Climate control

At the conclusion of the COP26 conference in Glasgow, some progress had been made towards dealing with the damage caused by global warming, but where governments held back, business more readily accepted the need for action.

COP stands for conference of the parties under the 1992 United Nations Framework Convention on Climate Change. In August, the UN Intergovernmental Panel on Climate Change (IPCC) issued a report warning that global warming of 1.5°C and 2°C will be exceeded unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades. “Human- induced climate change is already affecting many weather and climate extremes in every region across the globe,” the report stated.

2030 targets

To meet the Paris Agreement goals to limit global warming, many countries agreed on non-binding national targets to cut emissions or — in the case of developing countries — to curb the growth of emissions in the near term (known as nationally determined contributions or NDCs) mostly by 2030. Even if those NDCs were met, they would still result in 3°C or more of global warming, so to prompt deeper cuts, the Paris conference built in a ratchet mechanism by which countries will have to return every five years with fresh commitments.

Rather than new 2030 targets, the Glasgow Climate Pact set a challenge for nations to come back next year with improved 2030 targets in line with the Paris goal of keeping warming well below 2°C and closer to 1.5°C. Jacki Johnson FAICD, co-chair of the Australian Sustainable Finance Initiative, notes a central reporting register has been established to allow for the five-yearly global stocktake. “This is a significant next step as it will agree on consistent definitions and measures, and improve transparency across all countries.”

Where Australia stands

In the lead-up to COP26, Prime Minister Scott Morrison said Australia would stick with its current 2030 target of reducing emissions by 26–28 per cent below 2005 levels. The government has committed to a target of net-zero carbon emissions by 2050. These targets are well below many other industrialised nations. The UK has pledged to cut emissions to 68 per cent below 1990 levels.

Even before the conference began, Australia had been widely criticised. “It would be really helpful to see Australia step forward with a more ambitious effort,” said Jonathan Pershing, the US President’s deputy special envoy for climate change, in August. “I would submit that Australia could be much more aggressive.”

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While 2030 targets garnered much of the media attention, a key development was the introduction of a central carbon trading mechanism. Carbon trading allows countries struggling to meet emissions reduction targets to purchase emissions reductions from other nations that have cut their emissions more than the amount they had pledged.

“It will now be possible for credits from emission reduction projects to be traded through a central UN mechanism. However, this will require significant work to finalise the detail. The real risk is if accounting standards are not put in place and practices are not consistent,” says Johnson.

Climate reporting standards

COP26 made significant progress towards developing standardised accounting treatments for carbon emissions and performance. International Financial Reporting Standards Board Foundation Trustee chair Erkki Liikanen announced the formation of the International Sustainability Standards Board (ISSB). The ISSB will develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs. The new board will represent the consolidation of the Climate Disclosure Standards Board and the Value Reporting Foundation.

Jane Diplock AO FAICD, a board member of the Value Reporting Foundation, describes the move as “the most remarkable change I’ve ever seen — the balance of financial and non-financial elements in a company’s business model has flipped. It used to be you’d have 80 per cent in your financial reporting and perhaps 20 per cent in your intangibles, including branding and sustainability. However, the tech giants and companies such as Tesla have business models that no longer look at the traditional business models of extraction.”

Three key points

Finance for poor countries — Pledges were made to increase support to developing countries to achieve net zero. The aim is to direct US$100b annually from developed to developing countries. This ambition was first set at the 2009 Copenhagen climate talks, when wealthy nations promised US$100b a year in climate finance to developing nations by 2020. That goal has not been met and is likely to again fall short in 2021 and 2022.

Coal — COP26 reached a last-minute deal on coal after it agreed to drop wording calling for the “phase-out” of coal-fired power, replacing it with “phase-down” following intervention from India.

Deforestation — More than 100 world leaders promised to reverse deforestation by 2030. The countries who have signed the pledge — including Australia, Canada, Brazil, Russia, China, Indonesia, Democratic Republic of the Congo, US and UK — have about 85 per cent of the world’s forests.

What it means for directors

Directors need to rethink their time horizons when considering their responses to climate change and abandon the two to three-year planning cycle, says Geoff Summerhayes GAICD, former board member of the Australian Prudential Regulation Authority, noting COP26 will further lift expectations on directors. “If you’re not having conversations about climate risk, physical transition liability risk and how that’s embedded into your strategy, governance, risk management and metrics, I’d be raising a question as to why not.”

Responding to climate change puts the focus on directors as to how they balance risk and strategy as they consider the transition risks in decarbonising the economy, but also the opportunity, says Johnson. “Post-COP, those three areas of tension in terms of short term versus long term, strategy versus governance, then thinking through our societal value as companies, really need to come to the forefront for directors.”

High expectations

COP26 got underway with high expectations of progress. But even before the conference began, China, India, Russia and Brazil took the lead in stymying meaningful consensus at the G20 leaders’ meeting in Rome. Political leaders aside, the commercial sector, investment markets and firms, activist groups, regulators, courts, investors, consumers and employees have all moved significantly since the last COP in 2019. Over 450 financial institutions committed to ensuring a total US$130 trillion in assets under management is directed towards achieving net zero by 2050.

“The story of Glasgow was the raft of announcements by the corporate sector and corporate sector alliances,” says Summerhayes. “The huge economic structural shift to decarbonise the economy is underway and accelerating.”

“What differentiated this COP was the strong involvement of the private sector and the level of commitment and leadership shown by global companies,” says Johnson.