From Kyoto to Copenhagen, host cities of earlier UN climate change summits have become bywords for the success or failure of negotiations aimed at tackling the global climate emergency.
The preparation for, and negotiations during, the upcoming COP26 Summit offer a vital opportunity to make much needed progress and for Glasgow to become synonymous with restored faith in climate action.
We are a long way behind where we need to be. At a minimum, global emissions need to be brought down to net zero by 2050, halving this decade. Yet there are strong grounds for optimism that we’re turning the corner.
So, what’s required to accelerate the development of a net-zero economy? Crucially, how can the spectrum of protagonists in the global system change their behaviour to an extent that climate goals become achievable?
Impax believes that governments must lead the way in firming up goals and setting out pathways to achieve them. In response to credible, long-term policy signals, companies and the finance sector that backs them should discover that capital can be put to work profitably while contributing to the preservation of a habitable planet.
To be clear, this isn’t a one-way process: early and proactive statements of intent by companies and their funders can spur governments towards higher levels of ambition. Everyone in the system needs to act, now!
Governments must develop sectoral roadmaps towards ambitious targets
COP26 should focus on both the “where” and the “how” of greenhouse gas management. This means that as well as agreeing more ambitious targets, national governments must set out clear roadmaps to achieve them, such as the UK’s Net Zero Strategy, published this October, which provides a strategy for the UK to meet its 2050 net-zero target. This is a view endorsed by the Confederation of British Industry and the Institutional Investors Group on Climate Change.
Much has been learnt over recent decades about how to do this. In many countries, renewable power generation has accelerated because of national deployment objectives, power price support and market access mechanisms, tax regulations, streamlined planning procedures and policies that incentivise equipment-making. The best frameworks combine commitments that are stable over a decade or more, with tapered subsidies and adjustment mechanisms to reflect real-world experience. Subsidies for polluters should also be removed, with outright bans an option (for example on coal power).
We’re in the foothills of similar initiatives in the transport sector. The roll-out of electric vehicle (EV) charging infrastructure alongside new safety rules and standards is paving the way for the mass adoption of EVs in several countries, a process that needs to accelerate. For aviation and shipping, where the net-zero transformation is much further behind, there are encouraging signs that industry leaders will invest significantly in as-yet (commercially) unproven alternative technologies, such as “green ammonia” fuels.
The roadmap for decarbonising the heat sector remains particularly unclear. Replacing fossil fuel-based heating will likely require a combination of zero-carbon electricity and hydrogen derived from clean sources. Currently, solutions appear expensive and hard to scale. Governments therefore need to focus on innovation, appropriate trialling and demonstration, and, above all, international collaboration.
Corporate innovation must accelerate
As confidence in the transition to a net-zero economy grows, the pace of corporate investment in the sectors expected to become dominant is building rapidly. The stakes are high, particularly given debates over the optimal approach to technologies such as EV battery design or hydrogen electrolysis.
While the opportunities for potentially transformative technologies are enormous, so are the challenges. These are illustrated, alongside critical policy and industry actions, in the Energy Transition Commission’s excellent paper on hydrogen. In this context, businesses that step up their investment in R&D, align capital expenditure with net-zero sectoral roadmaps and prepare for a “long game” should benefit.
Carbon-intensive, hard-to-abate sectors are key to watch. In the steel industry, for example, the race is on to develop cost-effective, climate-friendly processes, such as direct-hydrogen reduction, and to dramatically improve the energy efficiency of existing processes. On the horizon, though, are substitute products, like cross-laminated timber, that could herald a world that uses less steel.
Other sectors face similar challenges. In petrochemicals and food, the threat of substitutes has the potential to undermine the most resolute management teams bent on evolving from the status quo.
The finance sector must fully embrace climate change
As in the corporate sector, the risks and opportunities associated with climate change have often been overlooked by investors and lenders, leading to the misallocation of capital. Addressing this effectively will be key to our future prosperity.
Integrating into decision-making both physical climate risks and the risks arising from the sustainable transition is a critical step towards a more resilient financial system. Practical tools including pricing models are on hand for investors, courtesy of the Coalition for Climate Resilient Investment, which Impax supports.
Given the complexity and uncertainty of climate-related impacts, those allocating capital will need access to timely information from the companies they’re backing, to assure them that corporate strategy, investment programmes and management resources are all fit for purpose. The disclosure of information in this area must quickly converge around agreed standards using clear metrics.
Central to progress here is adoption of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) by both investors and investee companies. Recently, Impax has contributed to development of a proposal by the Climate Financial Risk Forum for “climate disclosure dashboards.”
Ultimately, much of the money at stake is owned by pensioners and savers, many of whom seek reassurance that their capital is supporting a healthy planet. The finance sector must consequently evidence its “sustainability” claims and avoid “greenwashing”. To this end, green taxonomies have a role to play to signal alignment. Defining what is environmentally beneficial can be thorny, however, so regulators stepping into this area must tread carefully.
Let’s not squander the golden opportunity of COP26
We must emerge from COP26 with a renewed sense of confidence about how to get national economies on track towards net-zero.
Crucially, ambitious commitments do not require the agreement of all countries, and I am encouraged by the emergence of “coalitions of the willing” among national governments around single-issue campaigns in the run-up to the Summit.
For example, the Global Methane Pledge, led by the US and the EU, commits signatories to cutting emissions of methane – a highly potent but ephemeral greenhouse gas – by 30% by 2030. There have also been promising recent pledges on coal use. While G7 members vowed to transition away from unabated coal power generation this decade, three major lenders for coal projects – China, Japan and South Korea – announced they will stop overseas coal financing.
Groups are also coalescing around nature-related initiatives such as the Forest, Agriculture and Commodity Trade Dialogue, which brings together groups from producer countries and consumer countries to support the establishment of supply chains that protect forests while promoting development. I believe we can expect commitments from nations, companies and investors to address deforestation at the COP.
Negotiators can build on this momentum and overcome other obstacles to achieving the Paris goals. COP26 can also deliver progress by stimulating private-public sector dialogue that improves climate policies.
As the world’s attention turns to COP26, there is a fitting poignancy to the focus on Scotland’s largest city. A former cradle of heavy industry, most notably shipbuilding, Glasgow today is a diverse, modern economy with a £30 billion plan to become net zero by 2030.
If governments, companies and financial institutions commit fully to what’s required to create a net-zero economy, I believe Glasgow can forever be associated with a pivotal moment in addressing climate change.
COP26: Mobilising finance for net zero
The UN climate change conference presents a pivotal opportunity for governments to lay the tracks for investment in the transition to a sustainable economy