The first week of COP26 in Glasgow was an interesting mix of hyperbole, disappointment, excitement, and pledges

Through the week, commitments on methane, coal, and deforestation had created a buzz that this summit was going to achieve its goals to be considered a success. Mark Carney’s sobering speech on ‘finance day’ reminded everyone of exactly how much it was going to cost, and how the private sector—banks, in particular—needed to engage with the challenges and provide an executable solution. As the week wound down, with the Presidents and Prime Ministers gone, the energetic protests by the youth who are in Glasgow in full force, made it clear that promises made so far were nowhere near sufficient to limit climate change.

The truth about the success of the summit so far is somewhere in the middle, of course. In this dispatch we review what was committed to, and how those pledges may impact financial institutions and markets across the world.

Methane…

US and EU have been working on a global alliance to cut methane emissions by 30% by 2030. Methane is a greenhouse gas that is significantly more harmful vis-à-vis its impact on global warming compared to CO2. That said, methane also remains in the atmosphere for a significantly shorter time than CO2—for decades rather than centuries. The role methane plays in climate pathways is interesting. It implies that an overall cut over the next decade in emissions would lead to a rise above the 2100 target of 2 degrees, but then it will return to the target line as the gas leaves the atmosphere before the end of the century. In the end, global adoption of the plan would mean a 0.2-degree decrease in the final 2100 target.

The fact that over a hundred countries signed the pledge is good news, but the lack of specificity about how it would be achieved, along with the conspicuous absence of India, China, and Russia from the pledge, implies that there are concerns about its ultimate effectiveness.

Banks will need to keep an eye on countries who did sign up, as meeting the promise of a 30% reduction would likely see extensive transitional policies across methane-emitting industries and agriculture. Policies in these areas would have a material impact on business models and credit profiles in these sectors.

Coal…

Coal has been a key target of COP26, and some success has been achieved so far as 23 countries that are significant users of coal have signed up to a full commitment to eliminating it from their power sources. As part of the consortium, a number of international banks also pledged to end funding new coal power projects.

This particular agreement could have very significant implications for energy companies, particularly their hedging and funding activities. Besides, banks in this sector will have to look closely at the implications on their current book of business and the impact on their credit risk-related capital requirements.

Deforestation…

Perhaps the most eye-catching announcement was the agreement to stop and reverse deforestation. This included a commitment towards trade and development policies and redesigned agricultural standards.

The fact that Brazil signed up was a cause of celebration at the COP, but banks in the US agricultural sector will have to watch how policies are rolled out in order for them to be ready to support their customers through the sustainability transition.

There was pessimism introduced by the analysis from the UN that stated that the current policy set would achieve a limit of 2.7 degrees to global warming by 2100. This is far above the 1.5 degrees aimed for, and even the 2-degree commitment made at the Paris COP. In UN’s view there are too many targets lacking specific details. To reach the 1.5-degree limit, GHG emissions would have to halve by 2030—an outcome that seems a long way from current pledges and one that banks should be concerned about. If the world were to attempt to achieve that level of mitigation, policies would likely be stringent and would have to be very quickly implemented. Such a disorderly approach could be very damaging to the real economy of every country, as well as balance sheets of banks financing it. With more details forthcoming in the second week, discussions regarding transportation industry, and as the COP winds down, there is much to balance between the successes of the governments and the disappointment of the protestors.

Signing off for today, best regards from Glasgow…