If there’s one overarching message to come out of COP26, it’s that it’s not just governments that are prepared to fight the climate crisis – many players in the private sector are stepping up to support the change required. Between October 31 and November 13, more than 37,000 delegates across 200 countries descended on Glasgow, many of which were representing the world’s largest companies and financial institutions, to commit to stepping up their efforts to combat global warming. “The world finally brought together the coalition we need to win this fight,” wrote John Kerry, former U.S. secretary of state in the Wall Street Journal. “Not only governments but the private sector, large organizations, tribal and Indigenous communities, and young people.”
By the end of the conference, nearly all of the 200 nations in attendance signed the Glasgow Climate Pact, which reinforced the need for the world to limit the global temperature increase to 1.5 C. It was also the first ever climate deal to include plans for a “phase down” of coal usage. “We’re not just saying we need to move forward as a world, (we’re) showing that we are doing things. We’re making big decisions at home and encouraging people around the world to do more as well,” said Justin Trudeau, Canada’s prime minister
Of course, more work needs to be done for governments to achieve net-zero emissions – the balancing out of greenhouse gases produced and the amount removed from the atmosphere – by 2050, which 196 countries agreed to do in 2015 in Paris. Following COP26, the planet is on track for a 2.4 C scenario of warming despite efforts during the conference. Nations couldn’t agree to more progressive collective action like phasing out coal altogether, which is responsible for about 40% of greenhouse gas (GHG) emissions, the largest single GHG contributor.
Still, with more people around the world paying attention to the devastating effects climate change could have on our planet – at least 10% of habitable land is expected to experience chronic flooding by 2060, for instance – strides toward reducing carbon emissions were made, including among the world’s largest financial institutions.
Here are some of the key outcomes from COP26 that investors should be aware of.
Bringing the finance community together
At the conference, financial institutions from across the globe joined forces to create the Glasgow Financial Alliance for Net Zero (GFANZ). Led by Mark Carney, the former governor of the Bank of Canada and the Bank of England, more than 450 fund managers, banks, pension plans and asset owners promised to mobilize a collective $130 trillion in private capital to support the transition to net zero. BMO Global Asset Management and BMO Financial Group’s commitments to net zero through the Net Zero Asset Manager Initiative and the Net Zero Banking Alliance, respectively, roll up into the wider GFANZ initiative.
This coalition of financial institutions is committed to accelerating the decarbonization of the economy. They’ll do this by supporting the broader private sector to take the necessary steps to align with a net zero future and by supporting the climate financing required to scale technologies/solutions to transition to a low carbon economy. GFANZ outlines that the key to achieving net zero commitments will be to use science-based guidelines, detailed action plans that address climate challenges in the short term (by 2030) and transparent reporting along the way.
Setting a global standard
Another significant development for investors was the announcement by the International Financial Reporting Standards of the creation of the International Sustainability Standard Board (ISSB). The ISSB, which consolidated several other reporting standard boards, such as the Value Reporting Foundation and the Sustainability Accounting Standards Board, will be tasked with creating ESG-related disclosure standards that global investors can use when deciding where to put their money.
Typically, investors have had to rely on each company’s own disclosures when examining their climate-related activities and risks, rather than following a global set of standards that are comparable. With ISSB, that could soon change. The board, which is made up of representatives from other sustainability reporting organizations, did publish a general requirements prototype outlining its principles for sustainability disclosures. Much of it was built around the four pillars that make up the Task Force on Climate-related Financial Disclosures (TCFD), a standard created by the Financial Stability Board: governance, strategy, risk management and metrics and targets. When these standards are eventually created, companies and investors will finally be working from the same page.
The first big pledge made at COP26 involved more than 100 countries, representing 85% of the world’s forests, agreeing to both end deforestation by 2030 and reverse forest loss. Why is this important? Because deforestation is one of the biggest contributors to climate change after fossil fuel combustion. The World Resources Institute says that deforestation, if it were a country, would be the third largest emitter of carbon dioxide on the planet. At the same time, the world’s forests remove about 7.6 billion tons of carbon from the atmosphere each year. Keeping these forests around and growing is vital to the health of the planet.
The pledge, which includes Canada and, importantly, Brazil, where the world’s largest tropical rainforest resides, was also backed by $19.2 billion in funding. About $7.2 billion of that is new money, coming from the private and philanthropic sectors, and will be used to encourage deforestation-free soy and cattle production in South America and to increase investments in tree planting and other carbon-reducing solutions. The agreement also recognizes the rights of Indigenous communities, who are often the ones protecting these forests.
Cutting emission production
The Glasgow Climate Pact only pledged to reduce coal production, but more than 40 countries wanted to take their commitments a step further. Canada, Germany and the U.K., among other global players, signed the Global Coal to Clean Power Transition Statement, which saw these nations pledge to transition away from using unabated coal by 2030 (coal power generation that doesn’t employ any carbon emission-reducing technologies). While the statement didn’t include China or the U.S., it’s significant how many countries are ready to phase out coal.
However, the U.S., along with more than 100 other countries including Canada, did pledge to cut methane emissions by 30% over the next nine years compared to 2020 levels. While the world’s largest methane emitters – China, Russia and India did not sign the Global Methane Pledge – any reduction will help, as the gas is the second-largest contributor to global warming after carbon dioxide.
Finally, 24 countries, including Canada, also committed to end the sale of fossil fuel vehicles by 2040. Although China, the U.S. and Germany – the top automaking countries – did not support the pledge, some leading car companies, such as Ford, Mercedes and Volvo did sign the accord.
Time is running out
While progress was made at COP26, time is running out for the private and public sectors to start curbing emissions. Urgent action needs to be taken to dramatically reduce GHG emissions before 2030, which is when the Intergovernmental Panel on Climate Change (IPCC) says the window of keeping the planet warming to 1.5 degrees, closes. Fortunately, we are seeing more companies and financial institutions actively involved in funnelling capital to solutions that can mitigate this crisis. In our role, as stewards of investor capital, we will ensure that our investee companies are following their commitments, embracing COP26’s pledges and, ultimately, supporting solutions to combat the climate crisis.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc. and BMO Investments Inc.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.