The year that missed a beat

Hopes and dreams partially shattered

Over the last 2 weeks, our investment team has shared their views on what was at stake, what we thought was achievable, and what we hoped would be achieved. Surely, our readers must have felt growing frustration with the Glasgow show where self-appointed saviours of the world and their useless hangers on kept talking without achieving anything valuable. The more than 400 private jets and the constant partying inspired the ‘Glasgow is the new Davos’ article. Over the last 2 days, the youngest member of our team, who was in Glasgow, reported on the hopes and frustration of those people who will live with a world at ‘2 degrees plus’. 

Fundamentally, we never believed that 1.5 degrees would be set in stone in a way that would give no way back to the main countries in the world. Yet we hoped that below 2 degrees would become a firmly committed 1.5 degree objective with proper mechanisms, including a worldwide carbon price. Paris COP21 defined the framework and the broad objective to stay below 2 degrees and Glasgow was supposed to provide the road map. We are nowhere near this today.  It became clear in the last few days that no major breakthrough was in preparation as all major politicians, including the British PM who nominally hosted the conference, deserted Glasgow.

So success or failure? Probably the latter

Before answering, let’s bear in mind that many hopes expressed were unrealistic, and compromise defines this process. Yet, the situation is so serious that a dose of daydreaming is necessary. 

In the flurry of communication over the last few days, it is worth reading the report published by the Climate Action Tracker on 10th November to take stock of what we are talking about when we mention temperature targets. 

In 2015, ahead of the Paris Agreement, the CAT estimated current policies would lead to warming of 3.6°C, and the submitted targets (NDCs) would lead to 2.7˚C. Six years later, the warming from current policies has now come down to 2.7°C. If governments were to achieve all their submitted NDC pledges and long-term targets, temperature increase could be limited to 2.1°C. Adding all the net zero targets announced and discussed at Glasgow, this would even lead to 1.8°C.

Put in even simpler terms, to achieve a 1.5°C increase, we need to cut emissions worldwide by half this decade and be at net zero by 2050. The current carbon budget is now less than 10  years in the current trend.

Politicians and delegates will of course spend the next few days trying to convince us that the conference is a qualified success. They already won a free trip to COP27 in Egypt next year as a reward for (partially) failing. Some vague wording ‘encouraging the parties to do more’ is a guarantee of a great suntan next year!

Why finance and science will help more than governments

Despite feeling a bit deflated today, we remain resolutely optimistic for 3 reasons:

• Despite our dislike of greenwashing by financial institutions, we believe that investors will be key to the decarbonisation of the economy. We saw their financial commitments scaled up in a way that made governments look bad. By forcing asset managers and pension providers to redirect their savings towards increasingly ‘clean’ products, investors will not only debunk hypocrites but will force governments to act more forcefully by showing them where business is headed. On this front, Mark Carney led GFANZ members to make some impressive promises, committing $130 trillion in private finance to tackle climate change between now and 2050. True, the proof will be in the pudding and we will judge investment companies based on what they do not what they promise. Governments must help by de-risking investments in developing countries and hard-to-abate industries in order to ensure this private investment is distributed appropriately. 
• Science is on our side. New technologies are emerging that are designed with ‘zero carbon’ in mind and old tech improves quickly, as we wrote this week.  What’s more, ‘Big data’ is making it possible to analyse emissions and various environmental impacts and revive accountability for governments and industry. Incoming standards board the ISSB is eagerly expected to help raise consistency in financial and company disclosure. Soon, independent research will be in a position to check on official claims and enable individuals to not only change their behaviour but also make governments and companies more accountable. Our investment team is already able to calculate precisely the ‘temperature’ of our portfolios¹. And when we publish a figure (soon hopefully), we want to be sure it’s based on science and can be monitored over time. We believe in science and building a more comprehensive climate data ecosystem. 

• We believe that we are most probably moving towards a form of world carbon price, which is key to accelerating clean energy adoption. Companies that have already embraced an internal carbon price will race ahead of their competitors, making the right decisions while those resisting change will gradually fail and disappear.

The Glasgow Climate Pact

What was decided

Despite its shortcomings, the Glasgow climate pact* does include provisions which have never been agreed to on such an international scale. One such agreement was the understanding that countries across the globe must do more to prevent planetary warming from exceeding 1.5 degrees above pre-industrial temperatures. To do this, the pact asks governments to strengthen emission targets by the end of next year, rather than every five years, as previously required under the Paris Climate Accords.

For the first time ever, the agreement also mentions the role fossil fuel plays in the climate crisis, calling for “accelerating efforts towards the phase-down of unabated coal power and inefficient fossil fuel subsidies”.  Many wanted phasing out of coal use as the language used, while a lack of clarity on what “unabated” and “inefficient” actually mean is disquieting. The methane pledge we discussed here was also toned down in the final document, which now ‘invites parties to consider’ further actions to reduce by 2030 non-carbon dioxide greenhouse gas emissions, including methane. 

On the climate justice front, there was also some important language in the pact. For the first time, the pact made mention of “loss and damage” countries face as a section header in the agreement. This refers to the cost that poorer nations are already facing from the consequences of climate change. The pact “urges developed country Parties to at least double their collective provision of climate finance for adaptation to developing country Parties from 2019 levels by 2025”. 

The Santiago network, which was established in Chile at COP25, will be set to work helping developing countries access knowledge related to averting, minimising and addressing loss and damage. It’s not the financial instrument that developing countries asked for, but for the nations that have contributed least to the climate crisis, this is a welcome gesture. As we mentioned in a previous blog, there is a history of broken climate financing promises from developed nations. Let’s hope the promise is kept this time.

There was also the inclusion of rules for global carbon markets. This new rulebook, which has been negotiated ever since the Paris Climate accords, closes various loopholes that existed in this market previously, such as double counted credits. Importantly, credits issued before 2013 will not be carried forward in the new market, putting the focus squarely on future emission reductions. 

Concerns remain about poorer quality credits issued between 2013 and 2020, flooding the market and depressing prices. Unfortunately, there is still no hint of a global carbon pricing mechanism that would over time create a level playing field on the cost of decarbonising industrial processes. While it’s not clear what the right carbon price will be, this outcome is not even close to the $100 per ton that has been advised by experts. 

While most governments will likely paint this as an overwhelming success (the British PM claimed on Sunday night that ‘the agreement is the death knell of coal’), it’s clear there’s significant room to improve. The UK presidency doesn’t end here, so here are the key missing elements they’ll be thinking about over the next year: 

• A phase out of all coal generation, supported by finance for India and other developing countries to achieve this. 
• A plan for phasing out all subsidies for fossil fuels, not just inefficient ones. 
• More clarity on the carbon market, and a commitment to using the proceeds to fund adaptation in developing countries. 
• Appropriate loss and damage finance.
• A global carbon pricing mechanism
• Strict rules outlining the treatment of carbon offsets, and a clear message that offsets cannot replace emissions cuts. 
• More ambitious targets on cars, which didn’t quite hit the spot as Germany and China, as well as Toyota and Volkswagen failed to sign up to this pledge. 
• Stronger and accountable targets on methane – an easy win for climate that should be capitalised on. 
• New and strengthened NDCs being presented in 2022 (not 2025), and the establishment of a body to track new NDCs annually. 

“It’s meek, it’s weak and the 1.5C goal is only just alive, but a signal has been sent that the era of coal is ending. And that matters,” said Greenpeace International’s executive director, Jennifer Morgan. 

The key in moving on from COP26 is that we appreciate what it has achieved and what it hasn’t. No, we’re not on track for a 1.5°C world. No, it has not satisfied developing countries on finance and adaptation. Yes, it is too weak on fossil fuels. But it has upped the game. We just need to make sure that the level of ambition, action and accountability continue to accelerate, rather than stall, as we head home to continue working on our mission at Clim8. 

*Coverage of the Pact is linked from the Washington Post, as we wait for the most updated Pact to be made publicly available. 

Thank you for reading our ‘Glasgow blog’ in the last few days.. We tried to express our views with a bit of passion but based on science and what we honestly believe has to be done to stay as close as possible to a 1.5 degree rise. 

Clim8Invest Investment team 

¹Temperature alignment for the equity portion of our portfolios