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Geoff Cook

Mourant Consulting | Jersey

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Felicia de Laat

Mourant LP Partner | Jersey

John Rochester

John Rochester

Mourant LP Partner | Guernsey

Global Perspectives

The Race to Net Zero - things are hotting up

 

They say a picture is worth a thousand words, and the apocalyptic vision of a world burning in the UK promotional literature for COP 26 is a powerful call to action. The gathering in Glasgow - billed as the world's last best hope to avert disaster - is now underway.

Floods and heatwaves have become commonplace, triggering mass migration and heightening global tensions around food and water security. The poorest - the bottom billion, are the most affected.

But what is the ‘Path to Net Zero’? And what are the implications for International Finance Centres (IFCs)?

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From the 'what' to the 'how'

A global consensus, driven by increasingly frequent catastrophic weather events, has moved the debate.

Interestingly, the term ‘net zero’ wasn't in everyday use at the Paris Climate Accord in 2015, but science has converged around the simple math expressed by Bill Gates in his book, 'How to Avoid A Climate Disaster" – fewer greenhouse gases = less global warming.  Scientists believe that restricting to 1.5 degrees of warming may prevent the worst manufactured disasters looming, but only if Net Zero delivers through clean, sustainable energy, free of greenhouse gases.

Global warming and climate change are inextricably linked, but what actions are needed to avert climate disaster?

The 2015 Paris Climate Conference addressed the prospect of global warming by more than 3 degrees by 2100, compared to pre-industrial levels. The agreement set a clear objective – the ‘what’ - reduce global warming by 2050.

But COP 26 in Glasgow must develop the ‘how’.

The UK (joint Chair with Italy) has put its best foot forward and produced its Path to a Net Zero Strategy by 2050, (with Scotland recently advancing that goal by five years) with a range of targets and specific actions to achieve them – such as converting the country’s entire power supply to green by 2035.

But collaboration, cooperation and commitment will need to be the hallmarks of this summit, if efforts are to be successful, and so the UK is also asking other countries and especially developed nations and the largest emitters, to do the same and to sign up to a number of critical objectives:

  1. Secure Global Net Zero by 2050 and keep 1.5 degrees maximum global warming within reach
  2. Adapt to protect communities and natural habitat
  3. Mobilise finance, raising at least $100bn pa of government funding for climate initiatives and encourage international financial institutions to support private sector investment in the trillions
  4. Work together to deliver, by formalising the Paris Agreement and developing the rules that will govern progress, turning ambitions into action

 

Depending on which side of the argument you fall onto, it's either an ambitious set of goals, or it fails to seize the moment.

One thing is for sure, the countries attending will have plenty of opportunities to report on their progress against the Paris agreement, but they will also be asked to make further public commitments to move towards net zero by 2050.

China and Russia's absence at COP26 will disappoint, but the late arrival of Narendra Modi, the Indian Premier, will give the organisers some cheer. China, the United States, India and Russia are the most significant nation-state emitters of CO2, accounting for 55% of global emissions.

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Acceleration

So what are the implications of COP26 for financial services and IFCs in particular?

The post-pandemic period is infused by the spirit of 'build back better' and propelled by the need to address social inequalities.

There is a sharper focus on climate change and sustainability – a trend embedded before the pandemic that is seeing considerable acceleration through 2021 and into 2022. The concepts of sustainable finance and ESG investment have well and truly entered public mainstream, and finance houses are responding like never before to the groundswell.

Accountability has become the watchword for asset owners as well as governments, knowing that the world's eyes will scrutinise commitments made to the delayed UN climate change plan as never before.

Politicians may be at the centre of COP26, but there are real ramifications for the private sector, and 'Finance' will be expected to play its part.

Accelerating the flow of capital into climate-friendly investments will be both required and expected.  Governments and regulators will take a keen interest in private sector delivery and will be looking to hold businesses responsible for their every financial decision, taking climate change into account.

The more astute firms are already engaged, with the City of London Corporation, Blackrock and the Green Finance Institute, for instance, combining to play an active role in COP26.

It’s no coincidence that on 18th October, just a couple of weeks before COP26, the UK published its Greening Finance: A Roadmap to Sustainable Investing. The Roadmap aims to ‘green’ the financial system, including through new Sustainability Disclosure Requirements (SDR). Since 1st October, trustees of specific occupational pension schemes must ensure they embed climate change risk into their governance, strategy and risk management processes.

The formation of the new International Sustainability Standards Board, under the auspices of the IFRS, is another important step, receiving supportive commentary from Nikhil Rathi, CEO of the Financial Conduct Authority and Andrew Bailey, Governor of the Bank of England. Many of the Board’s initiatives respond to the G20 Financial Stability Board Task Force recommendations on climate-related financial disclosures.

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The direction of travel toward the establishment of new international standards is unmissable and the British IFCs will be wise to keep in step.

Thankfully, there are indications of proactivity amongst those IFCs - most have already launched sustainable finance initiatives. In addition, Guernsey has run a Sustainable Finance Week for several years in the Channel Islands, while the Government of Jersey recently hosted an inter-jurisdictional webinar entitled ‘Climate Change and Small Islands’, drawing participants from Bahrain, Antigua and Barbuda, Guernsey, Isle of Man, Madeira and St Helena.

IFCs will need to continue to be on the front foot and evidence their contribution and the fact that many will be attending COP26 either virtually or in-person is a positive step.

The COP26 Presidency, Mark Carney's COP26 Private Finance Hub and the High-Level Climate Action Champions all call for private financial institutions to announce new ambitious actions at COP26. These include joining the Race to Zero and the Glasgow Financial Alliance for Net Zero - GFANZ.

Setting science-based targets for 2025-2030, committing to phase out coal finance, announcing new net-zero adaptation-aligned financing to developing countries and emerging markets, and committing to nature-positive finance action are all also on the menu. IFCs will be wanting to make contributions in these areas.

Given the importance of financial services to many small state economies, the engagement of IFCs and the many firms that operate in and through them is critical in affirming a responsible approach to climate action. No less will be expected by the international investment community.

Mourant has significant experience in supporting climate and other sustainable finance related investment flows. You can find out more here.

 

About our Blog

Global Perspectives provides regular, on-point commentary on relevant topics in a pithy and accessible way. Our observations and points of view are based on listening hard to clients global needs, priorities and concerns. We draw on insights from every area of our business and collaborate to deliver this global thinking; something that clients tell us is distinctive and sets us apart.  If you'd like to find out more, please get in touch.

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