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Glasgow’s COP26 Left Strong Directional Markers for Banks to Follow

Author: Maria Butler
by Maria Butler
Posted: Feb 26, 2022

COP26, in Glasgow, was held at a time of considerable concern. The promise of COP15, in Paris, where the world had united in an ambition to hold global warming to a manageable 2 degrees above 1990 levels. Countries had also agreed to create and monitor their own internal targets. Unfortunately, most nations had made only small starts towards reaching those targets. Even if they were, the combined effect would be an ultimate warming increase of 2.7 degrees, a level that would tip the world into extremely volatile and difficult conditions.

The year 2021 had already seen cumulative warming of 1.1 degrees that is now locked into the system. An additional problem is the route to 2 degrees itself. While CO2 remains in the atmosphere for centuries, trapping heat as it does so, methane stays for just decades, but with a considerably greater potential for heat generation (20x greater than CO2). The end result is that a 2100 warming of 2 degrees may well be met through a pathway that sees a temporary period above the target. This situation would trigger a tipping point and positive feedback loops that could well be irreversible in themselves.

Therefore, Glasgow’s summit had a lot of expectation and urgency at its outset. The UK presidency of the COP laid out an ambitious agenda, including:

  • Maintaining the narrow hope of a 1.5-degree limit.

  • Acceleration of the electrification of transport.

  • Alignment of private finance and public policy.

  • Reforestation to reverse the loss of the world's main on-land carbon sinks.

  • Establishing a timeline for the removal of coal from the global energy equation.

There was some success across all of these areas, particularly with an agreement to ‘phase out’ coal from 2030. This was the most progress ever achieved in the area, though it was not absolutely what had been hoped for. The agreement to reverse deforestation, which notably included Brazil, was also a major win, as was the 30% decrease in methane, by 2030. Private financiers were a significant part of the conference, with Mark Carney announcing a $130 trillion alignment of banks and private investors.

What was unexpectedly successful was the agreement to reconvene on an annual basis, with the express intention of ratcheting up targets and ambitions. Whether such meetings can lead to the 1.5-degree goal is unknown, but at least an annual report and reappraisal provide the best opportunity to do so.

Banks must now put these market markers together to create the most likely policy pathways and run climate-based scenarios that reflect them. Stressing these scenarios to portray slow and fast implementation of policy will also be a requirement for banks to properly assess their risk levels and appetites.

Risk governance will need to include climate change as a specific area of analysis, with targets, limits, and regular reporting to senior management. Once this is established, and the most likely routes are programmed into risk systems for stress testing, banks will be able to put themselves at the center of the much-needed changes to come.

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Author: Maria Butler

Maria Butler

Member since: Dec 21, 2021
Published articles: 17

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