Of course the big ticket items have been extensively covered in the press this week, and Caroline describes them in some depth below. For example the country commitments to net zero and by when, keeping the goal of 1.5 degrees Celsius alive, the phase out of coal, carbon pricing and the burden on developing countries. But one thread running through many statements is the role finance will play in all this, and how this may be either mandated or measured.

Earlier in the year in Who ate all the PIEs we commented upon the rise of ESG reporting requirements - with the charge being led by the EU, but with UK and US moving in the same direction. In the run up to COP26 we saw the UK announce their Green Finance Roadmap, including the Sustainability Disclosure Requirements (SDR), confirming Task-Force on Climate-related disclosures (TCFD) style reporting requirements - upon a wide range of listed and large unlisted companies - and even going beyond TCFD with projecting taxonomy aligned disclosures and investment project labels.

• Capital commitment – the Glasgow Finance Alliance for Net Zero (GFANZ), a coalition of financial institutions, has cumulatively committed $130tn of finance needed to achieve net zero
• Mandatory disclosures – UK will become first 'Net Zero Aligned Financial Centre' with UK financial institutions mandated to publish net zero transition plans
• Standards board – a new International Sustainability Standards Board (ISSB) set up to develop harmonised global ESG disclosure standards
• Resilience of financial system - the network of central banks & supervisors known as the Network for Greening the Financial System (NGFS) will work to strengthen resilience of the financial system to climate related risk 

It will be interesting to see how the competing standards for climate related reporting come together. The establishment of the ISSB should help this process, though various jurisdictions are already some way down the road of defining standards. The EU Taxonomy has already published fairly exhaustive definitions for some areas, and the UK has now announced plans for their own Green Taxonomy. Will these standards converge or diverge? As with some other regulatory requirements (e.g. MiFID2 v Wholesale Markets Review) we are beginning to see the UK carve their own path separate to EU post Brexit.

NatWest has recently completed our ESG Global Investors Survey with 70 respondents covering €18tn AUM - it showed that improving risk / return was a bigger driver than the regulatory stick to advance ESG considerations, and responses underlined the importance investors are placing on consistent, standardised disclosures.

Next Steps?  

Of course COP26 isn't over yet - we have probably seen the main announcements from global leaders already, however there will be more detailed work fleshing out commitments through to the end of next week.  

What is clear is that ESG is becoming part of the DNA of financial institutions. Climate risk management will become as core to operations as market or credit risk management is, and ESG reporting as mandated, structured and audited as financial reporting.  

Good or bad COP? Either way, it has certainly focused global attention on this critical subject.  

Daily notes from Glasgow

Scroll on to read the on-the-ground notes from Caroline Haas, our Head of Climate & ESG Capital Markets, and Tonia Plakhotniuk in our ESG Advisory Team:

COP26 Day 1: Setting the tone for the negotiations ahead?

Today may have marked a historic moment for climate - the long awaited COP26 Climate Summit kicked off in Glasgow. The world is full of hope for meaningful breakthroughs to be achieved that would help keep the devastating effects of climate change in check.

What was Day 1 like and what did it reveal already? 

Key high-level goals of the Summit have been outlined from the outset by Alok Sharma, President for COP26 and Minister of State at the Cabinet Office of the UK.

• Mitigation: Deliver a negotiated outcome that helps secure global net zero by 2050 and keeps 1.5C alive
• Adaptation: Deliver global action to help vulnerable communities and habitats adapt to the impact of a changing climate
• Finance: Help mobilise public and private finance to support those on the frontline of the climate crisis, and reach global net zero by 2050
• Collaboration: Work together to finalise the Paris Rulebook and rise to the challenge of the climate crisis

Emerging debates in more detail:

1. Key focus so far: 1.5 degrees Celsius vs 2 degrees commitment. The current climate commitments as they stand, even if fulfilled, would still make the world warmer by 2.7 degrees and lead to disastrous outcomes, as noted by Christine Laguarde, the President of the European Central Bank. Higher ambition is needed – the 2 degrees goal would write a “death sentence” for island states, quoting Mia Mottley, Prime Minister of Barbados.
2. Phase out of coal: Preceding COP, over the course of Oct 30-31, the leaders of G20 agreed to end international public financing of new coal power by the end of 2021, however failed to reach a deal on phasing out coal power or stopping construction of new coal plants. Mario Draghi, Prime Minister of Italy was calling that a move beyond the G20 agreement is necessary. This was echoed by Antonio Guaterres, UN Secretary-General.
3. Unfair burden for developing countries: developing countries may be suffering the most from the catastrophic consequences of climate change whilst contributing to the problem the least. Developing nations are still $20bn short of the $100bn per annum that is needed to help them decarbonise their economies and help adapt to the changing climate, while building up the resilience of their economies.
4. Carbon pricing: Mario Draghi, Antonio Guaterres and HRH The Prince of Wales all raised their support for putting a price on carbon emissions that would reflect their true cost.
5. Intermediate 2030 targets: There seems to a lot of appetite to set and move ahead towards more tangible 2030 climate commitments, though the devil is always in the detail in terms of how and what this would mean for world economies? In particular, who will be paying? Many leaders, including Mario Draghi, Antonio Guaterres, Boris Johnson and HRH The Prince of Wales, called for the partnerships of private and public finance, where governments would help de-risk emerging climate solutions enabling the private sector to bring them to a tangible scale. The role of development banks in this endeavour was also called out to enhance the concept of ‘blended finance,’ the partnership between private and public finance.
6. Balance of ideology vs healthy pragmatism: Collaboration is key – the cost of inaction is going to be much greater than cost of implementation. All meaningful solutions should be considered without getting too bogged down in debates of which one is better. Ultimately, we will be using a mix of the different solutions, subject to their specific need and cost.
7. Private sector action in concrete terms: Katie Murray, NatWest Group CFO, spoke on the panel with a symbolic name Home is where the Heat is? alongside Andrew Griffith, MP, UK Net Zero Business Champion; Chris O’Shea, CEO at Centrica; Carl Arntzen, CEO at Worcester Bosch; and Osama Bhutto, Director of Campaigns, Policy and Communications at Shelter. The discussion came on the back of the recent report published under the same name 'Home is where the Heat is'  by the Sustainable Homes and Buildings Coalition (NatWest Group, Worcester Bosch, British Gas and Shelter) in collaboration with KPMG, which offered insight, ideas and recommendations to an ongoing and unresolved problem - how to decarbonise homes and buildings across the UK. Each panellist shared their own perspectives on the issue, but in summary:         

• UK has the oldest housing stock in Europe if not globally but the UK can still be a leader in the decarbonisation of homes and households
• There is a continuous need to raise people’s awareness of the benefits of energy efficiency upgrades paired with some tangible support mechanisms, such as cost sharing and providing advice
• There is a dramatic skills shortage (e.g. 40,000 additional heating engineers are required to help deliver the necessary upgrades), that is why Centrica has pledged one newly trained apprentice per day for the next ten years. 

The transition needs to be just for all – both the government and private sector need to chip in and make it work through making subsidies and discounted finance products available, including mortgages; longer term financing from governments; partnerships to develop innovative solutions to help individuals and smaller business with their net-zero journey, etc. A mix of measures will do the job eventually.

COP26 Day 2: Several major agreements reached. World leaders and large private sector players continue to strengthen their commitments

A lot was going on Day 2 with no shortages of climate pledges. Several breakthrough deals have been achieved. 

1. Fighting deforestation  

• World leaders agreed their first major deal - a pledge to halt and reverse deforestation by the end of 2030 – including Russia and Brazil. Ending deforestation and boosting nature-based solutions could cover a third of the work needed to stay within 1.5°C.
• More than 30 financial institutions, with over US$ 8.7 trillion in assets under management (including Aviva Plc, Storebrand Asset Management, Generation Investment  Management, JGP Asset Management, NEI Investments, Impax Asset Management, Church  Commissioners for England and Boston Common Asset Management) committed to tackle agricultural commodity-driven deforestation and related human rights abuses in their portfolios by 2025, with a focus on palm oil, soy, beef, and pulp and paper. The signatory organizations will individually create plans, milestones, and incentives to meet the proposed timelines, aligned with a Paris Agreement-compliant 1.5°C pathway.
• The EU Commission committed to spend $1bn to protect forests.
• Jeff Bezos, the founder of Amazon announced a $2bn (£1.5) pledge help restore nature and transform food systems.

2. Reducing methane emissions

• Another major deal marked the 2nd day of the Summit where 95 countries signed the Global Methane Pledge, initially unveiled by the US and EU, to reduce their methane emissions by 30 per cent by the end of 2030.
• The signatory countries collectively represent 70 per cent of the global economy and produce around 50% of global methane emissions. India, China and Russia, who are major methane emitting countries have unfortunately remained aside, but Brazil joined the forces.
• Methane is much more potent than C02 in terms of its global warming potential (more than 25 times according to some estimates), thus bringing the emissions down is seen as an important measure to help the world remain within the 1.5C target. Moreover, in many cases the reduction in its emissions can be achieved at a relatively low cost, e.g. through repairing and replacing natural gas pipes.

3. Investment in clean technologies

• UK Prime Minister Boris Johnson launched an international plan to deliver clean and affordable technology around the world by 2030. 40 countries representing more than 70% of the world’s economy, including the US, India, EU and China, signed up to the Glasgow Breakthrough Agenda. Boris Johnson set out the first five goals collectively covering more than 50% of global emissions:
• Power: Clean power is the most affordable and reliable option for all countries to meet their power needs efficiently by 2030.
• Road Transport: Zero emission vehicles are the new normal and accessible, affordable, and sustainable in all regions by 2030.
• Steel: Near-zero emission steel is the preferred choice in global markets, with efficient use and near-zero emission steel production established and growing in every region by 2030.
• Hydrogen: Affordable renewable and low carbon hydrogen is globally available by 2030.
• Agriculture: Climate-resilient, agriculture is the most attractive and widely adopted.

The EU committed to €1bn public and private investment scheme as announced by European Commission president Ursula von der Leyen. The EU Catalyst Partnership, launched together with Microsoft co-founder Bill Gates and the European Investment Bank, will aim to finance and commercialise innovative clean technologies between 2022-2026. Investments will be directed towards a portfolio of EU-based projects with high potential, in four sectors:

• clean hydrogen;
• sustainable aviation fuels;
• direct air capture; and
• long-duration energy storage. 

In an interview, Bill Gates said that the fund may be used to reduce the “green premium” - the estimated annual $5tn cost gap between cheaper fossil fuels and more expensive renewable technologies. 

Summing up the 2 days

• On an optimistic note - progress is surely being made. Yesterday India, Thailand, Nepal, Nigeria and Vietnam made new net zero commitments which means that 90% of the global economy has pledged to net zero.
• New Nationally Determined Contributions (NDC) announcements were made by: Argentina, Brazil, Guyana, India, Mauritania, Morocco, Mozambique and Thailand and new Long-Term Strategies submitted by Jamaica, Kazakhstan and the USA. On climate finance, new commitments came out from: Ireland, Spain, Australia and Luxembourg.
• On a less optimistic note, visible tension persists between dev

COP26 Day 3: Finance Day

Another very busy day with the financial services industry receiving the baton from the world leaders in showcasing how it can help the world decarbonise. 

A number of announcements were made but we reserved this piece for the most significant ones.

1. $130 trillion of capital already committed to achieving the 1.5C warming target

• Glasgow Financial Alliance for Net Zero (GFANZ), who is a global coalition of leading financial institutions in the UN’s Race to Zero campaign, delivered an analysis showing that the financial industry cumulatively committed to delivering over $130tn of finance needed to achieve net zero economy by 2050.
• Mark Carney, who chairs GFANZ, emphasised the progress made by the financial sector to date in a progress report across a number of work streams underway, including defining net zero pathways for carbon-intensives sectors, aligning on what a robust transition plan means for corporates and financial institutions, and a sector-wide plan to mobilise capital needed for decarbonisation in emerging markets. Michael R. Bloomberg, founder of Bloomberg LP, announced he will join Mark Carney as GFANZ co-chair.

2. UK will become the first ever ‘Net Zero Aligned Financial Centre’

• Rishi Sunak, Chancellor of HM Treasury, announced that the UK government will mandate UK financial institutions to publish a firm-level transition plan, setting out how they will decarbonize in line with the UK government’s net zero commitment on a comply or explain basis.
• A Transition Plan Taskforce will be set up to develop a “gold standard” for transition plans and associated metrics, coordinating with GFANZ. Next year the UK will publish a transition pathway for the financial sector setting out how the sector should move to net zero by 2050.  

3. International Sustainability Standards Board formally set up

• As expected, the International Financial Reporting Standards  (IFRS) Foundation, who is currently governing the development of IFRS standards via its International Accounting Standards Board (IASB), has announced the establishment of the International Sustainability Standards Board (ISSB).
• The ISSB will sit alongside the IASB and will develop harmonised, global ESG disclosure standards to meet investors’ information needs in this space. The new board will be based in Frankfurt, with offices in Montreal, San Francisco, and London.
• A technical group that was set up earlier published two prototypes of the future standards: one on climate-related disclosures (PDF) and the other on general sustainability disclosure requirements. The ISSB’s work should commence as soon as its Chair and Vice-Chair(s) have been appointed. The first set of international standards is expected to be formally adopted in 2022.

4. NGFS further committed to improving resilience of the financial system to environmental risks

• The Network for Greening the Financial System (NGFS), a wide network of central banks and financial supervisors that aims to accelerate the growth of green finance and develop recommendations for central banks' role for climate change, announced that it will expand and strengthen its collective efforts to improve the resilience of the financial system to climate-related and environmental risks, and encourage the scaling up of finance needed to support the transition towards a sustainable economy. Among other actions announced, it will:
• Further enhance and enrich its climate scenarios for the use by public and private stakeholders
• Analyse how climate change considerations can be integrated into monetary policies
• Further work to bridge the data gaps that currently hinder the identification, management and mitigation of climate-related risks
• Keep exploring emerging topics such as the impact of the loss of biodiversity or the risks associated with climate-related litigation, and work towards addressing them  

5. Supporting a Financial System for a Net Zero and Resilient Future (Panel)

• Alison Rose, CEO NatWest Group, spoke on a panel alongside Carlos Dominquez, Secretary of Finance and Chairperson-designate of the Climate Chance Commission, Philippines; Azucena Arbeleche, Minister of Economy and Finance, Uruguay; and Mathias Cormann, Secretary-General of the OECD; and Rishi Sunak, Chancellor of UK HM Treasury who moderated the discussion.

Key points raised:

• Capital is available, investors need confidence to invest – clear environmental taxonomies and definitions will serve as an important enabler for this
• Collaboration between governments and private sector is crucial - combining the different incentives of governments, investors and lenders/banks
• Private sector needs government policy that would signal on the direction of travel for the real economy sector, helping direct investment where it is needed
• Incentives and frameworks should be put in place to close the Green premium
• Governments should remove any subsidies that do not support the climate transition (e.g. fossil fuels)
• Emitters need to bear the burden of the cost of the transition (e.g. carbon tax)
• Emerging economies need to have ‘access to finance’ for the transition
• Regulatory convergence and clarity is needed as much as practical to avoid fragmentation and greenwashing
• We need to build resilience, we need to be bold and we need tougher targets and real commitments – there is no time to wait.

6. Net Zero and the SME* Climate Opportunity - hosted by NatWest Group (Panel)

Alison Rose, CEO NatWest Group, spoke alongside Professor Lord Nicholas Stern; Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy of United Kingdom; Clare Barclay, CEO Microsoft UK; Catherine Lewis La Torre, CEO British Business Bank.

Key points raised:

• Mobilising private capital needs government or public finance support to de-risk and scale up solutions
• Collaboration between parties is key - governments, banks, companies, multi-development banks, accountants all need to come together and work closely
• Sectors and customer groups should be broken down into segments to address specific climate related needs (SMEs, agriculture, infrastructure, etc.)
• The green premium** gap must close to bring everyone along in the climate journey
• There is a skills gap to be addressed - the transition needs to happen while upskilling communities

** The term ‘green premium’ continues to be raised which refers to the cost or pricing difference between the cost of ‘brown’ products or services versus ‘green’ alternatives.  This gap needs to be closed so that all socio-economic groups can participate in the transition trajectory.   

* Earlier in October, NatWest published a report A springboard to sustainable recovery - Unlocking the net-zero opportunity for UK SMEs discovering the opportunities that climate transition can bring for the SME sector and outlining what NatWest is doing to support:

• There is a £160+ billion revenue opportunity for SMEs as a result of the drive to tackle climate change
• SMEs contribute around 30% of the UK’s total emissions
• 130,000 new jobs could be created in the SME sector alone across the UK if the opportunities to support the transition to net zero are harnessed
• 30,000 new companies could be created to support the UK’s transition to net zero
• Half the UK’s carbon reduction ambition can be delivered by the country’s SME sector

7. Scaling Climate Finance to Mobilise the Trillions needed in Developing Countries – moderated by Professor Lord Stern of Brentford (Panel)

COP26 has continually highlighted the importance of providing finance to the developing countries to support their transition pathways. Lord Stern highlighted five specific components that are needed to deliver the committed $100bn, which ideally should be mobilised by 2022, but no later than 2023. The primary objective is to reduce the cost of capital by de-risking certain elements of the financing and expand the number of financing options and partners:

• Bilateral commitments of $60bn by 2025
• Special funds managed by  Collective Investment Fund (CIF) (intent to scale to $50bn over the next 10 years)
• Expansion of  Multilateral Development Banks (MDBs) and their roles (target $90bn by 2025)
• Private / public finance split: currently the rate is 0.50/1.00 which is considered too low; growth lies in the multiplier effect
• Innovative finance - special drawing rights, carbon markets, philanthropists

The other panellists (Finance Minister from Indonesia, Managing Director of the IFC and CEO of the French Development Agency) supported this approach and provided the following insights:

• Standardisation of frameworks since there are currently 200 different frameworks across 40 countries that need to be homogenised
• Importance of patient capital that considers longer time horizons given the planning and execution required for infrastructure projects to support the transition
• Development of an effective carbon price to quantify the transition and determine the cost to the ‘emitters’
• Coordination of the public banks, of which there are 530 globally, to minimise ‘doubling-up’ and maximising the effectiveness and impact of the financing
• Clear risk sharing between public and private finance that is well understood by all market participants

COP26 Day 4: Energy Day

The 4th day of the Global Summit was all about energy transition. There is good news and less so - although this probably applies to each day of the negotiations so far.

Most of the debate was circling around the phase out of coal and boosting clean energy technologies. 

1. 190 countries and organisations commit to ending the use of coal

• 190 countries and organisations committed to ending the use of and support for coal power. At least 23 nations made new commitments to phase out coal power, including Indonesia, Vietnam, Poland, South Korea, Egypt, Spain, Nepal, Singapore, Chile and Ukraine. This came under a new ‘Global Coal to Clean Power Transition Statement’. Allegedly, countries committed to ending investment in new coal power generation both domestically and internationally however the devil might be in the detail and the terms of those commitments still need to be further analysed and scrutinised. Countries also promised scaling up clean energy and supporting a just transition away from coal.
• Major economies should phase out coal in the 2030s, with other countries committing to phase out dates in the 2040s at the latest - specific dates for each of the new signatories are yet to be revealed. Again, additionality of such commitments is yet to be assessed – for example, Poland had already committed to phase out coal by 2040, so this was not a truly ‘new’ announcement.

2. 25 countries will end international public support for unabated fossil fuels by the end of 2022

• A group of 25 countries including Italy, Canada, the United States and Denmark together with multilateral development banks have committed, under the Statement on International Public support of the Clean Energy Transition, to ending international public support for the unabated fossil fuel energy sector by the end of 2022 and prioritising support for the clean energy.
• All of this comes on top of recent announcements from China, Japan and South Korea to end overseas coal financing which now means all significant public international financing for coal power has effectively ended. According to some estimates, collectively, this could reallocate about $17.8 billion a year in public support out of fossil fuels and into the clean energy transition.

3. NatWest joins Power Past Coal Alliance (PPCA) together with other financial partners

• 28 new members joined the PPCA including NatWest, Lloyds Banking, HSBC and Export Development Canada. PPCA is a coalition of national and sub-national governments, businesses and organisations working to advance the transition from unabated coal power generation to clean energy. The PPCA now accounts for over $17tn in assets across over 150 members.
• At NatWest Group we remain committed to phasing out our coal exposure by 2030, as we said when we launched our purpose-led strategy last year. We’ve announced today that we’ll phase out of providing banking services to UK coal production, coal fired generation and coal related infrastructure by 1 October 2024, with a global phase out by 1 January 2030 globally. We will also stop financing new customer relationships with corporates who explore for, extract or produce coal or operate unabated coal powered plants, and we won’t provide services to existing customers who are increasing coal mining activity”. Full press release can be found here.

4. First Movers Coalition will spur the commercialization of emerging technologies in this decade

• US Climate Envoy John Kerry, in partnership with the World Economic Forum, announced the launch of the First Movers Coalition, a platform where members will make purchasing commitments that support the development of early-stage technologies in the steel, cement, aluminium, chemicals, shipping, aviation, trucking, and direct air capture sectors. The coalition was formed by 25 founding members, including A.P. Møller - Mærsk, Amazon, Bank of America, Boeing, DHL, Trafigura Group, Vattenfall and Volvo.
• Today members committed to using sustainable aviation fuels and zero-emission shipping technologies by 2030; shipping cargo owners are targeting to transport at least 10 per cent of goods via zero-emission ships and get to 100 per cent by 2040. Members also committed to purchase zero-emission vehicles by 2030 as well as purchase at least 10 per cent of annual steel production from manufacturers that use innovative low carbon processes, such as hydrogen direct reduction, carbon capture use and storage, and electrolysis by 2030. Members will set similar targets for the remaining sectors under the initiative in early 2022.

5. Negotiations on carbon markets (Art 6 of Paris Agreement) actively kicked off

• Negotiations on international carbon markets are facing an obstacle: disagreement over a share of revenues from trading that should go to countries that need funds to adapt to climate change. Developing countries want a percentage of the proceeds from trading all types of carbon credits, including between countries, to be provided to poorer nations.