A New Era for the ESG World: COP26 Finalizes Paris Agreement

Around 20,000 people from 196 countries gathered in Glasgow in November for the United Nations COP26 climate summit. At the summit, countries reported how far they have come in the fight against the climate crisis and discussed the action plan to keep global warming below 1.5 degrees Celsius. During the discussions, it was stated that many countries have fallen behind their commitments to tackle the climate crisis, while it was determined that the climate commitments of six countries, including Turkey, were “critically inadequate”.

What is COP26?

Conference of the Parties (COP) is the annual United Nations Climate Change Conference, which was held for the 26th time this year. “The Parties” are the 197 signatories (196 countries and the EU) of the United Nations Framework Convention on Climate Change (UNFCCC), which was agreed in 1994. Thanks to the UNFCCC, developed and developing countries have formalized their commitment to jointly fight against the climate crisis. The COP summits, held since 1994, bring together the signatories to create a platform to discuss combatting climate change.

Why Is It Important?

The United Nations Climate Change Conferences are among the largest international meetings in the world, as they include representatives from all over the world as well as civil society and global news media. In fact, the number of delegates linked to the fossil fuel industry at the COP26 climate change summit in Glasgow exceeded the number of representatives from each country, according to an analysis shared with the BBC. The representatives attend meetings to clarify their positions and interests in order to reach agreement on climate change issues or to overcome stalemates in negotiations.

What Topics Were on the Agenda?

COP21, which took place in Paris in 2015, was the first summit where all countries formally agreed to limit global warming to 1.5-2 degrees Celsius with the acceptance of the Paris Agreement. COP26 was defined by experts as the first summit where the Paris Agreement will be tested. However, scientific studies indicate that the national commitments made so far fall short of this target. The objectives that were agreed at COP21 were:

• Reducing greenhouse gases,

• Accelerating renewable energy production,

• Holding the increase in global warming to "well below" 2°C and limiting it to 1.5°C, if possible,

• Providing financial aid to poor countries to combat the effects of climate change.

While the COP26 Climate Summit was underway, BBC environmental reporter Matt McGrath said "The document may be just seven pages long but it attempts to steer COP26 towards a series of significant steps that will prevent global temperature rises going above 1.5C this century. Perhaps the most important part of that is getting countries to improve their carbon cutting plans. To that end this draft decision urges parties to ‘revisit and strengthen the 2030 targets in their nationally-determined contributions, as necessary to align with the Paris Agreement temperature goal by the end of 2022’. It will be interesting to see how countries such as China, India, Brazil, and Saudi Arabia respond to this request to put new plans on the table by the end of next year.

“There is some comfort for developing countries to see that their financial needs are recognised as countries are asked to mobilise climate finance ‘beyond $100bn a year’ and the draft welcomes steps to put in place a much larger, though as yet unspecified, figure for support from 2025. Loss and damage, an issue of key importance to the developing world, is included in the draft with encouragement to richer countries to scale up their action and support including finance for poorer nations.

“The document also calls on countries to accelerate the phase out of coal and subsidies for fossil fuels - but has no firm dates or targets on this issue.”  On the other hand, Jennifer Morgan of Greenpeace International said, "The draft is not a plan to solve the climate crisis, it’s an agreement that we’ll all cross our fingers and hope for the best."

Matters Agreed Upon at COP26 and Future Projections

COP26 ended with global agreement to accelerate action on climate this decade following two weeks of intense negotiations that finally completed the Paris Rulebook. For the first time COP agrees a position on phasing down coal power. The Glasgow Climate Pact caps two years of raising ambition and diplomacy.

The agreed issues at COP26 are as follows, according to the official statement:

“COP26 has today concluded in Glasgow with nearly 200 countries agreeing the Glasgow Climate Pact to keep 1.5C alive and finalise the outstanding elements of the Paris Agreement. Climate negotiators ended two weeks of intense talks on Saturday with consensus on urgently accelerating climate action. The Glasgow Climate Pact, combined with increased ambition and action from countries, means that 1.5C remains in sight, but it will only be delivered with concerted and immediate global efforts. It is foreseen that the Glasgow Climate Pact will speed up the pace of climate action. All countries agreed to revisit and strengthen their current emissions targets to 2030, known as Nationally Determined Contributions (NDCs), in 2022. This will be combined with a yearly political roundtable to consider a global progress report and a Leaders summit in 2023.

“The Paris Rulebook, the guidelines for how the Paris Agreement is delivered, was also completed today after six years of discussions. This will allow for the full delivery of the landmark accord, after agreement on a transparency process which will hold countries to account as they deliver on their targets. This includes Article 6, which establishes a robust framework for countries to exchange carbon credits through the UNFCCC. And for the first time, heeding calls from civil society and countries most vulnerable to climate impacts, the COP agreed action on phasing down fossil fuels. COP decisions went further than ever before in recognizing and addressing loss and damage from the existing impacts of climate change. There were also commitments to significantly increase financial support through the Adaptation Fund as developed countries were urged to double their support to developing countries by 2025.

“The final COP26 text follows two years of intense diplomacy and campaigning undertaken by the UK Presidency to raise ambition and secure action from almost 200 countries. Work focussed on driving short term reduction of emissions to limit temperature rises to 1.5C, mobilising both public and private finance, and supporting communities to adapt to climate impacts. When the UK took on the COP26 mantle, in partnership with Italy, nearly two years ago, only 30% of the world was covered by net zero targets. This figure is now at around 90%. Over the same period, 154 Parties have submitted new national targets, representing 80% of global emissions. The UK Presidency has also been focused on driving action to deliver emissions reductions. We have seen a huge shift in coal, with many more countries committing to phase out unabated coal power and ending international coal financing. Alongside this, we have seen a marked commitment to protect precious natural habitats, with 90% of the world’s forests covered by a pledge from 130 countries to end deforestation by 2030.

“While on the world’s roads, the transition to zero emissions vehicles is gathering pace, with some of the largest car manufacturers working together to make all new car sales zero emission by 2040 and by 2035 in leading markets. Countries and cities are following suit with ambitious petrol and diesel car phase-out dates. Current policies would leave us on a path to a devastating temperature rise. But work done by independent experts Climate Action Tracker show that with the full implementation of the fresh collective commitments could hold temperature rise to 1.8C. Even with the action committed both during and before COP26, communities around the world will continue to feel the impact of our changing planet.”

How Will COP26 Affect the Business World?

Whether the outcomes of COP26 are successful or not directly depends on how well governments and the private sector cooperate. Therefore, states and governments will directly affect the private sector with new green investment areas, green projects, and a series of regulations to realize the transformation to which they are committed. For instance, according to the Grantham Research Institute on Climate Change and the Environment there have been 2,110 environmental laws passed globally since 1947, with 2,037 of these laws passed since the inaugural COP took place in 1995[1]. The outcomes of COP26 provide important insights into future regulation for the private sector to work in coordination and cooperation with governments. Eliminating the compliance risks of these regulations provides companies with opportunities to reduce fuel costs, prevent energy poverty, increase economic growth and welfare, and contribute to the emission targets of countries etc., while protecting their business.

At the same time, since the impact of global actions such as COP26 on the public is substantial, it is likely that consumers' understanding and behavior will change accordingly. At this point, companies also have the opportunity to create value and increase revenues by responding to sustainable consumption trends. While some companies are already using the carbon footprint label to show their consumers that their products are reducing their environmental impact, this trend is likely to accelerate and become a permanent marketing strategy.

It can be said that while government policies and new regulations will affect the private sector, it can also exert influence and direct new regulations. The rate of this interaction is also likely to increase after COP26 as for some time it has been thought that investors have been competing to invest in green assets, believing they will provide great returns in the long run. In fact, the "Capital Markets Board Green Debt Instruments and Green Lease Certificate Guidelines" document that was recently published by the Turkish Capital Markets Board was officially translated into English and published in a short space of time – showing a clear intention to disclose it for international public opinion.

As one of the summit's goals is to help private finance support the entire economy's transition to net zero, COP26 will obviously accelerate the green finance market considerably. It is expected that capital will flow into increasingly green companies and countries, putting extractive and polluting business models at high risk. Also, increased focus on “greenwashing” will promote standardization by providing clarity on what “green projects” or “green finance” are. The assessment of a carbon border tax to mitigate the unintended consequences of the EU's emissions trading system is an example of this awareness in action. Also, the Bloomberg New Energy Foundation calculates that between $78 trillion and $130 trillion in new investment is needed by 2050 in areas such as electricity generation and hydrogen production to help the world meet its environmental goals[2].

Along the same lines, the combination of emerging technology, increased regulatory risks for high-emission assets, lower cost of capital for green investments, and rising carbon emissions prices will create new opportunities for businesses. These opportunities can include the creation of new products and services or even entirely new business models. In particular, the rising price of carbon creates significant opportunities for businesses that can develop products and solutions that generate carbon credits – for example, filters that directly remove carbon dioxide from the atmosphere, or seaweed farming that captures and traps carbon, will be valued as new areas.

Finally, it is noteworthy that COP26 could even have a significant impact on companies’ human resources. “Research undertaken in 2019 found 73% of workers wanted their employer to improve its sustainability policy. 24% said they would refuse a job at an organisation with a poor sustainability record. Younger generations tend to be particularly concerned by the climate crisis. For example, Gallup research found that 70% of Americans aged 18 to 34 worry about global warming, compared with 56% aged 55 and older.”[3] Therefore, companies that participate in COP26, take part in public debates, and demonstrate that their environmental and social responsibility intentions are sincere with their behaviour and policies will ensure that dynamic young talents are attracted to and retained, making them more competitive in their sectors.

On the other hand, as a natural consequence of this close cooperation between governments and private companies, a government’s failure to take the environmental steps highly anticipated by the international community may put companies in their country in a difficult situation by carrying compliance risk. This is one of the biggest risks of Turkey being declared "critically inadequate" at COP26. The loss of the minimum harmony necessary for the ordinary course of business life will create a very disadvantageous situation for companies in Turkey or those who are considering making an ESG investment in Turkey. For this reason, it is vital for both the business ecosystem and the natural ecosystem that the Turkish business world and potential investors create and share their environmental social responsibilities in a transparent way. They must encourage each other in this field, and foster strong public opinion about their approach, which also finds its way to consumers and other stakeholders. In this way, it can be ensured that governmental bodies are invited to cooperate in the formation of comprehensive, functional, and uniform regulations the groundwork for which has already been laid by the Paris Agreement.

Conclusion

The Paris Agreement was a good start, but it has not been fast enough. Therefore, the decisions taken at COP26 were urgent interventions to deal with the climate crisis. Although there are criticisms that these interventions will not be sufficient or sincere, it is certain that they will create radical changes in the business world and consumer culture. In order to make life sustainable, we are at a point where it is necessary to support and get ready for a transformation at the corporate, governmental, and even intergovernmental level, as well as individual green transformational steps.