Article

After COP26: Now, the Hard Part

Broad policy announcements grabbed headlines, but here are some of the implications for business.

Par Jenny Davis-Peccoud, Debra McCoy, et Torsten Lichtenau

First published on novembre 16, 2021
min


As the 26^th UN Conference of the Parties in Glasgow drew to a close over the weekend, with some participants buoyed by the prospects of aggressively attacking climate change and limiting global warming to 1.5 degrees Celsius through their actions over the next decade, one sobering truth remained clear: There’s an overwhelming amount of work ahead for governments, financial institutions, and corporations. Among the achievements that we found most encouraging were the strong commitments and international agreements, such as the more than 100 countries representing the lion’s share of the world’s forests pledging to halt deforestation by 2030. Parties agreed to update 2030 targets in 2022 rather than in five years, and they also closed loopholes around some legacy, poor-quality carbon credits. (For more, see “Four Myths about Carbon Offsets.”) Some accomplishments were thwarted by disregard, such as the commitment to reduce methane that wasn't signed by several key emitters or the pledge to end investment in new coal power generation that failed to garner support from countries representing 70% of the world’s coal production. But whatever happens on the policy side, much of the real work of the climate transition will be driven by finance and private companies, which were at the table in a serious way for the first time. One significant outcome was the International Finance Reporting Standards Foundation’s formal announcement of a group that will be tasked with establishing standards for comparable sustainability disclosures. The International Sustainability Standards Board will work to create a baseline that will, for the first time, allow investors to assess companies based on common financial and sustainability performance standards. Investors’ commitments to net zero also moved forward through the Glasgow Financial Alliance for Net Zero (GFANZ), which includes some of the largest and most influential financial institutions in the world and 40% of global bank lending assets. The banks, insurers, asset managers, and asset owners in the alliance have committed to implement guidelines by 2030 in order to reach net zero by 2050. This means the implied temperature of operating and investment decisions will become increasingly transparent and may become a gating issue for obtaining finance. (For more, read “A Proven Approach to Decarbonized Loan Portfolios.”) Along with these moves in finance and standards, companies are steadily increasing their understanding of and focus on the investments required to make climate transition possible. They are adapting operations and developing new technologies to facilitate emissions reductions, and they are building resilience, both for their own supply chains and the vulnerable communities around the world that support their businesses. Despite such plans, the task ahead is significant. Few companies have a bankable plan for reducing carbon emissions, and only 7% of corporate change programs succeed, based on our research. But the urgency and attention around COP26 make it clear that executives who want to lead can no longer watch and wait. In our work with large companies that are acting on their ambitions and starting to reduce their emissions, four specific principles are guiding decisions that are making a real difference. Make carbon transition a pillar of strategy. Ambitions to reduce emissions should guide decisions about where to compete and allocate resources. Get more bang from your net-zero buck. Measure the carbon transition like the rest of the business, and find ways to monetize investments in carbon reduction. Embed carbon transition into the fabric of the business. Price carbon internally, link compensation incentives to transition goals, and track greenhouse gas emissions as you would costs. Avoid the hourglass effect. Senior managers and new hires may be enthusiastic supporters, but the transition needs buy-in from the middle managers who must implement change successfully. Related report Beyond COP26: An Action Plan for CEOs As measures to tackle climate change accelerate, more companies will approach their own carbon transitions with the same results orientation as any other strategic transformation.

As the 26^th UN Conference of the Parties in Glasgow drew to a close over the weekend, with some participants buoyed by the prospects of aggressively attacking climate change and limiting global warming to 1.5 degrees Celsius through their actions over the next decade, one sobering truth remained clear: There’s an overwhelming amount of work ahead for governments, financial institutions, and corporations.

Among the achievements that we found most encouraging were the strong commitments and international agreements, such as the more than 100 countries representing the lion’s share of the world’s forests pledging to halt deforestation by 2030. Parties agreed to update 2030 targets in 2022 rather than in five years, and they also closed loopholes around some legacy, poor-quality carbon credits. (For more, see “Four Myths about Carbon Offsets.”) Some accomplishments were thwarted by disregard, such as the commitment to reduce methane that wasn't signed by several key emitters or the pledge to end investment in new coal power generation that failed to garner support from countries representing 70% of the world’s coal production.

But whatever happens on the policy side, much of the real work of the climate transition will be driven by finance and private companies, which were at the table in a serious way for the first time.

One significant outcome was the International Finance Reporting Standards Foundation’s formal announcement of a group that will be tasked with establishing standards for comparable sustainability disclosures. The International Sustainability Standards Board will work to create a baseline that will, for the first time, allow investors to assess companies based on common financial and sustainability performance standards.

Investors’ commitments to net zero also moved forward through the Glasgow Financial Alliance for Net Zero (GFANZ), which includes some of the largest and most influential financial institutions in the world and 40% of global bank lending assets. The banks, insurers, asset managers, and asset owners in the alliance have committed to implement guidelines by 2030 in order to reach net zero by 2050. This means the implied temperature of operating and investment decisions will become increasingly transparent and may become a gating issue for obtaining finance. (For more, read “A Proven Approach to Decarbonized Loan Portfolios.”)

Along with these moves in finance and standards, companies are steadily increasing their understanding of and focus on the investments required to make climate transition possible. They are adapting operations and developing new technologies to facilitate emissions reductions, and they are building resilience, both for their own supply chains and the vulnerable communities around the world that support their businesses.

Despite such plans, the task ahead is significant. Few companies have a bankable plan for reducing carbon emissions, and only 7% of corporate change programs succeed, based on our research. But the urgency and attention around COP26 make it clear that executives who want to lead can no longer watch and wait. In our work with large companies that are acting on their ambitions and starting to reduce their emissions, four specific principles are guiding decisions that are making a real difference.

Make carbon transition a pillar of strategy. Ambitions to reduce emissions should guide decisions about where to compete and allocate resources.
Get more bang from your net-zero buck. Measure the carbon transition like the rest of the business, and find ways to monetize investments in carbon reduction.
Embed carbon transition into the fabric of the business. Price carbon internally, link compensation incentives to transition goals, and track greenhouse gas emissions as you would costs.
Avoid the hourglass effect. Senior managers and new hires may be enthusiastic supporters, but the transition needs buy-in from the middle managers who must implement change successfully.

Related report

Beyond COP26: An Action Plan for CEOs

As measures to tackle climate change accelerate, more companies will approach their own carbon transitions with the same results orientation as any other strategic transformation.