Long-read: a look back at COP26 and the central role of ESG for businesses moving to net zero

Fri 21 Oct 2022
Posted by: William Barns-Graham

ESG - Environmental Social Governance issues

“Friends, it is up to all of us to sustain our lodestar of keeping 1.5 degrees within reach.  To continue our efforts to get finance flowing and boost adaptation. After the collective dedication which has delivered the Glasgow Climate Pact, our work here cannot be wasted.”

So said Alok Sharma, the president of the 26th UN Climate Change Conference (COP) at the closing plenary of COP26 in Glasgow last year.

But what did last year’s conference achieve and what is its legacy as we approach COP27 in Sharm El Sheikh, Egypt?

COP26 – what happened

More than 200 nations adopted the Glasgow Climate Pact which aims to turn the 2020s into a decade of climate action.

Carmen Amieva, a customs specialist team lead at the Institute of Export & International Trade (IOE&IT) and an expert on ESG (Environmental, Social and Governance), says the major achievements included:

  • A strengthened commitment to build resilience to climate change
  • Pledge to curb greenhouse gas emissions and provide the necessary finance to do this
  • Reaffirming the pledge from developed nations to provide $100 billion annually to developing countries
  • Collective agreement to reduce the gap between existing emission reduction plans and what is required to reduce emissions to the level needed to ensure that the global average rise in temperature is limited to 1.5 degrees
  • Nations for the first time being called upon to phase down unabated coal power and inefficient subsidies for fossil fuels

During the conference, the UK officially announced the enshrinement in law of the recommendation from the Taskforce on Climate-related Financial Disclosures (TCFD) for Britain’s largest companies to disclose their climate-related risks, opportunities and financial information.

Since COP26, a new Plastic Packaging Tax was also introduced in the UK in April 2022, which you can read more about here. Several global corporations have announced sustainability initiatives, which you can read more about here.

But what are companies required to do to ensure they are playing their part in the move to net zero?

ESG requirements

ESG reporting has become perhaps the main driver for net zero in the business world.

“ESG is the culmination of many climate change agreements,” said Jane Tait, a customs consultant at the IOE&IT. “It has come about to prevent green washing and has been developed to stamp out non-compliant practices once and for all.”

In the UK, listed companies that either have an annual turnover exceeding £500m or more than 500 employees are required to include sustainability in their annual reporting via the ESG framework, according to Tom Rose and Rachel Richardson from Macfarlanes LLP.

This requirement was expanded in 2022 and can be found in the Companies Act 2006, among other laws, and is expected to be further formalised through the Sustainability Disclosure Requirements (SDR) set out by then-Chancellor Rishi Sunak in October 2021.

SDRs will be tied to key corporate decision-making, with Sunak saying: “We want sustainability to be a key component of investment decisions, and our plans will arm investors with the right information to make more environmentally-led decisions”.

Although there is no specific technical unit overseeing ESG compliance, environmental regulators in the UK have reported issuing 1,000 penalties since 2010 to firms not complying with ESG requirements, totalling over £250m.

But compliance is generally high, with 88% of publicly traded companies, 79% of private equity-backed firms and 67% of privately-owned firms having ESG initiatives in place in 2020, before COP26, according to NAVEX Global. SMEs are also increasingly adopting ESG as a key part of their strategies, with 77% having a purpose statement that includes it, according to Quote Companies Alliance.

Frederic Jean-Baptiste, an IOE&IT business member and chief executive of global trade services provider Customs & Freight, advised that ESG is an opportunity for SMEs, despite not yet being required legally.

“It's also an opportunity for all businesses, importers and exporters, to think about sustainable ways of doing even the smallest things, to change the status quo for the wider society's benefit,” he said. “And there's a lot of guidance but also funding available for small companies that innovate, because of the government’s green transition plan.”

You can read more about the challenges firms face when reporting ESG here, including the role that the digitalisation of trade and supply chains will play.

Beyond ESG

It’s not just about ESG though.

In its 2050 Net Zero Strategy, originally published in October 2021, the government included a ‘Ten-point plan for a green industrial revolution’. Although ESG has a particular relevance to the final point, ‘green finance and innovation’, the plan also addressed the increased use of renewables, delivering new nuclear, accelerating the shift to zero emission vehicles and protecting the natural environment, among other points.

In June 2021, the government also introduced the new Green Technical Advisory Group (GTAG) to oversee the delivery of the ‘Green Taxonomy’, which it says will “help clamp down on greenwashing” and help the government to “boost investment in projects that accelerate the transition to a sustainable economy, create green jobs and support the UK’s environmental goals.”

How the UK trades with the rest of the world is also a key part of its net zero strategy. The Department for International Trade’s Board of Trade in 2021 published a ‘Green Trade’ report which included recommendations to invest in the low carbon economy to make the UK a hub for ‘green exports’ and ‘green finance’, among other recommendations.

In a speech last year, the previous international trade secretary, Anne-Marie Trevelyan, said the global market for low-carbon exports is projected to be worth almost £2 trillion by 2030.

Clydebank Declaration

One of the key achievements from COP26 was the signing of the Clydebank Declaration to develop green shipping corridors – routes between two or more maritime ports which have zero-emissions.

Frederic Jean-Baptiste tells me that you can’t have green trade without green shipping:

“Obviously, one of the most polluting elements here — despite the fact it is the most fuel-efficient — is shipping. The International Maritime Organization has started the process towards moving the industry towards net zero. There are a lot of structural changes happening in the shipping industry, starting from ships being built to be more energy efficient”.

While this is an international endeavour, Ilona Kawka, a digital trade and customs specialist at the IOE&IT, says that a lot is being done in the UK to do its part in making green shipping corridors happen. This includes the implementation of a plan from the Department for Transport (DfT) to implement low-carbon technologies, move away from road and air freight transport and use digital solutions to optimise efficiency around vehicle utilisation to achieve net zero emissions from HGVs by 2030, aviation by 2040 and shipping by 2050.

In March 2022, as part of its National Shipbuilding Strategy, the UK government also created a unit called UK SHORE within the DfT to work towards sustainable maritime shipping.

In Teesside, a hydrogen transport hub is expected to be operational by 2025, with the government dedicating a £3m pool of funding to it. The government is also hoping to launch green freeports in Scotland in which rebates will be offered for green investment.

Onto COP27

As ever with any COP, the full impact of COP26 – including how many of its pledges become reality – will not be known for years. Ahead of the next meeting of the annual conference in Egypt in November, Amieva tells me that COP27’s success  will be measured “on its ability to deliver on two goals: solidarity and accountability.”

In Glasgow last year, 40 world leaders signed up to the Breakthrough Agenda which committed 40 countries – including the US, India, EU, China and developing countries – to make sustainable solutions “affordable, accessible and attractive”. The countries signing up to this agenda represented more than 70% of the global economy.

Amieva says the campaign “demonstrated vision and commitment to clean energy innovation and cemented partnerships between world leaders, achieving significant momentum to 2022 and the next COP Presidency.”

How this momentum will carry through will be fascinating to see.

Thank you to Ilona Kawka, Carmen Amieva, Jane Tait and Rosana Verza for their research and support for this article.