The Paris Agreement hammered out at COP21 in 2015 was hailed as a landmark, as 195 nations committed to combat climate change and “unleash actions and investment towards a low-carbon, resilient and sustainable future”.
Under the Paris Agreement, countries agreed to try to limit global warming to 2C - but ideally 1.5C - to curb climate breakdown, and to submit their own action plans (Nationally Determined Contributions, or NDCs) as to how they each will achieve this.
COP26 is the first time the parties will review the most up-to-date NDCs.
Keeping an eye on the ball… and pushing it further
Four clear objectives have been set for COP26:
- Ensure global net zero by 2050 and maintain the achievement of the goal of 1.5 °C
Countries will be expected to declare ambitious greenhouse gas (GHG) emission reduction targets - Nationally Determined Contributions - that align with the goal of achieving net zero emissions by 2050. To meet these goals, countries will need to accelerate the phase-out of carbon, encourage investment in renewable energy, reduce deforestation and accelerate the shift to electric vehicles.
- Formalise how signatories work together to address climate change
COP 26 will be used to embed the rules necessary to implement the Paris Agreement, by finalising the Paris Rulebook. This covers the provisions related to governance, mitigation, transparency, finance, the periodic global stocktake, and implementation and compliance. It includes a timeline of key milestones in the agreement’s implementation.
- Mobilise the finances committed to in the Paris Agreement…
To achieve the first two goals, developed countries must deliver on their promise to raise at least USD 100 billion in climate finance per year. International financial institutions must play their part and work to unleash the trillions of dollars in private and public sector finance needed to ensure global net zero.
However, an expert report prepared at the request of the UN Secretary-General, indicates that the USD 100 billion target is not being met (the latest available data for 2018 is USD 79 billion), although it accepts that climate finance is on an ‘upward trajectory’. The growth in sustainable bond issuance is one example.
Mind the gap
And that gap could be even larger than originally thought. According to a recent study by the Energy Transitions Commission, achieving net zero emissions by mid-century would cost an estimated USD 1 trillion to USD 2 trillion a year of additional investments, or 1%-1.5% of global GDP.
When potential public or private investors question whether such a commitment would make financial sense, they should really be asking themselves whether the world can afford not to invest in climate action.
Communities in all parts of the world are already suffering from the financial effects of climate change, be it crop loss due to drought, or major damage to infrastructure caused by flooding or other extreme weather. Investments in climate change mitigation and adaption will also create jobs and provide an opportunity to enable a just transition in many communities.
Loss of natural capital = loss of everything
Mankind also has to recognise and deal with the symbiotic relationship between climate change and biodiversity loss. The loss of ecosystems – of natural capital – due to climate change arising from human activity is causing additional (and possibly soon-to-be irreversible) damage to health, food resources and, particularly in the developing markets, economic welfare.
Strong financial and business arguments
The UN Special Envoy on Climate Action and Finance, Mark Carney, says the huge amount of investment required represents an opportunity and not a risk. He argues that the benefits that flow from such investments dramatically outweigh any upfront costs.
The financial and business cases for clean energy are stronger than ever. In most countries, going solar is now cheaper than building new coal power plants. Clean energy investments also drive economic growth, with the potential to create 18 million jobs by 2030, even allowing for the inevitable fossil fuel job losses.
The annual USD 100 billion commitment from developed countries referred to in the Paris Agreement ‘is a floor, not a ceiling’ for climate finance, according to the UN.
But the benefits of the investments will likely be far greater. Shifting to a green economy could yield a direct economic gain of USD 26 trillion by 2030 compared with business-as-usual.
- Achieve adaptation to protect communities and natural habitats
Even as GHG emissions begin to slow, the climate will continue to change, with devastating effects. COP26 will also urge cooperation to encourage countries affected by climate change to protect and restore ecosystems and biodiversity, build defences, implement alert systems, and make infrastructure and agriculture more resilient to prevent loss of homes, income, and lives.
The UN Environment Programme (UNEP) estimates that adaptation costs alone – just for developing countries – will be between USD 140 billion and USD 300 billion per year by 2030, rising to USD 280 billion to USD 500 billion annually by 2050.
Great expectations? Perhaps not. Urgent needs? Yes.
Clearly, there is much riding on COP26, and the watching world will have urgent – if not great –expectations of it delivering its aims. It is perhaps the most difficult of political tasks to achieve concord between nearly 200 countries.
When considering Earth’s future, delegates at COP26 may do worse than bear in mind a line (paraphrased here) from Charles Dickens’s ‘Great Expectations’: “For too long a time, I have avoided thinking about what I have thrown away, when I was quite ignorant of its worth.”
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
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