In this three-part series, we delve beyond the headlines and unpick what success could look like at COP26. In the first article we identified the big players whose decisions will most effectively move the needle. Second, we examined where each of those big players is right now, focused on their legislative agenda and recent commitments. In this third and final article of the series, we look at what companies need to know about COP26 as they evolve their ESG strategies.
With the dust settled on COP26 the hard work begins for companies to react to the latest developments and ensure that their ESG strategies are responsive.
Reactions are mixed as to how far COP26 was able to achieve its goals of (i) motivating governments to make increasingly ambitious NDCs, using the ratchet mechanism; (ii) progress some outstanding questions of the Paris agreement such as Article 6; and (iii) provide detail on how wealthy countries will deliver their 2009 pledge to finance $100bn annually of developing country climate mitigation investments. Specifically, the mid-century net-zero emissions targets and the interim 2030 goals were on everyone’s mind.
The Glasgow Pact did not meet all of these objectives, with climate finance at the $100bn level delayed until 2023, and current NDCs putting our likely global warming by the turn of the century at 1.8 to 2.4 degrees; not sufficient to meet the goal of “well below 2 degrees”. That said, there was real progress on Article 6 discussions, with greater clarity on how carbon markets will function internationally, and for the first time, an explicit call to “phase down” coal subsidies, albeit stopping short of “phasing out”. There was also significant engagement from the full range of stakeholders who will be critical to deliver these commitments in practice.
The role of business is greater than ever before
Specifically, more than ever before, COP26 welcomed and significantly developed the role of the private sector in delivering the Paris Agreement. Companies have a critical role to play not just in curbing their emissions, but by investing in the technology and innovation that will be necessary for us to meet our commitments. The WBCSD (World Business Council for Sustainable Development) used COP26 to launch the Business Manifesto for Climate Recovery, which “calls for a new Corporate Determined Contributions (CDCs) mechanism to measure the private sector’s contribution to the global climate recovery”. This would be a significant step to formalizing the role of business in achieving the Paris Agreement and its high-profile backing by several of the 200+ leading brands who are members of the WBCSD is notable.
Not having a net-zero commitment is no longer an option
A recent report from Accenture published shortly before COP26 found that already, almost one-third of the 1000+ largest listed European companies aim to reach net zero by 2050¹. And with the potential for governments to be asked to submit new NDCs annually (as opposed to once every five years) if they are perceived to be laggards, the attention on climate change strategies will only increase. This means that although companies are not yet legally bound to announce targets and cut their emissions, it will be increasingly hard for companies who do not to engage credibly in other global fora and networks.
The scrutiny of new-zero emissions is also likely to become more nuanced. Beyond net-zero commitments for scope 1 and 2 emissions, there will be increasing pressure for companies to align their value chains with net zero commitments, especially consumer goods sectors such as agriculture and apparel. Interim pledges, such as significant emissions cuts by 2025, will be necessary to differentiate the companies which are most likely to achieve their goals from those making commitments without robust plans.
Keep value-creation front of mind
For all of the focus COP26 has provided on Environmental factors, it is critical that companies do not lose sight of their own materiality assessments and the strategic commitments that stem from them. S and G factors have taken somewhat of a backseat in the media in recent months due to the attention COP26 has generated, but for some sectors delivering environmental outcomes is not the most materially significant factor of focus. For example, the latest SASB materiality map (below) reiterates that for financial sectors, the E factors are not likely to be material to their business, and whilst net-zero emissions targets are welcome and a virtue signal, focusing on business ethics and risk management is actually more material for companies in the financial services sector.
Overall, COP26 has been a positive, momentum-building event that has galvanised stakeholders from every corner of the globe. The attention that companies already feel on their ESG strategies and tactics will only increase in the years to come as events such as COPs focus the minds of clients, investors, employees and suppliers.
FOOTNOTES & LINKS
1 Reaching Net-Zero by 2050, Accenture Insights https://www.accenture.com/us-en/insights/consulting/reaching-net-zero-by-2050