Strategies and Risks in the Wake of COP26

Mayer Brown

By James Whitaker

Now that COP26 is behind us, what are the implications going forward?

The two-week long UN global climate summit – postponed by a year due to COVID – brought some 40,000 delegates, together with high expectations of a reboot of our approach to pressing climate challenges, to Glasgow, and certainly included plenty of drama.

Unfortunately, it’s difficult to characterize COP26 as a resounding success. Nor can we say the world is now on a path that will avoid climate disaster. But some positives did emerge.

The Positives

Let’s take a closer look at some of the most significant:

  • The target of limiting global warming to 1.5 degrees Celsius, the widely recognized level of average temperature rise above which the impacts become catastrophic, is still alive – but barely. However, meeting it demands a Herculean effort by all stakeholders over the months, and years, ahead.
  • The timeline for climate action was accelerated, requiring world leaders to “revisit and strengthen” their 2030 targets by the end of 2022, as opposed to waiting another five years.
  • The unexpected but welcome US-China Cooperation Pledge means the world’s two biggest greenhouse gas emitters will focus on developing regulatory frameworks and environmental standards and deploying carbon removal technologies, as well as other related activities.
  • Specific rules were adopted aimed at defining how the new market mechanisms covered by the Paris Agreement will move beyond being merely aspirational to actually work.
  • Private finance was scaled up to tackle deforestation, and deals were reached to cut methane emissions and phase out new petrol and diesel cars.

The Negatives

On the flip side, COP26 resulted in several negatives as well.

  • Overall, the climate plans and pledges adopted for this decade are insufficient to meet the goals of the Paris Agreement. It has been suggested that we could be on track for a more dire 2.4 degrees Celsius average global temperature rise.
  • The last-minute toning down of the agreed-on language around the use of coal from “phasing out” to “phasing down” and the vague reference to “inefficient” subsidies for fossil fuel were disappointing. Even if UK Prime Minister Boris Johnson sees little difference between the choice of wording, others see very significant ones.
  • The wealthy nations of the world fell short of the $100 billion annual commitment in funding for less developed nations to mitigate the effects of climate change, and we saw little meaningful progress on this climate finance issue at COP26.
  • The lack of any enforcement mechanisms means that, ultimately, the world is reliant on the good faith of governments to move forward with implementing the actions and changes necessary to create meaningful change.

Identifying the Risks

From business’ perspectives, as usual, the risks and exposures post-COP26 will be largely sector-specific. But a number of overarching issues emerged that are likely to impact industries across the board.

First, COP26 focused the world’s attention on the urgency of the climate emergency and the roles that private enterprise, as well as national governments, must play. As result, the pressure on corporations and financial institutions, in terms of their environmental practices, will be more acute than ever.

Second, the move toward carbon neutrality will be watched extremely closely, as will disclosures and statements made about performance. Investors, and fund and asset managers will look increasingly closely at green standards and credentials when allocating capital; this will affect the cost of funding and access to capital markets.

Third, the risks associated with potential stranded assets are likely to become even more acute as commitments to phasing down – and ultimately, hopefully, phasing out – coal and other fossil fuel sources expand.

Last but not least, the use of strategic litigation to encourage – or compel – behavioral change is expected to continue to grow.

Act Now to Limit Exposure

Proactive and positive engagement with stakeholders, including shareholders, investors, employees, suppliers, community members, NGOs and other interest groups, is more crucial than ever. Meanwhile, the increased focus and pressure to improve climate-impactful behavior and make bold commitments in that regard is welcome, but organizations need to take care to avoid misrepresentations that could expose them to regulatory or litigation risk.

The fact that COP26 accelerated the timeline for climate action, and most nations committed to arrive at COP27 in Egypt with revised NDCs, offers cause for optimism – even if it could be construed as simply “kicking the can down the road.”  It’s clear that change needs to happen quickly, and we can expect pressure on national governments, corporations and financial institutions to increase rapidly. There is much unfinished business to address.

Watch Episode One of Legal Soundings to learn more about what you need to know after COP26.

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