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COP26: Progress but Work Remains to Be Done

ESG

By Lee Souter, CFA, FRM  |  November 23, 2021

Over the past 10 years, environmental, social, and governance (ESG) investing has moved from a specialized pursuit into a mainstream activity. The relationship between ESG and investment management goes back over three decades and can be traced through the development of voluntary, cross-sectoral, non-governmental ESG-related reporting initiatives that started with the Global Reporting Initiative (GRI) standards, first published in 1997, which have since been followed by numerous competing models such as the Sustainable Accounting Standards Board’s standards and the Climate Disclosure Standards Board framework.

In the two-weeks from October 31 through November 13, 2021, over 25,000 delegates from nearly 200 countries, including 120 heads of state, business leaders, activists, and non-governmental organizations, met in Glasgow, Scotland, at the 26th Conference of the Parties to the UN Framework Convention on Climate Change, better known as COP26.

While the summit failed to achieve all its stated goals, it did conclude with an agreement that will define the global agenda on climate change for the next decade.

Major Achievements

Following closely on the heels of the release of the Sixth Assessment Report of the Intergovernmental Panel on Climate Change that UN Secretary-General António Guterres referred to as “a code red for humanity,” the importance of COP26 could not be made clearer.

Broadly, COP26 continued to build on the landmark 2015 Paris Agreement, culminating in the Glasgow Climate Pact, which included several key points:

  • Revisiting emissions reduction plans at COP27 in Cairo in 2022 with a focus on the 1.5 degree C Paris Agreement target
  • Recognition of coal as a driver of climate change with a goal to phase down its use
  • Increased commitment to provide climate financing for developing countries

In addition to the final overall statement, several additional pledges were made by governments and multilateral coalitions including:

  • 130 countries committed to halting or reversing deforestation by 2030; this group represents nearly 90% of the world’s forests
  • 20 countries committed to phasing out the use of coal and 25 countries committed to ending the public financing of unabated fossil fuel projects abroad
  • More than 100 countries committed to reducing methane emissions by 30% by 2030
  • Additional pledges committed to the protection of biodiversity, increased commitment to the Global Ocean Alliance, and an increased shift to sustainable farming
  • Several key individual governments making or accelerating net zero pledges, including India, Brazil, and Nigeria

In support of these goals, several investor-led announcements were also made:

Across several sectors, additional pledges were made across industries as diverse as shipping, automotive, health care, fashion, aviation, chemicals, and materials.

Coal Compromise

Despite all the positive movement in the commitments made, the notable absences of China and Russia left any global commitment short of the full backing required for true climate action as they are the first and fourth-largest greenhouse gas emitters. Furthermore, countries such as India who rely heavily on coal for energy were not part of the coal pledge and negotiated the final statement down from “phasing coal out” to “phasing coal down,” leaving open the option for countries to continue using coal.

Conclusion

While many commitments were made and many headlines written, the closing statement from Secretary-General Guterres highlighted the gap between what was done and what remains to be done. He reaffirmed the need to end fossil fuel subsidies, phase out coal, put a price on carbon, protect vulnerable communities, and deliver the $100 billion climate finance commitment.

But Guterres concluded his comments on a positive note. The Secretary-General appealed directly to the youth, activists, indigenous communities, women leaders, and all those leading the charge on climate change. He acknowledged their disappointment with the failure of COP26 to achieve all of the summit’s goals, but stressed that “the path of progress is not always a straight line.”

The commitment of the global financial industry to focus on mitigating climate change will undoubtedly continue to evolve and accelerate further shifts in the already rapidly evolving ESG regulatory landscape.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

ESG Investing Solutions

Lee Souter, CFA, FRM

VP, Director of ESG Strategy

Mr. Lee Souter is VP, Director of ESG Strategy at FactSet. In this role, he helps develop FactSet's overall ESG content strategy, working closely with product strategy teams across the enterprise to meet the evolving and complex client demand for industry-leading ESG solutions. Prior, Mr. Souter was an Analytics Specialist, focusing on providing content, analytics, and attribution solutions to clients across equities, fixed income, and multi-asset class strategies. He earned a B.S. in Mathematics from the University of Vermont and an M.S. in Actuarial Science and Mathematical Finance from Boston University. He is a CFA charterholder and Certified Financial Risk Manager.

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