The draft agreement of the financial pledges discussed at COP26 is giving “a market signal of the level of ambition” from leaders to step up their climate efforts, according to Matt Crossman, stewardship director at Rathbones.

He said the language used in the draft agreement is “quite significant” from policymakers as for the first time in history the phasing out of fossil fuel and coal financing has been referenced to.

The draft deal “calls upon parties to accelerate the phasing out of coal and subsidies for fossil fuels”.

“This is quite significant,” ESG Clarity editorial panellist Crossman said.

“It is the first ever mention of fossil fuels and coal in a first draft, sending the market a signal of the level of ambition. 

“But to be meaningful it has to stay in there.”

Countries will finalise the agreement next week, after COP26 has drawn to a close, but Crossman said he is “cautiously optimistic” the reference will not be removed.

“We hope it is left in there and then next year they come back with even stronger revised text.

“This could lead to year-on-year progress with annually revised targets – rather than talking about it every five years,” Crossman added, as has been the case since the Paris Agreement.

“If it is taken out, questions will be asked,” he also noted.

Beyond COP26

The next 12 months are crucial in terms of putting into place the practicalities of the promises made at COP26, with Crossman highlighting only the initial decisions can be decided in the fortnight in Glasgow – the detail is to come.

“The practicalities are big,” he said.

However, the signals given by policymakers will help asset manager engagement with investee companies on climate.

The big announcement on phasing out of coal power will aid these conversations, Crossman said, and a big surprise to come out of the commitments was that Poland – one of Europe’s largest consumers of coal – was among the 190 countries and organisations that committed to phasing out the use of the fossil fuel by 2030-2040.

“That was not expected. As part of our work with Climate Action 100+, we talk to utilities companies in Europe and now we can go to them and highlight that Poland is on board. It is a real shift and gives us more of a foothold that Poland has committed – it is a big deal,” Crossman says.

“This political will and market signals for where the future lies really helps our dialogue,” he added.

China and US declare joint climate effort

Meanwhile, China and the US shocked markets by coming together to sign a deal on climate.

The world’s two biggest emitters unexpectedly announced in a joint declaration they will be working together to reduce emissions. They have agreed to implement “concrete and pragmatic” regulations in decarbonisation, reducing methane emissions and fighting deforestation, Chinese climate envoy Xie Zhenhua said in Glasgow.

A working group will bring the two countries together on a regular basis to “a multilateral process, focusing on enhancing concrete actions in this decade,” the declaration said.

Fiona Reynolds, CEO at the Principles for Responsible Investment, said the closer collaboration between the world’s two largest emitters is a positive development in efforts to address climate change.

“The US and China’s acknowledgement of the significant gaps in current efforts to address the climate crisis is an important step, and closer working on key areas such as methane, deforestation and electricity echo key areas of focus from COP26 so far, which should be viewed as a welcome move. 

“Moving forwards, this partnership should provide the foundation for closer policy tightening between the two nations, with expanded scope for consistent legislative and regulatory action to address systemic climate change issues. With this said, we still need to see action taken further and faster on key areas such as reduction of fossil fuel usage.” 

Science-based targets

More than 1,000 companies are setting 1.5C-aligned science-based targets, the Science Based Targets initiative (SBTi) and the United Nations Global Compact announced at COP26.

The 1,045 companies represent over $23trn (£17.2trn) in market capitalisation, cover 53 sectors in 60 countries and have more than  32 million employees.

The Business Ambition for 1.5C campaign was initiated by the UN Global Compact in 2019 and is led by the SBTi.

The SBTi said 75% of submissions from corporates this year have been 1.5C-aligned targets and from June 2022, the SBTi will not accept targets from corporates that are anything other than 1.5C-aligned.

SBTi recently launched a net-zero standard, saying it is the first of its kind – providing “a credible assessment” of net-zero target setting and helping companies ensure their climate goals are Paris-aligned.

The standard applies to Scope 1, 2 and 3 emissions, but SBTi said corporate climate action should go further and include investment in climate mitigation beyond their value chains.

SBTi explained once a company has made a commitment they must submit their targets to SBTi for validation within 24 months. Companies are then required to report company-wide greenhouse gas emissions and progress against their targets on an annual basis.

Of the companies that have submitted targets to SBTi, one-third have completed validation of near-term emission reduction targets and over half have committed to reach net-zero emissions across their value chain by 2050.

SBTi explained it will use the SBTi Net Zero Standard to validate the integrity of these targets.

Sanda Ojiambo, CEO and executive director of the UN Global Compact, said the rise in corporate climate commitments has been unprecedented.

“Ahead of the UN secretary-general’s Climate Summit in 2019, we challenged corporate leaders to limit the worst impacts of climate change and make the 1.5C goal the new normal for corporate action. Today, through the Business Ambition for 1.5C campaign we have witnessed an unprecedented increase in corporate commitments to tackle the climate emergency.

“Leading companies must now build trust by setting credible and independently-validated emission reduction targets and report on their progress. Greenwashing and misleading commitments have no place on our path to net zero,” she said.