COP26 likely to accelerate focus on climate and ESG

Emphasis on meaningful action

The 26th United Nations Conference of Parties (COP) Climate Change Conference (COP26) begins Nov. 1 in Glasgow, Scotland. The conference is intended to bring parties together to accelerate action toward the goals of the COP21 Paris Climate Agreement and the UN Framework Convention on Climate Change to reduce greenhouse gas (GHG) emissions well below 2, preferably 1.5°C — continuing a recent trend of governments, companies and their stakeholders making environmental, social and governance (ESG) considerations front and center.

In the United States, the presidential administration is likely to use the momentum from the international meeting to build upon the suite of climate-forward legislation and executive orders it has already announced (e.g., National Climate Task Force, Executive Order on Climate-Related Financial Risk and Executive Order on Tackling the Climate Crisis at Home and Abroad) and push companies to make, or enhance, commitments to reduce GHG emissions and plans to reach them. In addition, COP26 will likely bolster the administration’s current calls for increased investment in low-carbon transition technologies. The SEC is also expected to release a proposed rule on climate change disclosure by the end of 2021 (for more, see “CorpFin releases sample comments on climate change”). In line with these actions, market leaders will continue to double-down on critical ESG issues, including climate change, as they make decisions around investments, as well as transitioning and diversifying their portfolios. All of this activity, in turn, will increase pressure on middle-market suppliers, vendors and partners to meaningfully address climate change and ESG more broadly as the federal administration and governments worldwide incentivize action and increasingly mandate transparency in the process.

When COP26 concludes on Nov. 12, market leaders and the middle market should be prepared to experience a renewed rhetoric of urgency from both domestic and international partners, as well as greater pressure in showcasing pragmatic implementation per the Paris Agreement commitments.


 

Increasing pressure from all directions

A recent statement from the UN Secretary General described the climate crisis as “a Code Red for humanity.” The 2021 Intergovernmental Panel on Climate Change (IPCC) report on GHG emissions asserted that human activity is driving the warming of the planet. The report stated that to avoid the worst impacts of climate change, we must limit global warming to 1.5°C above pre-industrial levels by acting globally to reduce emissions by 50% by 2030 and achieve net zero carbon dioxide emissions by 2050.

In order to address climate change, many “early adopter” market leaders have already made significant commitments in line with IPCC guidance — making net zero¹ or other emissions reduction commitments and signing onto recognized climate initiatives, such as the Science Based Targets Initiative (SBTi), Race to Zero, UN Global Compact and Business Ambition for 1.5oC. Market leaders have likewise begun formalizing their commitments at scale, with 96% of the world’s 250 largest companies (the G250) and 80% of the 100 largest firms across 52 countries (the N100) reporting on their sustainability performance. Large institutional investors, such as Blackrock and Vanguard, have also publicized their decisions to allocate capital only to entities that are addressing climate change. With this momentum comes increased license to operate pressure as middle-market companies are compelled to grapple with what it means to be both a good corporate citizen and a sustainable business in a climate-impacted global marketplace.

While the emphasis of COP26 is on climate change and the environment, all elements of ESG will receive increased attention. As leading organizations continue to mature their ESG programs, many will focus on their own ESG readiness. This pressure will come from their supply chain as their vendors, tenants, employees, and customers continue to set goals, activate ESG statements, and drive more transparent disclosures. Though pressure is mounting, companies might also see opportunity in the imperative to differentiate and earn the favor of these large customers and partners.


 

Expected COP26 areas of focus

COP26 serves as an important milestone for coordinated, global efforts on climate change action. Whether or not the conference meets organizers’ full expectations, guidance and market signals are coming, either directly from COP26 or in subsequent initiatives driven by governments or private entities related to it.

Expect guidance to emerge on four key topics, which track with the COP26 goals:

1. Focus on action: Outcomes of previous COP Conferences have led to GHG emission reduction targets and commitments. COP26 is anticipated to focus on accelerating pragmatic and transparent action toward these goals.
2. Accelerated adaptation: COP26 seeks to enable and encourage countries impacted by climate change to build defenses and resilient infrastructure. Guidance should focus on technological solutions, as well as how to invest in those solutions for the low-carbon transition.
3. Leveraging finance: Change will require both governmental and private financing. Look for the current administration to detail its support for climate-related infrastructure and push for increased funding in low-carbon transition investment. When leaning into ESG financing, companies will need to focus on the accuracy of ESG metrics and disclosures, including third-party validation of reported data.
4. Increased collaboration: Accelerated impact requires collective action. The current administration is likely to announce strategies for public-private partnerships, as well as opportunities to organize sectors and industries with common interests and challenges.

Next steps

Grant Thornton is closely monitoring COP26. When guidance is announced at the end of the conference, organizations will want to fully understand how it impacts business priorities and operations. Organizations will also need to consider how to integrate GHG emissions reduction targets, strategies and reporting, as well as program governance and risk management considerations into business planning. It will also be important to understand how any GHG emissions initiatives impact other relevant ESG considerations. Recognizing that shareholders and stakeholders are looking for transparency as part of climate and ESG programs, leaders will need to consider and address funding, staffing, operationalizing and reporting, and reflect those efforts in marketing strategies in order to earn — or increase — trust.

Of course, the exact COP26 recommendations have not yet emerged. Between Nov. 1 and Nov. 12, we’ll see important news coming out of Glasgow. And we’ll share our insights on the implications of the conference for the middle market on an upcoming webcast.


 

Key takeaways

1. Expect COP26 to accelerate momentum on climate action.
2. Expect “early adopters” and market leaders to continue to double-down on climate and other ESG imperatives as they invest, diversify and transition.
3. Expect accelerated focus on ESG implementation as middle-market companies receive increased pressure from across their value chain.
4. Expect holistically ESG and sustainability topics to continue to gain maturity and those middle-market players already engaged and proactively managing their voice, plan and disclosure to be at an advantage.

1 IPCC defines net zero emissions as when anthropogenic (i.e., human-caused) emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals, over a specified period of time.