Nov 15: Key takeaways and time for action as the curtains fall on COP26

COP26 has now come to an end, and after the clock reached extra time over the weekend an agreement was finally reached on what will now be known as the “Glasgow Climate Pact”. The Pact’s significance is that it reinforces and elevates the world’s commitment to a 1.5 degree target, and recognises that there is a need to significantly scale up the funding for the developing countries to assist with the costs of both mitigation and adaptation. There is for the first time an explicit reference to the end of fossil fuel usage (which is a significant breakthrough), although the reference to coal was downgraded from a “phase-out” to a “phase-down” at the last minute request of India and China. There is also agreement to end “inefficient fossil fuel subsidies”, albeit there is no timeline for this. A standalone organization will be set up to funnel financial support and technical advice to developing countries looking to mitigate damage and loss which will not otherwise be avoided. The much publicised $100bn a year in climate finance was formally missed however, which the Pact noted with “deep regret”, but the goal was reaffirmed to reach and match that amount each year annually to 2025. 

Our key takeaway from Glasgow, which was repeated by speakers at multiple events, is that there is sufficient capital and finance available for the net-zero transition. In particular, there are significant funds available for clean energy and carbon reducing projects, but just not enough suitable projects coming to market at the speed needed for those funds to be utilised. Public policy will therefore be required in many situations to de-risk markets and new technology types broadly, and individual projects more specifically, in order to meet and match the private investment on offer. The head of the CBI observed that there has now been a boardroom tipping point, but we now need a supply chain tipping point and a consumer tipping point to enable a whole-system transition. 

Another takeaway is the commencement of a move towards a more open and quantifiable measure of emissions and environmental impact. The ISSB announcement, with its very granular reporting requirements, should be seen as a indication of what will likely be implemented at a national level in law, whereby ESG and climate reporting will be elevated to a similar position to financial reporting. This is likely to happen both from a formal regulatory/legal perspective (for example, the UK will require all financial services firms to publish their net-zero plans by 2023) but also when funding requests are being considered by bank credit committees (or any company when reviewing contractor options). Transparency is likely to be a key headline across both the private and public sector action, backed by litigation threats premised on the protection of “human rights” or the prevention of “greenwashing”.

A high level summary of the other achievements and announcements from the past two weeks include: 

• The Glasgow Climate Pact also finalized the rulebook of Article 6 of the Paris Agreement regarding carbon trading markets. This was one of the core goals of COP26, and the new agreement provides clear accounting guidance for emissions trades between nations as well as proving a new crediting mechanism to broaden access to those countries wanting to attract further clean investment through the global carbon market. The voluntary carbon trading market is already growing quickly due to corporate demand as businesses seek to use carbon credits as part of their strategy to reach net-zero emissions.
• The Glasgow Leaders Declaration on Forests and Land Use was launched whereby over 130 countries accounting over 90% of the world’s forests have committed to halt and reverse global deforestation by 2030. 12 major state donors also pledged to provide £8.75bn ($12bn) of public money between now and 2025 to support developing countries achieve this goal, and a further £1bn ($1.5bn) was also pledged by private philanthropic donors to protect forests in the Congo Basin, home to the second largest rainforest in the world.
• There was an announcement of a new High-level Expert Group to police net zero commitment and call out so called “greenwashing”. The new group will report directly to the UN Secretary-General over the next few years. 
• In the UK, Chancellor Rishi Sunak announced that the UK will, from 2023, mandate all financial institutions and listed public companies operating in the UK to publish their plans and strategies on how to transition to net zero by 2050. Fully delivering on these commitments will not however be mandatory, rather the new policy is intended to promote transparency, accountability and promote companies taking greater responsibility for their broader environmental impacts.
• Under US and EU leadership, a “Methane Emissions Reduction Action Plan” was launched, which signed up 150 countries to reduce their methane gas emission by 30% by 2030. Oil and gas facilities (and leakages from them) will be within the scope of this. 
• The Glasgow Financial Alliance for Net Zero (or GFANZ, for short), an alliance of financial institutions committed to meeting the outcomes from the Paris climate agreement was launched with the support of former Governor of the Bank of England Mark Carney. Its 450 members represent an astonishing 40% of the world’s financial assets under management. They will all now work towards meeting global net-zero by 2050.
• The International Sustainability Standards Board (ISSB) was launched to establish a comprehensive baseline sustainability reporting and disclosure standard to assist in the delivery of “high quality, transparent, reliable and comparable reporting by companies on climate and other environmental, social and governance (ESG) matters”. 
• Alongside the ISSB, a prototype standard covering climate-related disclosures was also launched, which while not legally binding will create a set of standards that all businesses will need to start to consider. In particular there is a set of very granular expectations that companies will need to consider.
• 190 countries and companies signed up to phasing out coal powered electricity generation within the next two decades. China nor the US agreed to this however, but there was also a commitment to end all investment in new coal power generation, with all 7 of the G7 nation pledging to do so this year. 
• The International Chamber of Shipping’s “Shaping the Future of Shipping” conference in Glasgow also proposed a $5bn fund, financed by a levy of $2 per ton on marine fuel, and with a target launch of 2030, to massively increase R&D to decarbonize global shipping. 
• A UN “Race to Resilience” programme was launched to develop a new framework to get cities, regions, businesses and investors to advance approaches to resiliency. A Global Resilience Index was also launched to improve how investors measure the resiliency of nations, corporates and their respective supply chains.

Norton Rose Fulbright partner Elisa de Wit, who heads our Australian climate change practice, said “It is fantastic that we now finally have the rules for the operation of carbon markets finalised under Article 6. Finalisation of these rules means that there can be a co-ordinated approach to the development of carbon abatement projects, and strong integrity as to how credits from these projects can be utilised to meet countries’ nationally determined contributions. It will allow private sector investment to mobilise to scale up the undertaking of nature based solutions, with the associated co-benefits that these types of projects can generate, including addressing bio-diversity loss, indigenous engagement and regional employment. After 10 years of experience assisting clients in Australia to undertake land-based carbon projects, we are really looking forward to working with our international clients to capitalise on these opportunities as they emerge in other jurisdictions across the coming decade”.

Our EMEA head of sustainability, Caroline May, said “The Glasgow Climate Pact marked the outcome of 2 weeks intensive activity, and whilst missing out on final pledges to achieve 1.5, it did lead to commitments to GFANZ, to the “phase down” of coal and fossil fuels, to reduce methane emissions and to arrest deforestation as well as commitments to meet adaptation costs in developing economies. It served as a consciousness raiser reminding us all that time is running out and further work, especially upon implementation, will be required before COP27 if the target of 1.5 is to remain alive”.

Philip Roche, co-head of our shipping practice, said “Although shipping, like aviation, lay outside the formal conference agenda, the number of side events and the number of attendees from the IMO, EU, and key stakeholders showed that the shipping community was determined to demonstrate that meaningful steps are being taken to allow shipping to play its part in global decarbonisation, however difficult and indistinct that path may be. There is real effort being made into working out how this journey may be travelled; whether that will be through improving the efficiency of the existing fleet through regulation, or by the production and supply of new fuels, or by measures such as the Clydebank declaration for green shipping corridors, or finally, the use of financial measures and instruments such as market based measures and/or a carbon levy on fuel. In the end, it will probably be a combination of these measures which allow global shipping to achieve the goals set by both the IMO, the EU and other parties, including users of shipping.”

Thomas Lord, regulatory and compliance project manager, said “There is a need to rationalize the objectives of, on one end of the scale, significant investors such as green funds with investments ranging up to billions of dollars and, on the other side of the scale, smaller nature based developers whose investments may be in the low millions of dollars. Both will require careful thought and the high volume lower value investments should not be forgotten about. The IFRS proposal to put ESG and carbon issues into financial, as opposed to ESG, reporting may be the most significant impact of COP 26 to many of our clients over the next five years.”