The lesson from COP26: finance is now driving global change

by Liam Jones

It’s nearly two weeks since COP26 finished and the dust is settling.

It’s clear that the most important development from COP was the launch of the Glasgow Financial Alliance for Net-Zero (GFANZ), representing 450 organisations with some USD130 trillion of assets under management. 40% of global assets are now committed to the transition. For a sense of scale, global GDP last year was USD85 trillion.

GFANZ has an extensive workplan, with roadmaps and 7 workstreams. Above all it has a simple message: “we want to invest in the transition to a low-carbon economy”. And of course, the green bond markets’ continuing high rates of oversubscription are proof of that.

The COP26 inter-government negotiations also led to an agreement that “keeps 1.5°C alive” – albeit depending on countries honouring the Glasgow Climate Pact to strengthen their Nationally Determined Contributions (climate change plans) in 2022. A modest advance.

The inclusion of coal and methane in the Pact is an important milestone for transition, but many countries are frustrated both by the weakening of language on coal (from “phase out” to “phase down”) and by the lack of finance to enable their mitigation and adaptation measures.

The other big news of the year — major economies committing to necessarily ambitious 2030 targets at April’s Leaders’ Summit — served as an impetus for various COP26 announcements:

  • The US-China Joint Glasgow Declaration on Enhancing Climate Action in the 2020s was about cooperation on methane and CO2 reductions, regulation and standards; but above all, it was a clear message that the two largest economies are now working together on climate action. The question will be what’s next. We’d like a “green window” of trade, establishing preferential trade rules for sustainable products and services. We think appetite for such a trade agreement is strong.
  • The US and the EU announced an agreement to discourage trade in high-carbon steel and promote trade in low-carbon steel. In the context of proposed Carbon Border Adjustment Mechanisms this is incredibly important, and we believe a precursor to a wide range of “Green windows”.
  • The Russian Green Taxonomy, recently passed into regulation by the Duma (Russian parliament) includes the 100g CO2/kWh threshold for electricity generation from fossil gas, first suggested by the EU Technical Expert Group on sustainable finance and a cornerstone of the EU Taxonomy Delegated Act. The taxonomy recognises the importance of Paris alignment over fossil fuel interests. Russia’s taxonomy was designed to closely align with the EU and other global taxonomies, recognising the importance of cross-border compatibility. Russia has committed to being net-zero by 2060.

A few other outcomes:

  • The Net-Zero Asset Owners Alliance, part of the GFANZ and representing USD10trn of assets under management, has stated in an internal document that they don’t see fossil gas and nuclear as green investments and that they would oppose their inclusion in the EU Taxonomy. Following this, logic would suggest Germany, Luxembourg, Austria, Portugal and Denmark’s joint declaration that the EU Taxonomy should exclude nuclear to meet institutional investor requirements must be followed by a similar declaration on gas. Inclusion of fossil gas would ‘damage its integrity, credibility and therefore its usefulness’ far more than nuclear.
  • A South African Just Energy Transition Partnership was announced, with UK, US and EU providing USD8.5bn to accelerate coal phaseouts through a mix of grants, concessional loans, risk-sharing and investment. This is a blueprint for funding rapid decarbonisation in other emerging markets. 
  • ADB launched an Energy Transition Mechanism that will use blended finance to retire existing coal plants. A sort of “bad bank” for coal plants. Yes!
  • The ADB also launched the ASEAN Green Recovery Platform. This USD665m fund pledged by the UK, Italy, EU and GCF aims to mobilise USD7bn for low-carbon and climate-resilient infrastructure projects.
  • The declaration on financing the clean energy transition has gained key new signatories including France and Germany. This brings public finance committed to ending overseas fossil fuel financing by 2022 and funding the clean energy transition to USD22trn.
  • A Global Environment Facility event on nature-based solutions (NBS) saw calls for capital allocation to indigenous peoples to safeguard biodiversity resources. Dr. Jane Goodall called for 'a new relationship with the natural world’. WWF’s new Powering Nature Report sets out a framework for NBS, suggesting new financial mechanisms to mobilize private capital towards nature-positive practices.
  • At an S&P side-conference, PRI’s Sagarika Chatterjee called for the members of the GFANZ to set 2030 targets and actively align asset allocation with climate action, while Carbon Tracker’s Mark Campanale called for a ban on fossil fuel IPOs and bond issuance and substantive actions to prevent fossil fuel bonds lingering in passive indices.
  • At the same side-conference, the Bank of England’s Michael Sheren warned of the risks to balance sheets if the true cost of carbon is not priced into assets – prophesising whole balance sheet collapse without action on transition risk.
  • Climate Action Tracker has found that the side pledges on methane, deforestation, coal and transport would close the 2030 emissions gap by 9%. They calculate that all non-binding targets and announcements from COP26 put the world on track for 1.8 degrees warming.
  • The Network for Greening the Financial System, representing now 100 members, published a “Glasgow Declaration” committing to integrate climate risk into their supervision and monetary action, with 2/3 of members also making individual pledges.
  • The Bank of England published its approach to greening its corporate bond purchase scheme (CBPS). The new policy excludes bonds from firms that don’t meet UK carbon disclosure requirements and entirely excludes thermal coal bonds. This will result in a 25% reduction in the CBPS’s carbon intensity by 2025.

See also our blog on “12 brilliant news stories from COP26

The coup de gras

With European green sovereign issuance showing consistently tighter pricing than vanilla equivalents, Blackrock launching a sovereign ETF weighted by countries’ physical and transition climate risk, and institutional investors increasingly making their green capital requirements clear, finance may drive action faster than the UNFCCC.

Australia announced its net-zero targets just before COP26. Their long-term emissions reduction plan attributes this decision partly to concerns about potential penalties for their cost of capital. Their Treasury argues that without such a plan and consequential access to capital markets now focussing on green, their cost of borrowing would increase by 100 to 300 basis points. This is the first time a government has noted the risk of being penalised in bond markets if they do not go green. Green bond issuance has flushed out this differential.

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