPMG’s view is it was somewhere in between, with progress made in a number of areas, but also some significant disappointments. Glasgow held on to the aspirations of the Paris Agreement of limiting global warming to 1.5C, but, as things stand, the world is definitely not on track to hit this target.
COP26 has delivered in creating increased momentum on the climate agenda and more parts of society are being mobilized to act. There are now a growing number of ‘bottom up’ initiatives, like GFANZ, that are developing a momentum of their own — with the potential to make real change.
Glasgow should be seen as part of the ongoing process of global climate change negotiations that began at the Rio Earth Summit in 1992. The final ‘decision’ document reflects this ongoing process — calling on all parties to submit updated or new Nationally Determined Contributions (NDCs) ahead of COP27 in November 2022.
With new commitments made by India, Russia, Brazil, Saudi Arabia, Australia and others, at least 90 percent of the world’s economy is now signed up to net-zero targets — that figure was less than 30 percent one year ago.2
Businesses are now far more engaged than ever before, taking initiative and not waiting for governments to act. This was demonstrated by the Glasgow Financial Alliance for Net Zero (GFANZ), which has US$130 trillion of assets under its control. Clean finance can now play a critical role in driving, or stopping, activity irrespective of changes in government policy — although some questions remain about how these assets expect to be mobilized in practice.
More generally, there has been a definite and perceptible shift toward ‘bottom up’ action by companies, investors, consumers, individuals and cities — with a vast array of initiatives underway to help reduce greenhouse gas (GHG) emissions, that will likely generate a momentum of their own, separate from the government-led COP gatherings.
Banks, insurers and capital markets are expected to drive action now to a far greater extent than ever before. The new requirements for all listed companies in the UK to produce net-zero transition plans by 2023 can only increase transparency and scrutiny of the companies that have credible plans and those that don’t. This is likely to be replicated in other countries.
COP26 has established a new International Sustainability Standards Board (ISSB) to develop global reporting standards, building on and incorporating initiatives like the Task Force for Climate-related Disclosures (TCFD).
The Glasgow Breakthroughs establish innovation programmes for clean power, zero emission road transport, clean steel, hydrogen and sustainable agriculture. There is considerable optimism around the world that the solutions to climate change can be found, with a big role for renewables, electric vehicles, low carbon hydrogen, batteries, carbon capture and storage, direct air capture, and other forms of long-duration energy storage.3
Methane accounts for about 0.5C of the 1.1C-1.2C warming the world has seen to date, and the Global Methane Pledge signed by over 100 countries, will aim to cut methane emissions by 30 percent by 2030 — compared with 2020 levels.
Progress was made on reforestation, with the commitment signed by over 100 countries including Brazil, Russia, Canada, Indonesia, Democratic Republic of the Congo and China to reverse and end deforestation by 2030. This builds on the biodiversity commitments held at COP15 to a 30 by 30 target — a plan to conserve 30 percent of the world’s land and sea by 2030.
On coal, the G20, including China, had already agreed to stop funding new coal-fired power stations, abroad. Now, 65 countries have signed up to the Powering Past Coal initiative aimed at taking coal — the most polluting fuel — out of the energy mix, altogether. 4 In a dramatic last-minute twist, the final text of the Glasgow Climate Pact was amended to refer to the “phase-down of unabated coal” rather than “phase-out” — following push back from some large coal using countries.
There has also been a much greater focus on green innovation, through the UN Climate Change Global Innovation Hub and on supporting emerging technologies through the announcement of the First Movers Coalition.
There was significant progress made on Article 6 — the rule book for carbon accounting. This will bring greater transparency to how carbon markets work, closing a number of loopholes and reducing the scope for double counting of carbon reductions.
The climate finance target of US$100 billion per year for developing nations — first introduced in Copenhagen back in 2009, and due to be met by 2020 — can now not expect to be met before 2023.
While there have been new long-term commitments to net zero made by a number of countries in the run up to COP26 — including energy-rich economies like Australia and Saudi Arabia — the shorter-term targets and plans for many countries for 2030 remain vague. We need to see a steep drop in emissions this decade, if we are to limit global warming to 1.5C (see graph below). The UN estimates that we’re far from halving world emissions by 2030 — as needed for the Paris goal of 1.5C emissions. Referring to net zero and the Paris Agreement goals, Special Presidential Envoy for Climate John Kerry, summed it up by saying that “We can do this. The question now is whether we do it in time.”
Implications for businesses
COP26 has been termed the ‘Business and Finance COP’, because of the more prominent role the business and finance community has taken compared to previous conferences.
The scrutiny of plans on decarbonization is only going to grow from both investors and from consumers. This is especially true in the UK, which had already made climate risk disclosures mandatory for large companies from 2022, and for all companies by 2025. In addition, they’ve now added a new requirement for listed companies to produce net-zero transition plans by 2023.
Globally, the International Sustainability Standards Board (ISSB) is now tasked with coming up with global reporting standards with a focus on carbon emissions.
Net zero is the next industrial revolution. And like other revolutions, those businesses who seize the opportunity can expect to thrive — those that don’t, may not.
The reality? These changes are coming and businesses should be prepared. If you already have a credible, quantified plan for emissions reductions, then great; if you don’t, you should begin to consider one as soon as possible.
KPMG firms can support businesses and organizations with the transformation needed to fight climate change through KPMG IMPACT — the accelerator for KPMG’s global ESG strategy. For example, KPMG in the UK has developed the KPMG Climate IQ to assess the impacts of climate change under different scenarios. This tool supports the development of robust, credible plans and strategies for decarbonization and assistance with emissions reduction.
Global organizations are responding not just to regulatory developments, but also to increasingly intense scrutiny from institutional investors. Other stakeholders, such as employees and customers are paying attention to how businesses are preforming on the net-zero agenda.
Given that most carbon emissions come from businesses, this is a welcomed development. Government policy and regulation will likely continue to be critical — and the reality is that global corporations are now moving faster than governments in the race to net zero.
Short-term targets and action
Coming out of COP26, there’s an absolute necessity for substantial progress to be made between now and 2030 — if the ultimate 2050 net-zero targets are to be achieved. This underscores the importance of developing net-zero and climate transition plans with both short-term targets and actions.
What does the short-term environment on the climate agenda look like for the business community?
There’s an increased focus on reporting and disclosure — particularly as a result of the ISSB announcement. Governments are expected to continue to pursue policy initiatives to help drive the agenda, not just for reporting, but across the wider carbon space.
It’s clear that institutional investors are taking this agenda incredibly seriously as they recognize it directly relates to the value of their investments. As a result, companies are likely to see much greater focus from the investment community. The making of commitments will no longer be sufficient — the future will be about developing meaningful and well thought out plans, followed by swift action. And companies should expect to report their progress, yearly, between now and 2030.
The climate agenda is not just about risk. It’s critical the business community grasps the value in the opportunity associated with the global response to the climate crisis. Society is entering a phase where low carbon goods and services have increased value and this feature will likely continue to dominate the marketplace. Organizations who understand the value opportunity as well as the risk, are most likely to be successful.
All countries have been asked to look again at their 2030 targets and come back next year with more ambitious reduction plans – like a ‘one-way rachet’ ramping up levels of ambition.
Is 1.5C still achievable? Technically yes, but only just and as things stand, we are not on track.
Glasgow is not the end of the story. This is an ongoing process, and we have come a long way in six years since Paris, when the world was heading for 3C-4C of global warming. The world has made significant progress in bending the arc of that trajectory down “toward 2C” as Alok Sharma, COP President puts it.
Every degree, every tenth of one degree, really matters. The world is already seeing the devastating effects of climate change at ‘only’ 1.1C-1.2C of warming, today. At 1.5C, 70 percent of the world’s coral reefs die. At 2C, they all die and more than 1 billion people, globally, could be affected by fatal heat and humidity — according to the UK Met Office; whilst many island states and low-lying areas will likely become uninhabitable.6
The world witnessed some progress made at Glasgow in tackling climate change. But there is much more to do — especially in terms of delivery of the commitments and initiatives announced at COP26 and on near-term targets for 2030.
Soon, the world’s eyes will turn to COP27 in Egypt, which could no doubt be set against the backdrop of ever more extreme climatic events.
2. PM: Glasgow Climate Pact keeps critical 1.5C global warming goal alive - GOV.UK (www.gov.uk)
4. PM: Glasgow Climate Pact keeps critical 1.5C global warming goal alive - GOV.UK (www.gov.uk)