Increasingly frequent extreme weather events and a global pandemic formed the backdrop for the delayed COP26 climate summit. Hopes were high that ambitious agreements to turn the tide on the climate crisis and limit warming to below 1.5°C would be reached. Yet, despite the progress in Glasgow, significant challenges remain – and companies could face an increasingly unpredictable regulatory and stakeholder landscape, as well as intensified investor pressures in the short to medium term. This article explores some of the implications of COP26 for companies, and how they might adapt and build resilience.
Written by Heather Daniel (Associate), with input and oversight from Richard Folland (Critical Resource Senior Advisor)
Expectations were high as negotiators from around the world descended on Glasgow for the most important UN climate summit since 2015 (COP21, in Paris). With global average temperatures already at 1.1°C above pre-industrial levels, there is a growing recognition that the window to limit warming to 1.5°C – and avoid the most dangerous impacts of climate change – is closing. Against this backdrop, many viewed COP26 as a ‘make or break’ summit. Yet, despite the high stakes, few were optimistic that world leaders would reach consensus on an ambitious enough agreement to tackle the unfolding crisis.
Ultimately, COP26 was neither the flop that some had expected (especially given the state of the US-China relationship), nor the success that was needed. For example, emissions pledges continue to lag behind the scientific consensus, with Climate Action Tracker calculating that even if current targets are met, warming would still reach 2.4°C by 2100. More positively, governments committed to resubmit their climate pledges next year at COP27, providing some encouragement that climate policy ambitions will be increased in the near future. Meanwhile, although the summit saw the announcement of new climate finance pledges to support developing countries, many in the Global South will continue to be frustrated with what they view as a lack of responsibility and support from the developed world. Although significant gaps remain, it is clear that the mood and appetite for action has changed. Many now acknowledge the need for urgent action already this decade (as opposed to vague long-term pledges) and governments are starting to move in the right direction, albeit not yet at the right pace.
For companies, the implications of COP26 are still materialising. Uncertainty regarding the timeline, speed and unpredictability of future policy developments presents a significant risk for companies, creating challenges for those looking to plan ahead. Amid this uncertainty, this article explores three developments from COP26 that reflect how the attitudes of key stakeholder groups – namely regulators, investors and civil society – are evolving, and the implications these developments will have for companies.
Governments are starting to question the future of fossil fuels
The focus on fossil fuels at COP26 marked a significant departure from previous climate summits. Despite last minute changes to the language around coal and fossil fuel subsidies in the final agreement, COP26 sent a clear signal that fossil fuels can no longer fly under the radar of global climate action. This marks a significant step forward from the Paris Agreement, which makes no reference to fossil fuels at all. While specific language around the future of oil and gas was lacking in the official text, outside the formal negotiations, the launch of the Beyond Oil and Gas Alliance (BOGA) received a lot of attention as the first diplomatic initiative led by countries concerned with exiting oil and gas production. While no major producers have yet signed up to the initiative, pressure is likely to intensify on the major OECD producers – including the US, UK, Norway and Canada – to participate and to take tangible steps to shift away from fossil fuel production.
In light of these signals, there is a growing risk that companies could fall victim to sudden regulatory changes aimed at the phasing out of fossil fuels, or encounter challenges in securing access to cost-competitive capital. Linked to this, some argue that the recent surge in gas prices has exposed the volatility of energy markets, underscored the level of disruption that can occur when stakeholders are not aligned, and strengthened the case for a rapid transition to renewables. However, the policy response is far from certain. Some governments, driven by short-term electoral politics, will undoubtedly continue to prioritise driving down the cost of gas over increasing investments in renewables, for instance by turning to cheaper sources of gas further afield to alleviate short-term crunches. Yet COP26 showed that pressure on governments to transition will not abate. With fuel prices expected to rise further in 2022, many will encounter increased demands to explain their logic behind continued investment in fossil fuels and related infrastructure.
Adopting coherent and robust climate strategies which account for the possibility of sudden regulatory upheavals will therefore be critical for companies in terms of mitigating risks. This should involve regular monitoring of the evolving policy landscape and undertaking rigorous scenario analysis exercises that explore the potential regulatory outcomes and their associated implications for the business. Although the risks for mining companies – compared with oil, gas and coal businesses – may be less direct, it will nonetheless be important for them to also develop clear decarbonisation scenarios that take into account the possibility of sudden and disorderly regulatory changes, including in relation to the availability and price of fossil fuels.
Standardising sustainability disclosures will continue to be an investor priority
With navigating the ‘alphabet soup’ of ESG reporting and performance standards being a well-known challenge for companies and their investors, greater clarity on the development of standardised sustainability disclosures was a priority for the finance and investment community at COP26. Glasgow therefore witnessed a significant development with the announcement of the establishing of the International Sustainability Standards Board (ISSB), which is to be tasked with creating consistent global standards for sustainability disclosures. The ISSB will aim to build upon the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), which has been highly successful in driving voluntary disclosures by business and investors and is providing the basis for mandatory climate-related disclosures in a number of jurisdictions, notably Europe and North America.
It will take time for the ISSB to develop its global standard, and it is difficult to say at this early stage whether the new standard will be supported by regulation aimed to ensure compliance. Nevertheless, the establishment of the board is a significant step forward in the quest for more cohesion and standardisation in sustainability disclosures and will serve to ramp up investor expectations on this agenda. Against this background, we anticipate investors demanding more of companies on disclosure and reporting about their plans and policies in respect of climate and the energy transition. Given that reporting standards are likely to become more stringent, widespread and ultimately mandatory, it is essential that companies take the opportunity to get ahead of the curve now. Aligning with the recommendations of the TCFD will be a smart way for companies to prepare for increased regulatory and investor demands for enhanced disclosures. However, in doing so, companies should be mindful that the TCFD is not simply designed around disclosure, but requires companies to carefully consider how climate-related risks and opportunities impact broader business strategy.
Civil society pressure will continue to intensify, increasing the risk of sudden policy shifts
Civil society stakeholders came out in record numbers at COP26, with observers noting that the presence in Glasgow was significantly larger than previous summits despite the ongoing pandemic. Protestors gathered outside the main venues every day, many inspired by Greta Thunberg’s calls for more action and less ‘blah blah blah’. Articulate youth activists like Greta made their voices heard on the media, as did indigenous groups alarmed by the impacts of climate change on their societies and neighbourhoods. While the large civil society presence seems to have had a limited impact on policymakers’ willingness to conclude a more ambitious agreement, these bottom-up pressures are multiplying. Civil society pressure was, for instance, a driving force behind the development and publication of the International Energy Agency’s (IEA) net-zero pathway report earlier this year.
This pressure is unlikely to abate in the aftermath of COP26. On the contrary, the continued need for more ambitious action to address the climate crisis will likely encourage further campaigns and demands on governments to set more ambitious targets, thus increasing the possibility of rapid shifts in policy. Companies in every sector may also find themselves on the receiving end of civil society campaigns, with groups demanding increased transparency around transition strategies. Those companies that are laggards on climate will increasingly be at risk, especially as civil society attention widens beyond the major polluters to focus also on smaller carbon-intensive companies that have so far failed to demonstrate sufficient action to tackle climate change. Activists are also ramping up pressure on banking and institutional investors.
Continued uncertainty on policy and delivery – for now
Despite these important developments, a significant degree of uncertainty remains – especially around the ability of governments to deliver on the commitments they made inside and outside of the UN process in Glasgow. Growing pressure to act, combined with a continued lack of political will and global co-ordination between governments could result in ‘knee-jerk reactions’ and increase the chances of a ‘disorderly transition’. The lack of clarity regarding government policy and delivery, and the accelerating speed of the transition, creates challenges for companies looking to plan ahead, while the potential for impulsive policy changes could impact companies’ ability to operate profitably.
Within this context, it will be critical for companies to prepare and to plan internally, so they are both better equipped to mitigate climate risks for their businesses and are better positioned to take advantage of opportunities arising from the transition. Moreover, the takeaways from COP26 indicate how stakeholder attitudes are evolving, and where companies are likely to encounter pressures in the future. While uncertainty will remain, one thing is clear – the future is changing for energy and mining companies, and companies must respond accordingly.