This briefing summarises the key climate trends and announcements of most importance for non-executive directors and industry leaders reflecting on the UN COP26 negotiations and related events in Glasgow from 31 October – 13 November 2021.
Authors: Harriet Harthan and Nick Scott
At a glance
COP26 Scorecard: 1.5OC future on a knife edge
Key takeaways for NEDs
Whilst global political progress on climate action proves challenging as ever, it is clear the global business landscape is shifting as organisations and coalitions increase both net-zero commitments and action on climate to prepare their businesses for a fast-approaching zero-carbon future. The top takeaways for non-executive directors from this briefing are as follows:
- With increased focus on 2030 targets and accelerated action, now is the time to ensure your businesses move from ambition to action in their climate strategy and consider using an internal carbon price to drive that strategy. Civil society is increasingly conscious of greenwash, raising reputational risks if plans are not clear.
- Encourage your businesses to embrace opportunities for collaboration and climate action through initiatives such as the Race to Zero and the Science Based Targets initiative (SBTi); and to harness global cooperation seen in announcements such as the US and China commitment to work together on climate action.
- Ensure your businesses are properly reporting and accounting for climate change, not only to meet mandatory TCFD-aligned reporting requirements and new global standards, but also to attract investment from an increasingly climate-aligned financial sector, and to articulate a clear economic case for climate decisions that protect shareholder value.
- Advise your businesses to understand potential impacts of the systemic change occurring within global financial systems which aims to unlock significant climate investment, as proposed by new initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ).
- Advise your businesses to prepare for the cost implications of global climate policy trends including the removal of fossil fuel subsidies and expansion of carbon pricing mechanisms to ensure a planned transition to new business models where needed.
The Glasgow Climate Pact
After two weeks of intense negotiations, world leaders agreed to the Glasgow Climate Pact, which keeps 1.5OC in sight, but will only be delivered with immediate and significant global action. The Paris Rulebook was also completed after six years of discussions, which agrees on a transparency process to hold countries to account as they deliver on their targets and to rules on global carbon markets. Although further action is needed to reach international climate goals, reaching a final agreement on these rules between the 197 parties is a significant step forward.
Whilst not part of the formal COP negotiations, this year’s summit had a significant business presence, with senior executives and high-level representatives from organisations and NGOs across the world in attendance to support private and cross-sector initiatives for net-zero. NEDs should check whether the boards on which they sit are aware of these initiatives and, where possible, encourage their companies to get involved.
Climate law & governance
Mandatory requirements and enforcement mechanisms are becoming more common in national and international climate policy. COP26 finalised some technical requirements in the ‘Paris Rulebook’ related to transparency and reporting requirements for nations, and for carbon market mechanisms in Article 6 mentioned above.
Trade law and climate change
Trade law is another area where climate change is coming into focus. The EU’s Carbon Border Adjustment Mechanism (CBAM), introduced in July 2021, aims to price carbon emissions from goods entering the EU. As the impacts of CBAM start to take shape, it is likely to influence the introduction of similar carbon pricing mechanisms in other countries and regions. See the Cambridge Institute of Sustainability Leadership’s working paper on CBAM and its implication for business and trade. Trade rules may also play a facilitative role to climate-friendly solutions, for example those that remove barriers to the flow of green technologies.
Climate litigation is an increasingly viable option for individuals and groups seeking to compel governments and businesses to reduce emissions or prepare for climate risks. This year, a ruling from Germany’s Constitutional Court ordered the government to take more urgent measures to reduce emissions in line with the Paris Agreement goals. In the Netherlands, a court held that Royal Dutch Shell must reduce its global emissions by 45%. Climate litigation is a growing risk to governments and businesses in the UK, evidenced by recent cases brought against the Oil & Gas Authority and against the Universities Superannuation Scheme.
The expanding global and local trends in climate law and regulation highlight the importance for dedicated resource and knowledge within businesses to address climate-related law and policy issues. Understanding the impact of climate-related legal and policy developments and how a business must adjust to meet these changes will be vital to business success.
International Sustainability Standards Board
During the first week of COP26, the International Financial Reporting Standards Foundation announced the launch of the International Sustainability Standards Board (ISSB), which will set global standards for sustainability disclosure. Although the exact details have not been finalised, the standards will align with the Task Force for Climate Related Financial Disclosure (TCFD) and will impact markets globally.
Disclosure is a key aspect of UK domestic climate policy. From April 2022, premium listed UK companies will be subject to mandatory TCFD-aligned disclosure requirements. The UK was the first country to announce such a policy, and its Green Finance Roadmap outlines planned expansions of these requirements. Investors are also affected by these changes, such as through the UK’s Pensions Schemes Act 2021 which lays the groundwork for mandatory TCFD-aligned reporting for large pension funds – read our Pensions Act briefing for further information. The UK Government also aims to create a sustainable investment product labelling regime to help guide investor confidence.
UK climate policy
In addition to international pledges made in Glasgow, the weeks leading up to COP saw the UK explain its domestic plans to reach net zero. The Government’s Net Zero Strategy was met with a mostly positive response, though some questions remain about whether the Government’s proposed policies are sufficient to meet its ambitious goals.
Shortly after the Net Zero Strategy was published, the UK Treasury announced its spending plans in the Autumn budget, which included an additional £4 billion in spending on green projects. The Treasury also published its Net Zero Review, which set out the costs and benefits of the net zero transition. Notably, the Treasury emphasised that the government may need to cut spending or raise taxes due to diminishing tax revenue from the fossil fuel industry, a loss which will not be recovered from future carbon pricing initiatives.
Header and inset images supplied from the official flickr account for COP26.