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COPs’ Pledges to Fight Climate Change Rarely Become Policy 

Author: Maria Butler
by Maria Butler
Posted: Feb 17, 2022

COP26 in Glasgow ended with an agreement to be ratified by participating countries and pledges around methane, coal, and deforestation. On the surface, these can be seen as market indicators for banks to use as a basis for climate-related scenario analysis.

While the promises made at regular summits are useful, banks have to exercise a certain amount of caution when translating them into actual policies. It is these policies that will impact the environments in which banks operate, which will fundamentally change the business models of their obligors.

As an illustration of this, we can look at three of the most important COPs of the past.

At the 1997 COP3 in Kyoto, Japan, targets were agreed upon between nations, which included a range of greenhouse gasses. A key development was the agreement that developed countries would shoulder most of the burden when it came to meeting the aims of the COP. A timeframe was set for completion between 2008 to 2012. All 36 countries that accepted and ratified their targets, met them, but this was achieved through a mixture of overseas funding and home policy.

In 2009, at COP15 in Copenhagen, the second period of tighter targets was to be agreed upon but all that was achieved at that summit was a general agreement to keep ‘warming’ to less than 2 degrees, over the century. Most of the issues had to do with global commitments being owned by a subset of the global community. In effect, no new targets were agreed upon.

COP21 in Paris is largely held to be a turning point in the international fight against climate change. The 2-degree ambition was strengthened and each country agreed to create its own targets and report back on them in 2021. The success at this COP was that it put all countries on the same track, but it should be noted that even if all country pledges had been met, the rise in global warming would still be above 2 degrees by 2100.

The point here is that communal commitments made at COPs, often, are not met by the individual aims of attendant nations. In fact, even individual aims are not always backed by policy and met by the countries.

COP26, in Glasgow, was held at a time when failures of the past summits were most apparent. The scientific view of the climate issue was that the world is on a code red footing, and needs to greatly accelerate efforts towards the 2-degree limit and, most notably, must reach carbon neutrality by 2050.

Between the various bodies analyzing the problem, specific economic areas have been identified for action, and at the COP itself, each was discussed during specific sessions throughout the two weeks. These ran from the electrification of transport to agriculture. Various summit pledges were agreed upon to engage in these areas of concern.

Banks now have a working blueprint for scenario creation but need to learn lessons from the past regarding how quickly action will have to be taken. The difference between an orderly (quick starting and planned) and a disorderly (late beginning and sudden) transition is extremely large for the industries and businesses impacted by them.

As long as banks build stress testing models with these various speeds in mind, the models they build can be extremely useful when looking to understand the credit risk implications for their balance sheets.

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Author: Maria Butler

Maria Butler

Member since: Dec 21, 2021
Published articles: 17

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