As world leaders gathered in Glasgow on Monday for the start of COP26 – the climate change conference considered to be the most important since the Paris agreement in 2015 – participants in capital markets are still optimistic about the possibility of making significant progress, although the necessary breakthrough leading to a sharp increase in ambition seems less likely.

The financial sector has thrown its intellectual and messaging weight very strongly behind this COP since at least last year, with a crescendo of alliances, common declarations and announced objectives.

Part of this is to make politicians understand that they cannot hide behind the argument that climate action is damaging the economy.

Financial institutions are now turning to politicians to deliver. “Contrary to some views, many ESG investors do not think they can solve the world’s problems on their own, but seek government cooperation, advice and regulation to help address the climate emergency.” , said Arthur Krebbers, Head of Corporate Sustainability at NatWest Markets in Amsterdam: “There is always a gap between the aspirations of the ESG financial community and the first news.

Chinese Presidents Xi Jinping, Vladimir Putin of Russia and Jair Bolsonaro of Brazil are not expected to attend the summit, although there are still rumors that Xi could appear.

This in itself will make it more difficult to reach an agreement, especially on the central questions of how quickly countries should reduce their carbon emissions and how the cost of this operation should be distributed among rich and rich nations. poor.

In recent weeks, China has expressed reluctance to change its plan to reach peak emissions by 2030 and net zero by 2060, which would still allow the world’s largest emitter to continue trading. increase its pollution, making the goal of limiting global warming even to 2 ° C all but unachievable.

The G20 summit in Rome this weekend failed to produce the gains climate activists hoped for – and it could be an easier negotiating forum than the COP, which includes many more countries, especially the world. in development.

“Certainly, post-Rome progress is not necessarily where we would like it to be,” said Farnam Bidgoli, head of ESG EMEA solutions at HSBC in London.

But market participants are reassured that the conference has four components: climate change mitigation, adaptation, funding and collaboration.

Bidgoli said agreements could be made on each set of issues separately, without depending on the others, “so that we can end up with victories, although progress in other areas may be slower.”

The Paris Agreement sparked a wave of sustainability awareness in financial markets. The hype surrounding COP26 means that its most enthusiastic promoters have sometimes hoped for a similar burst of energy.

But Jacob Michaelsen, head of sustainable finance advice at Nordea Markets in Copenhagen, said it would be “a much more complex and multifaceted COP than it was six years ago.”

“I don’t think we need a new consciousness,” he said – consciousness had already been created by Al Gore’s film An inconvenient truth, the Paris Agreement and Greta Thunberg. “These are all the foundations we need,” he said. “It’s much more about building on it as quickly as possible. “

The complexity of this COP would come partly from difficult questions at the realpolitik level, he said, and partly from scientific advances.

“There is now growing evidence of the side effects of climate change on biodiversity and natural habitats,” Michaelsen said. “We know the financial markets need to appreciate this better. “

Citing comments from David Attenborough, Michaelsen said that “we still have time to get back on track and take action to limit climate change, but that’s because some of the costs are being borne by the natural habitat “.

For now, however, the most vital issue on which markets hope to see political progress is the pace of emissions reductions – the primary focus of the Cop 26 mitigation track. Despite discouraging rumors of China, some market players are relatively optimistic.

“On the mitigation aspect, the preparation, in terms of the targets set, has been really positive,” Bidgoli said. “We are in a better position due to the acceleration of private sector engagement in the commercial net zero race. Saudi Arabia has set a target of net zero, as has the United Arab Emirates. These are all pretty promising signals. What we are waiting to see is whether we can move forward on common timetables and common reporting frameworks.

Negotiators hope countries will agree to harmonize their Nationally Determined Contributions (NDCs) timelines so that they are updated every five years with growing ambition, and ideally progress begins to converge towards zero. net in 2050.

So far, China and now Saudi Arabia are aiming for net zero in 2060 and Thailand announced on Monday that it will achieve it by 2065.

Although neither Brazil, India, nor China have indicated that they want to take big steps forward in their NDC at this COP, Bidgoli said, “What is positive is that major private sector players in all three countries have started setting net zero commitments for 2050. ”. Indian companies Tata Chemicals and UltraTech Cement, Brazilian meat packer JBS and Chinese computer maker Lenovo Group have all charted ambitious paths, she said.

These commitments were “at least in part due to pressure from institutional shareholders”.

Michaelsen said that while over China “the pessimists may gain the upper hand,” there was still hope that the United States could “surprise on the upside.”

“The United States has also entered into underperforming the COP – it is trying to incorporate climate change concerns into its larger infrastructure bill – but the Biden administration plans to come to the COP with a series of announcements, ”he said.

When it comes to adapting to climate change, the ultimate price is to define a global objective. “It’s probably the hardest thing to achieve,” Bidgoli said, “but there are also less lofty aspects – on capacity building and technology sharing between developed and developing countries. We could see progress being made there.

COP26 has been dubbed “the finance cop” because of expectations that this is an area where progress could be made.

At the Copenhagen COP in 2009, widely regarded as a failure, rich countries pledged to “channel” $ 100 billion a year in climate finance to developing countries by 2020. They missed the target. , to the anger of the developing world, especially since 100 bn is a small fraction of what is estimated to be the actual need.

Despite their support for climate diplomacy, wealthy states like the UK and especially the US have been reluctant to invest money in it. Worse, there is still no agreement on how to measure climate finance.

The participants do not hope for decisive progress here.

“What we are asking for are better definitions of what can be included in climate finance, so there is a signal that can be sent to the private sector,” Bidgoli said.

In this context, an important announcement is expected Thursday by the European Commission and the Chinese joint working group on the alignment of their green taxonomies.

This COP is unlikely to be the one where big changes are made to the regulations that increasingly govern sustainable finance, but there will be an update from the IFRS Foundation on its progress in developing international accounting standards. sustainability.

Krebbers said that “one possible path is for policy makers to wait for the IFRS Foundation to take its course with its proposed sustainability reporting regime. [That would be] similar to the approach with TCFD – start with various market players developing voluntary standards, then governments can provide additional support.

The area where governments could be more aggressive, said Krebbers, was “openness and transparency of data. ESG data is still relatively difficult to obtain. There is an argument for considering certain ESG information as a public good, which should be made available free of charge. “

The EU should push for ESG data to be available in standardized and machine-readable formats. ESG rating agencies closely monitor their proprietary information and scores.

Capital markets are eager for politicians to show leadership at COP26, on many fronts. “The private sector has been quite clear about the need for greater certainty in policy making, so that it can act on it,” Bidgoli said.

The thirst to invest in the green transition is obvious, as is the scale of the needs.

But the obstacles to achieving this funding are still palpable day to day, Bidgoli said. “There is a gap between the technologies the private sector is willing to fund and the technologies needed to unlock net zero,” she said. “This is why the $ 100 billion and the implementation plans behind net zero in countries like the UK, US and EU are so important. The private sector must be able to count on some support for technologies which are currently not economically viable. “

If clarity could be achieved in international negotiations, Bidgoli said, “it will eventually get into the private sector.”

Michaelsen said: “All the studies show that we are still not funding enough, but funding can only happen if the investments happen in the first place. Investments are made by governments, asset owners, asset managers and companies. These actors will have to make investments so that we can finance them.

Nevertheless, even if this COP produces little progress, the trajectory of the markets is clear.

“Some would say that sustainable finance was already extremely hot, but the market has the capacity to do more,” Michaelsen said.

Governments setting the direction would give great confidence and speed up the transition, but in the absence of this, the markets, aided by NGOs, are setting the pathways themselves.

Michaelsen noted the “momentary” adoption of science-based targets over the past year. “Certainly the power of the financial markets has helped move that needle,” he said.

Debt markets, long ignorant of SBTs, have now embraced them.

“Many sustainability-related loans are now linked to SBTs and almost all of them have CO2 targets,” he said. “In the bond market, there is a clear preference for climate goals and it’s much easier to sell your story if it’s tied to an SBT. In a few years, I am convinced that this will become the norm.