On the eve of the COP26 Climate Summit, the spotlight is on world leaders to address the climate issue. The goals and commitments carved out during the event will transform the sector. Sonia Shah discusses what it will mean for financial services.
Under the UK's presidency, the summit, delayed a year because of COVID-19, will be carried out in person in Glasgow. More than 190 world leaders are expected to attend and discuss multilateral action on the ESG agenda. Coronavirus, while destructive socially and economically, provides the international community with a historic chance to re-build greener.
The UK is in the spotlight
The UK holds a unique opportunity. Climate change has been an increasingly crucial topic for public awareness across the world and leaders have responded by making promises and pledges to tackle the environmental harm and the impact on society. Following a string of extreme weather events and the loss of biodiversity at an increasing scale, the pressure on the international community is higher than ever.
The event will seek declarations from countries on their 2030 emissions reduction target to show how this compares to international net zero ambitions. Additionally, a key objective is to clarify and finalise the rules in the Paris Agreement, which came from COP21 in 2015.
Many stakeholders have recognised that to catalyse a greener future, we need the right incentives to create major change now. Financing the green revolution is an integral piece of the puzzle and will have an impact at every level, from the individual to the international. The UK’s financial system is a global driver and will play a defining role in shaping a sustainable future.
Key goals for COP26
Commit to global net zero by 2050 and keep 1.5 degrees Celsius goal within reach
Countries are being asked to reduce emissions substantially by 2030, but a UN report says that global warming is likely to reach 1.5°C as early as 2030 if it continues to increase at the current rate.
Protect communities and natural habitats
The international community will aim to coordinate in supporting areas affected by climate change to protect and restore ecosystems, build robust defences, implement warning systems, and make infrastructure and agriculture more resilient to adverse climate effects and avoid further loss of homes and lives.
Countries promising USD100 billion in climate finance per year to facilitate the first two goals must be held accountable. International financial institutions have a role to play in unlocking private and public sector finance to achieve net zero.
Work together to deliver international frameworks
Attending leaders hope to finalise the Paris Rulebook, and agree on multilateral collaboration between governments, businesses, and society to deliver on environmental goals.
What will COP26 mean for financial services?
Governments understand that updating infrastructure and promoting innovation are key components in safeguarding the planet. This requires the right incentives for long-term projects and the development of more sustainable practices. Countries will make commitments about new ways of financing to encourage greener growth from private companies, this could reveal international cooperation on financing frameworks and have a substantial impact on cross-border investments.
It's likely that firms will also make ESG goal announcements alongside events, showcasing their commitment to sustainability as well as the creative ways that they are financing projects. Industry peers should keep an eye on how their commitments compare to other key players in the industry.
Encouraging green financing means linking investments to sustainability through various ESG metrics. The existing system focuses mainly on growth but does not consider the negative impact on the environment. World leaders could set out plans on a systematic shift on how to determine companies’ climate impact and how they access capital, influencing how investment decisions are made.
Sustainability reports – including climate-related disclosures – must be a uniform and globally accepted framework for this to happen; countries could agree on the steps to developing these. We expect to see deadlines given by heads of state for making these disclosures mandatory.
These metrics must be driven by robust ESG data sets to improve transparency, strategy, and action against greenwashing. Additionally, countries will seek to price biodiversity to calculate the value of nature, but also to quantify the financial cost of its loss.
COP26 is a crucial point for the world economy and finance in the fight against climate change. We will be watching the event closely and providing further insight on any developments that impact our clients in the financial services sector.