The 2021 United Nations Climate Change Conference, also known as COP26, ended last week to mixed reaction from delegates and climate activists. In the first of a three-part series on COP26 outcomes, Victor Wong, Head of UOBAM’s Sustainability Office, gives his assessment of the progress made and gaps still in place.
What were the significant developments arising out of COP26?
Asia is one of the world’s most at-risk regions when it comes to climate shocks. So it was heartening to see Asian countries stepping up their commitments to mitigate climate risks. Within ASEAN, we saw Thailand affirming their 2065 net zero target and suggesting that, if financially supported by the international community, this was achievable by 2050. They also revised up their mid-term 2030 target to 40 per cent from 20-25 per cent previously. Vietnam followed suit by announcing their 2050 net zero targets, with intentions to phase out coal-fuelled power generation by 2040.
Closer to home, Singapore’s Minister for Sustainability and Environment Grace Fu announced the country’s intention to review its existing climate targets. This was welcomed by many critics who felt that previous targets were critically insufficient. Furthermore, an agreement on the rulebooks for global carbon credit market was finally reached, after six years of deadlock.
What were the biggest surprises?
US and China sprung an unexpected climate change pact at the summit. Both major greenhouse gas emitters agreed to boost climate cooperation and also jointly announced their aims to raise their climate ambition in the 2020s. There was joint recognition on the need to curb methane emissions, combat deforestation, and boost clean energy. While no concrete plans were laid out, these announcements provide the potential for meaningful changes and closer regulatory alignment across these two global powerhouses.
What was achieved in relation to Asia Pacific countries?
APAC nations made large commitments to fight climate change by reducing methane emissions, and deforestation. The global methane pledge saw more than 100 nations, representing half of global methane emissions, signing on to slash global methane emissions by 30 per cent (from 2020 levels) by 2030. In addition, the deforestation pledge saw 141 nations, covering 91 per cent of the world’s forest, signing on to halt and reverse forest loss and land degradation by 2030.
For the coal pledge, we saw more than 40 nations alongside non-country organisations signing on to phase out coal-fired power generation. This is aimed to be done by 2030 for developed nations and 2040 for emerging countries. However, we also observed the softening of wording in relation to coal use; from “phasing out” to “phasing down”. While it may seem like quibbling over semantics, the change spells a weakening of the commitment surrounding the use of coal.
How will these developments impact sustainable investing?
With more Asian countries committing to net-zero carbon emissions, we expect several major shifts. Firstly, we expect state-level climate plans and policies to accelerate. We will see greater regulatory pressure but also market incentives, subsidies, carbon taxes, and the implementation of carbon markets to internalise costs of emissions.
Secondly, we will see business models transitioning to incorporate more sustainability factors. Carbon-intensive sectors such as energy, utilities, and mining will be transformed, but we also expect broader parts of the economy to be involved. This includes energy efficient products, infrastructure, renewables, transportation, food systems, carbon storage and hydrogen technology.
Thirdly, companies will aim for better management of operational and reputational risks stemming from climate change. There will also be greater shareholder and consumer demand for businesses to make the transition to greener practices, especially given the increasing trend of green premiums and brown discounts.
What is the outlook for Green Financing?
To achieve global sustainability targets, accelerated growth is required in the sustainable finance market. Last year, green bond issuance hit a record high. This year, the figure is projected to almost double to US$400 to US$450 billion. As more capital is provided to companies that seek to make change and to create a positive impact, we can expect increasing focus on, and interest in, sustainability-linked bonds.
On the back of such developments, regulators will likely put together more robust frameworks and systems to ensure the reliability of the green finance market. At COP26, we observed the creation of the International Sustainability Standards Board to harmonised ESG reporting standards. Regulators in Asia have also begun putting in place sustainability disclosures frameworks for both companies and investors. Over time, investors can expect greater transparency and have greater confidence in sustainability disclosures.
What were the missed opportunities?
The COP26 Summit has had many positives and was a step forward. However, current pledges are still insufficient to keep warming to 1.5°C. The Climate Action Tracker puts current pledges on a 2.4°C warming trajectory. Also, climate financing between developed and developing countries that was agreed six years ago remains in the crosshairs. The promised US$100 billion for climate finance per year for developing countries is delayed to 2025. Furthermore, double counting and greenwashing concerns on the rulebook of the global carbon market remain.
Nevertheless, assuming that the pledges made are paired with substantive plans for implementation and enforcement, we think there is reason to be optimistic. We look forward to the more ambitious pledges that will shape COP27 to be held in 2022 in Egypt.
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