The outcome of COP 26 is mixed which is inevitable for a conference that seeks to cater to the wishes and expectations of almost two hundred countries. Our view is an optimistic one, as it has become clear that net zero is our common global goal on climate action covering some eighty nine percent of global GDP. Furthermore, during the course of the 2 weeks, strong and substantial financial commitments have been made to facilitate the transition. Glasgow Climate Pact The outcome of COP26, the Glasgow Climate Pact, is remarkably the first U.N. climate decision that includes an explicit mention of fossil fuels, calling for an accelerated “phase-down” of unabated coal-fired power generation and phase-out of inefficient fossil fuel subsidies. Previous drafts of the agreement called for a phase-out of unabated coal-fired power generation. However, a late intervention, purportedly from India and China weakened the language of the text. The agreement makes progress on adaptation finance, urging developed countries to at least double the amount of climate finance going specifically to adaptation by 2025 based on 2019 levels. Nevertheless, the text acknowledges with “deep regret” that the goal of providing $100 billion a year to developing countries for mitigation measures has not been met. In terms of nationally determined contributions (NDCs), as they stand current pledges are insufficient to limit warming to 1.5 °C. As a result, the pact requests that countries “revisit and strengthen” their 2030 targets by the end of 2022, similar to the ratchet mechanism built into the Paris agreement, although it remains to be seen if countries will meet this expectation as some forty countries did not update NDCs before COP26. Outside of the final text there was a number of important announcements: Methane The Global Methane Pledge was signed by over one hundred countries responsible for close to half of global anthropogenic methane emissions. Leaving aside valid concerns over how this will be implemented and enforced as it does not indicate what level of reductions countries will commit individually. In fact, the initiative aims to reduce global methane emissions by at least thirty percent from 2020 levels by 2030. Disappointingly, several major methane emitters such as Russia, China, and India did not join the pledge. Although China agreed to discuss mitigation of methane with the US in the first half of 2022. Deforestation Deforestation gained centre stage in the first week with 141 countries committing “to halt and reverse forest loss and land degradation by 2030” covering some 91% of forests globally. Importantly, key countries such as Brazil and Indonesia signed the agreement. However, Indonesia’s environment minister has since criticised the terms of the agreement, calling them “inappropriate and unfair”. Despite this, the declaration is supported by private funding with the CEOs of more than 30 financial institutions announcing their intention to divest from activities within their portfolios associated with deforestation. Phasing down fossil fuels Whilst for many there was disappointment at the last-minute change of phrase from phasing ‘out’ to ‘down’ in the final pact, prior to the conference the UK announced 190 countries and organizations committing to phase out coal including Poland, Vietnam, Egypt, Chile and Morocco. During the conference, the announcement of the formation of the Beyond Oil and Gas Alliance (BOGA), a coalition of national and sub national governments, which aims to “set an end date for their oil and gas exploration and extraction and curtail new licensing”. At formation there are eleven members including Costa Rica, Denmark, France, Greenland, Ireland, Quebec, Sweden and Wales as core members, with California, New Zealand and Portugal as associate members. Crucially, Nicola Sturgeon confirmed Scotland was in talks with BOGA to join at some level, a critically important development given the prominence of the oil & gas sector in the Scottish independence referendum debate, and the raging arguments that continue over the fate of the Cambo field development in water West of Shetland. Furthermore, over thirty countries and financial institutions committed to halt financing unabated fossil fuel development overseas by the end of 2022, albeit with significant caveats as it recognises that there will be limitations regarding alignment with 1.5 degrees of warming. It remains to be seen how this will be put into practice. There was also a non-legally binding agreement on achieving a 100% zero emissions car market worldwide by 2040 and in leading markets by 2035, with the support of UK, Canada, Norway and Chile, and global manufacturers such as Ford Motor Company, General Motors, Jaguar Land Rover, Mercedes-Benz, and Volvo. However, the US and China as well as other leading car manufacturers were not part of the deal. Beyond governments, investors committed to engage with investee companies within the automotive manufacturing industry to achieve this goal and to promote within all their holdings the development of decarbonization of their fleets aligned with science-based targets. It is becoming clear that any financing in the fossil fuel sector on both the supply and demand side will increasingly come under scrutiny, with the spectre of a ban on new exploration combined with a drive for zero emissions vehicles as examples of this trend. Glasgow breakthrough An interesting announcement supported for more than forty countries was the ‘Glasgow breakthroughs’ which aims to steer innovation towards five areas by 2030: 1. Clean power 2. Zero emissions vehicles 3. Near zero emissions steel 4. Renewable and low carbon hydrogen 5. Sustainable and climate-resilient agriculture It is worth mentioning that not all countries committed to the five areas. There also are no concrete steps on how they will be implemented, with the UK Government inviting “responsible Ministers to review global progress”. Just Transition The EU, US, UK, France and Germany announced a Just Energy Transition Partnership with South Africa which aims to help South Africa achieve its decarbonisation targets. The first phase of the partnership is worth $8.5 billion in financing to help the country move away from coal-fired power generation. This partnership may serve as a model for future cooperation agreements between developed and developing nations. US and China Declaration The US and China announced an unexpected “Joint Glasgow Declaration” which aims to enhance climate action this decade. Key areas of cooperation include reducing methane emissions, CCS and DAC, electricity transmission, energy efficiency. Finance The Glasgow Financial Alliance for Net Zero (GFANZ), a group of banks, investors, and insurers led by former Bank of England governor Mark Carney claimed that $130 trillion of private sector finance is now committed to net zero. However, this figure is somewhat misleading as it represents total assets under management by member institutions, not capital that is currently constrained to just net-zero investment. Members of the alliance have committed to reach net-zero emissions by 2050, alongside interim 2030 targets, across all scopes. At present, not all the financial institutions have announced their short- and medium-term commitments. Nonetheless, it is clear that asset owners and managers will increase expectations on investee companies with regards to transition plans covering all scopes, as well as climate considerations on governance structures, remuneration incentives and capital allocation aligned to net zero targets. Creation of a global sustainability board Finally, an important step in the future of sustainability reporting was the establishment of the International Sustainability Standards Board (ISSB) by the IFRS foundation which will work towards the creation of a global sustainable reporting standard. The foundation already announced that it will be built upon existing standards such as the Task Force on Climate-Related Financial Disclosures (TCFD). This is a crucial step to the creation of a holistic sustainability reporting disclosures framework, although the results will be adopted by countries on a voluntary basis and clear definition will likely require a number of years before the framework becomes mandatory. For that reason, financial institutions and business should continue reporting under the TCFD which is becoming increasingly mandatory in several jurisdictions and keep updated on the new changes on the sustainability reporting landscape. Our View We are broadly encouraged by the outcome of COP26. With enhanced climate ambition being agreed by the two largest emitters, despite a backdrop of increasingly tense geopolitical conditions. Despite this progress, we are not on track for 1.5 °C, and more work needs to be done on all areas of climate action, and so we are now entering a period where implementation needs to come to the fore, with substantive progress made by the time the next COP takes place in Egypt. For businesses, there is no let-up in expectations emanating from political, economic and civic stakeholders, and as such the direction of travel on climate risks is clear. The time for businesses to act on climate risk is now.