COP26 and Lombard Odier: achieving net zero

This November, the 26th annual United Nations ‘Conference of the Parties’ climate change summit in Glasgow—known as COP26—will see Lombard Odier host The Zero-Hour Sessions, a series of events that will explore the power of nature, the importance of policy, and how companies and sectors need to decarbonise to reach net zero.

For the past few years, the COP has focused on the 2015 Paris Agreement, where participating nations committed to limiting global warming to below 2°C while aiming for 1.5°C, adapting to the effects of climate change, and funding the work required.

…the COP has focused on the 2015 Paris Agreement, where participating nations committed to limiting global warming to below 2°C while aiming for 1.5°C, adapting to the effects of climate change, and funding the work required

Countries also agreed to return five years later at COP26 with revised ambitions and updated plans for achieving them.

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renewed urgency meets a unique opportunity.

Of course, COP26 was not to be in 2020. But even as Covid-19 claimed the lives of millions and disrupted the global economy, one phenomenon almost entirely immune to the effects of a global pandemic is climate change.

Despite the temporary dip in emissions caused by the imposition of lockdowns and travel restrictions, we have now largely returned to the ‘old’ normal—one in which overall emissions continue to rise. Meanwhile, the effects of climate change continue to make themselves felt, as storms, floods and wildfires intensify worldwide.

We estimate that net-zero commitments now cover nearly 80% of global GDP

But despite the pandemic-induced turmoil and the fact that we have not yet done enough to put ourselves on track to achieve the goals of the Paris Agreement, there is hope. We estimate that net-zero commitments now cover nearly 80% of global GDP.

Carbon-free energy is now cheaper than fossil fuels in most nations. Green technologies, such as electric vehicles, are developing rapidly. And as the world begins its recovery from the pandemic, we have a unique opportunity to accelerate these trends by building back greener.

Now, after a year’s delay, COP26 must capture that opportunity.

Carbon-free energy is now cheaper than fossil fuels in most nations

COP26 insights.

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the four primary goals of COP26.

1. Secure global net zero by mid-century

At COP26, countries are expected to deliver more ambitious 2030 emissions reductions targets that will put them on track to achieve net zero by 2050. Hopefully, these will also be backed up by clearer roadmaps outlining the policies governments will pursue to get there.

2. Adapt to protect communities and natural habitats

With severe weather events already becoming more frequent and intense, COP26 will help and encourage countries to do more to increase their resilience. Nature, in particular, is increasingly recognised as having to play a vital role in the transition to net zero.

Investment in nature-based solutions, and the development of more credible and transparent carbon offset markets will be high on the agenda.

3. Mobilise finance

Delivering on COP26’s first two goals will, in turn, require developed countries to finally deliver on their pledge to deploy at least USD 100 billion in climate finance per year to support developing countries. This, however, still scratches the surface of the overall investment levels required. The IEA, for instance, estimates that by 2030 roughly USD 5 trillion per year will be required in investments into the energy system alone.

4. Work together to deliver

COP26 aims to confirm the Paris Rulebook (the rules that operationalise the Paris Agreement) and promote the collaboration between governments, businesses and civil society we need to achieve net zero. Carbon prices may be one means through which governments may drive decisive action, and the integration of carbon markets would significantly reduce the potential for future friction.

a decisive moment.

If we are to reach net zero on time, we must seize this once-in-a-generation opportunity to build back greener and accelerate the momentum of the sustainability revolution.

For instance, COP26 is a chance to discuss fairer pricing on using natural resources and promote the development of natural climate solutions that would capture our remaining CO₂ emissions in a net-zero world.

We must also lay the groundwork for the removal and reformation of fossil fuel subsidies and more appropriate carbon pricing. According to the Organisation for Economic Cooperation and Development and the International Energy Agency’s analysis of 81 economies, governments supported the production and consumption of fossil fuels to the tune of USD 468 billion in 2019.

Meanwhile, the IMF estimates that 80% of global emissions are unpriced, even as the IEA states that achieving the goals of the Paris Agreement would require prices to approach USD 250 per tonne in developed markets – and other roadmaps place these figures considerably higher still. We believe that the elimination and revision of fossil fuel subsidies and better carbon pricing will enable the market to reflect the true costs of energy in all its forms and drive the innovation we need to achieve net zero.

COP26 is a chance to discuss fairer pricing on using natural resources and promote the development of natural climate solutions that would capture our remaining CO₂ emissions in a net-zero world

funding the net-zero economy.

As investors, we see it as our fiduciary duty to reduce climate-related financial exposure in our clients’ portfolios by investing with a net-zero mindset. As such, the third goal of COP26, related to mobilising finance, is particularly important to Lombard Odier. And it is why we aim to use the opportunity to provoke productive conversations and action on this front at the summit through our Zero-Hour Sessions.

In particular, we must use COP26 to discuss ways to accelerate the creation and expansion of the resources and expertise financial institutions need to deploy capital at scale in the real economy with a net-zero mind-set.

Right now, traditional Environmental, Social and Governance (ESG) criteria only capture backward-looking information that amounts to the carbon footprints of today, when what we really need to understand is what is being done to address these. So, we must move beyond carbon footprint analysis, the European Union (EU) Taxonomy, climate benchmarks or ESG data, and instead adopt more forward-looking approaches that help us distinguish climate leaders from climate laggards, and allow us to assess the valuation impact that such climate-related financial exposures could have on any company.

…we must use COP26 to discuss ways to accelerate the creation and expansion of the resources and expertise financial institutions need to deploy capital at scale in the real economy with a net-zero mind-set

To do this, we at Lombard Odier have been early pioneers in the development of so-called Implied Temperature Rise (ITR) metrics that helps us assess both how quickly individual industries need to decarbonise, and which companies are delivering on that decarbonisation. These metrics allow us to assess whether a rapidly decarbonising company is truly aligned to limiting global warming to 1.5°C, or the higher levels of global warming that companies taking slower action (if any) would be contributing to. In turn, this enables us to assess the likely trajectories of their cash flows and valuations, so we can deploy capital at scale throughout the global economy without real biases and with a clear focus on companies true climate exposure.

We call this Climate Value Impact (CVI). But for such an approach to enable the mobilisation of net-zero capital at the scale and speed we need, it must be codified into a common framework that can be deployed across our entire industry.

We are proud to be a part of the delegation and lead productive conversations on how to accelerate the transition to a more sustainable economy at COP26.

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COP26 and Lombard Odier: achieving net zero

let's talk.

renewed urgency meets a unique opportunity.

COP26 insights.

sign up to our newsletter.

the four primary goals of COP26.

1. Secure global net zero by mid-century

2. Adapt to protect communities and natural habitats

3. Mobilise finance

4. Work together to deliver

a decisive moment.

funding the net-zero economy.

our expertise.

where we are.

get in touch.

let's talk.

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