You may have noticed a dearth of our coverage of COP26 last week. An estimated 30,000 attendees descended on Glasgow for the UN’s annual two-week long climate summit with a great deal of pomp, circumstance and media coverage, so it was obviously a big deal. We didn’t ignore it – we simply waited for practical outcomes, which didn’t happen until Saturday when the summit ended in overtime. Certainly other observers and pundits will have their opinions.
Here are the results of the past two weeks in Glasgow that should probably have your attention for the next six to twelve months:
- Prepare to transition to a transition economy. While the final agreement language was condemned as watering down early drafts’ language concerning fossil fuel, that may not actually be important. My impression is that the summit thrust into the spotlight a real move to a transition economy harnessing businesses, investors, finance, citizens and governments. Consider Larry Fink’s idea that seems to coalesce these pressures into a practical and reasonable framework – most likely with private equity playing a critical enabling role. Perhaps we have actually moved past the transition tipping point for real.
- Offsets may be more confusing – and risky – than before. The final COP26 agreement put new new rules in place for trading emissions in bilateral deals and in a U.N.-supervised marketplace. Details are to be determined. The timeline for putting rules into practice may not be consistent with corporate Net Zero commitments that rely on offsets, especially if the transition economy and actual emissions reductions move more rapidly than expected. There are also questions about how older offsets already being used will be recognized, and how new ones will be validated/verified.
- Corporate ESG and climate data reliability is paramount. Underlying many discussions, policy developments, corporate disclosure approaches and technology solutions is simply having good data. That starts at the physical point(s) of emissions. Companies should plan on ESG data validation approaches starting with expanding the use of your own internal audit team (supplemented with subject matter experts in emissions and process equipment) and – if necessary – engaging qualified external auditors. Expect more involvement from your Audit Committees and more pressure from investors and ratings organizations to confirm data validity beyond simply a management assertion. As announced in Glasgow, the U.N. is exploring methods to police corporate Net Zero commitments and progress.
- Standardized accounting and disclosure for climate/ESG is far from settled. The big ISSB announcement was a step forward in the battle for The One Standard to Rule Them All (apologies to Tolkien). Yet another standard was announced during the same summit. In the near term, use of the patchwork (sometimes cherry-picking) of voluntary disclosure standards/frameworks will almost certainly continue. ISSB/IFRS need to be adopted in individual countries – including the U.S. – before they are mandatory and enforceable, which could take more than a year. The final IOSCO Recommendations on ESG and sustainability disclosures are in the same boat and that document explained it clearly:
The IOSCO recognises that individual jurisdictions have different domestic arrangements for considering, adopting, applying, or otherwise availing of international standards. It will be important for individual jurisdictions to consider how the common global baseline of standards might be adopted, applied, or otherwise utilised within the context of their domestic regulatory frameworks in a way that promotes consistent and comparable sustainability disclosures across jurisdictions.
There has been – and will continue to be – much coverage and many analyses of the summit in the coming days. One source of curated detail and technical content you may find helpful is the COP26 microsite on Advisory Board member Mark Trexler’s Climate Web.