COP26: Outcomes and Next Steps
The 2021 United Nations Climate Change Conference (COP26) produced some breakthrough pledges, a draft rulebook for an international carbon market, and some big aspirations. The agreement reflects a much more robust approach to a wide variety of areas regarding the current and potential future impacts of climate change, as well as an urgency to limit warming to 1.5°C. If the public and private sectors can truly work together to deliver on the commitments called for, Glasgow could be remembered as the moment the world began to translate the Paris Agreement from aspiration to action on climate change. Here is a snapshot of the most important outcomes and next steps.
COP26: What matters for business
- The COP text for the first time recognizes the role of fossil fuel use in climate change, calling for the “phase down” of coal-fired power and the elimination of “inefficient” fossil fuel subsidies.
- The rules of the game have been set for the international transfer of carbon offsets:
- Article 6 of the Paris Agreement aims to strengthen the integrity of carbon markets and support a mechanism for global emission trading; however, agreement on the terms has been elusive.
- Decisions in Glasgow provided a draft structure and operational rulebook for such a global trading mechanism, though implementation may reveal further challenges.
- Financial sector climate pledges are real: through the Glasgow Financial Alliance for Net Zero (GFANZ), over $130 trillion in private capital from 450 financial groups has been committed to achieve Net Zero.
- The GFANZ process calls for the setting of short-term, sector-specific targets — for example, through the Net Zero banking alliance, banks will have to make industry-specific emission reduction targets for their loan books. GFANZ also hosts Net Zero alliances for insurers, asset managers, asset owners, and other sectors of the financial industry.
- Sector-specific approaches are the next big thing, as are the increased data demands and scrutiny that come with them.
- The US-EU led Global Methane Pledge focuses on a 30 percent reduction in methane emissions by 2030 in several key sectors, including oil and gas, waste, and agriculture.
- Leaders representing over 85 percent of the world’s forests committed to halting and reversing deforestation and land degradation by 2030.
- An agreement was made to work towards all sales of new cars and vans being zero emission by 2040 or earlier, or by no later than 2035 in “leading markets.”
- Saying “Net Zero” alone is no longer enough, moves by voluntary reporting organizations — including the launch of the International Sustainability Standards Board and the SBTi Net Zero Standard — add momentum to the push for increasing transparency and rigor around corporate climate commitments.
What to watch for
- Increasing country ambitions — countries are to come to COP27 next year with new pledges for emissions reductions; with 131 nations now committed to Net Zero, look for a focus on how countries will actually achieve those goals, as well as achieve significant, near-term emissions reductions.
- What is an “inefficient” fossil fuel subsidy? In 2020, the value of fossil fuel subsidies globally was about $6 trillion according to International Monetary Fund (IMF) research.
- Companies need to understand Article 6 and how carbon credits will be applied and accounted for in order to avoid potential risk management and reputational issues.
- Approximately $12 billion of public funds and $7.2 billion of private investment has been committed to protect and restore forests — but how will the money be spent to do this? In addition, what does success look like?
- The Global Methane Pledge aims to limit methane emissions by 30 percent compared with 2020 levels, but being a voluntary, non-binding statement with no enforcement provisions, its implementation will be challenging.
What to do now
- Have in place an internal review mechanism through a stakeholder committee and a board of directors reporting agreement on climate data and disclosures.
- Determine how and where you will invest the money and resources needed to meet Net Zero
- Get smart about carbon offsets that integrate operational and financial objectives.
- Look for opportunities in sector-specific approaches to mitigation.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.