COP26 and the investor dilemma

19 June 2021

Jeremy Lawson, chief economist and head of Aberdeen Standard Investments’ Research Institute, outlines his thoughts on policy expectations and why there is a need for urgent action ahead of COP26. 

The COP 26 meetings due to be held in Glasgow in November will be the most important in a generation. Without more ambitious targets and credible actions, global temperatures will not be held at 2 °C above pre-industrial levels, let alone 1.5 °C. Changes need to be made in Glasgow as progress towards the Paris goals has been insufficient.

The six key recommendations for restoring the credibility of the Paris Agreement are that:

  • Countries upgrade their emissions-reduction targets, so that the total envelope of global emissions is compatible with keeping temperatures at least 2 °C below pre-industrial levels.
  • As many advanced economies as possible commit to Net Zero 2040 targets. This will ease the burden on emerging economies and increase the possibility of the Paris objectives being met.
  • Governments back up their targets through binding legislation.This must include more onerous carbon pricing, joined-up policy across all levels of government, and greater spending on ‘zero carbon’ research and development.
  • The regressive effects of higher carbon prices are offset by funnelling revenue into progressive policy initiatives, including reform of tax-transfer systems.
  • Signatories treble the size of the Green Climate Fund (GCF) and accelerate the Sustainable Development Mechanism (SDM) to aid the just transition.
  • Signatories implement clear climate-disclosure frameworks and standards, in line with the Task-force on Climate-related Financial Disclosures.

The G7 and G20 members must signal their willingness to move in this direction and send a powerful message to the rest of the world that the largest economies and emitters are ready to act to limit future damaging climate change.

In the five years since the Paris Agreement, global greenhouse-gas emissions have continued to rise and may not peak until 2022, requiring even more drastic emissions cuts to meet the Paris objectives. Despite the ambitions of the Paris Agreement, the nationally determined contributions (NDCs) to support the temperature objectives fell at least 80% short. Current pledges leave the world on track for 2.4 degrees of warming – and all the damage of this outcome.

Lasting emissions reductions require widespread political buy-in, backed by clear legislation. That is why we developed the ASI Climate Policy Index for the major advanced economies. Our work highlights that most developed countries have made progress towards decarbonisation, but there are still no countries with fully credible Net Zero 2050 strategies. Sweden and Denmark currently lead by building climate initiatives into all policymaking.

The investor dilemma

This policy backdrop, in which global emissions reduction targets are insufficient and lacking credibility, matters enormously to the investment community.

A key objective of the Paris Agreement was to ensure that financial flows were compatible with the agreement’s temperature objectives. Subsequently, there has been a rush to encourage the players in the financial industry, and the companies in which they invest or lend to, to align their capital allocation decisions to the Paris goals.

If global policy is not aligned with those objectives, capital flows directed by the financial sector will not be either. This is a key reason why most investor and corporate net-zero commitments carry the caveat that they are conditional on government policies becoming aligned with the Paris Agreement’s goals.

Our recommendations are ambitious, but achievable, and the benefits are incalculable. The IEA demonstrated that a net-zero transition by 2050 could lift, not lower, economic activity. The economic costs of inaction, not to mention the social, health and environmental impacts, tip the balance even more towards much greater action now.

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