COPs drive private sector action

COPs are not just annual events; they can be landmark events too.

COP21 was the occasion on which the Paris Agreement – a legally binding international treaty on climate change – was adopted by 196 parties in December 2015. For the first time, a binding agreement brought all nations together to combat climate change and adapt to its effects.

Its overarching goal is to hold ‘the increase in the global average temperature to well below 2°C above pre-industrial levels’ and pursue efforts ‘to limit the temperature increase to 1.5°C above pre-industrial levels.’ This 1.5°C threshold has become iconic, largely because the IPCC has repeatedly pointed out that crossing the 1.5°C threshold risks unleashing even more severe climate impacts. But it is a tough ask.

As much as COP21 will be remembered for the Paris Agreement, it also marked the launch of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) – a significant landmark for private sector ambition.

In clearly defining climate change as a source of financial risk, the launch of TCFD marked a key inflexion point, building on Mark Carney’s seminal ‘Breaking the tragedy of the horizon’ speech a few months earlier. Climate-related financial disclosure has since become mandatory across many countries, and there are now over 140 central banks and supervisors working together through the Network for Greening the Financial System, all of which has been built on the foundation of climate change as a financial and economic, not just environmental, issue.

Put another way, COP21 delivered a breakthrough by governments. It is also provides an example of how COPs can mobilise private sector action.

Then – of particular significance – came COP26

COP26 – in Glasgow in 2021 – is often viewed as the ‘Net Zero COP’.

It was the COP where the Glasgow Financial Alliance for Net Zero – a coalition of leading financial institutions committed to accelerating the net zero transition – took centre stage, having formally launched earlier in the year. Prior to COP26, private sector commitments to net zero were relatively few; there are now over 650 financial institutions around the world committed to accelerating the net zero transition, accounting for over $100tr of capital. And many businesses too.

While the Glasgow COP therefore marked a second important inflexion point, moving beyond just managing risk to the private sector committing to playing its part in the transition to net zero, it will not be the last.

Speaking of which…

The next big shift we are starting to see is the need to move beyond net zero, recognising that reducing emissions is only part of the challenge – we also need to consider nature, adaptation and ensure a just transition. And sometimes, particularly for financial institutions, an exclusive focus on reducing emissions at the level of the portfolio can lead to unintended consequences. For example, focusing on ‘greening one’s own balance sheet’ in a way that doesn’t necessarily support ‘greening of the economy’. In other words, decarbonisation that looks good on paper but may not be helpful in combating climate change at a system-wide level (often referred to a ‘paper decarbonisation’). Ultimately it is global emissions, not those accounted for in a single portfolio, that will determine the future risks that we face.

That is why initiatives such as the UK’s Transition Plan Taskforce, who’s guidance is now being taken forward internationally, recommends that high-quality transition plans should consider the contribution a company can make towards the global transition, including and beyond their own emission reductions, and to do this in a way that also takes nature, society and the need to support climate adaptation into account.

COP 30 – the COP of contribution?

With this shift towards a system-wide approach in mind, the outcome from COP29 will begin to set out the roadmap to COP30 – a COP where the theme of contribution may well take centre stage. A COP that becomes known for cementing a global recognition that the challenge of climate, nature and biodiversity are intrinsically linked. And one that reinforces the role of non-state actors – including central banks, companies and investors – in not only responding to, but also contributing towards, a just and resilient transition to a sustainable future. And doing so not only because it’s the right thing to do but because we all have a responsibility to take action today to minimise future risks and protect and enhance long-term value.

Leading the transition

Reflecting on the last decade of COPs and the inflexion points highlighted above, from climate risk to climate contribution, they all have at least one thing in common – leadership.

While we all have a contribution to make, it is those who have influence that have the greatest responsibility to act, and whose contribution will be critical in securing a sustainable future. Leadership from the boardroom can play a pivotal role ensuring companies take a strategic approach to the climate and nature challenge, both now and for the long-term. COPs provide an opportunity not only to raise ambition by governments but also to reflect on a board’s own climate strategy and accelerate action by the private sector. They only come once a year – use them wisely.