COP26: 5 things to watch for

COP26, the high-profile United Nations climate summit starting on Sunday, will see world leaders and negotiators from almost 200 nations gather in Glasgow, Scotland, to seek agreement on key climate issues.

Leaders will meet through 12 November to develop strategies for reducing global greenhouse gas (GHG) emissions over the next few decades with a goal of preventing the climate crisis from overwhelming Earth's critical systems.

Here are five areas accounting and finance professionals can watch for as governments, businesses, and standard-setters announce their climate commitments and plans during the two-week event.

Regulatory implications

Progress on reducing GHG emissions since the signing of the Paris Agreement in 2015 has been short of what's needed. Countries may agree on reducing global allowable GHG emissions every year ("carbon budgets") more significantly. There could be more countries moving from the current voluntary national commitment to a legally binding one, like what the UK and France have done by writing the commitments into law. Countries are likely to introduce higher carbon taxes, trade restrictions, emissions trading schemes (ETS), and new ways to price carbon into goods and services. Such global and regulatory changes will have substantial impacts on business, especially those that emit high amounts of GHG.

Finance professionals should pay attention to these announcements and determine how new regulations in their businesses' jurisdiction will affect their supply chain, source of funding, and markets where they sell products. If allowable GHG emissions are severely cut, companies may be forced to change their operations or business models.

There could also be impacts on company balance sheets. Governments may have new GHG emissions rules that could cause companies to no longer exploit an investment or resource they have, resulting in what's called a stranded asset. Fossil-fuel reserves is an example, where there is an estimate of over $1 trillion of stranded assets in the oil and gas sector. Even if your business does not own any stranded assets, you may have stranded liabilities in these affected businesses if you supply goods and services or lent them money.

Sustainability reporting

Reducing confusion in environmental, social, and governance (ESG) and sustainability reporting has been a goal of various regulators, standard-setters, and framework providers. Progress may continue towards a global sustainability reporting standard at COP26.

The IFRS Foundation, which in April proposed amending its constitution to permit the formation of a new International Sustainability Standards Board, is expected to announce a final decision about the new board at COP26. The US Securities and Exchange Commission, which earlier said it would provide more information on its requirements for climate change disclosures by the end of the year, hasn't said anything about making announcements during COP26. But its latest sample letter to companies gives a glimpse of what it envisions climate disclosures to look like when it finally announces the new rules.

Major professional accounting bodies and firms will be present at COP26 and will potentially launch new initiatives and plans that are worth noting. What we can be certain of is that future businesses will have to disclose more information on their GHG emissions, and those increases in requirements for large companies will trickle down to small businesses through supply chains.

Currency and capital implications

Lower national carbon budgets may affect currencies, where currencies of high GHG-emitting countries may see greater volatility. Businesses in industries that emit high amounts of carbon may see increased cost of capital and a markdown in their share prices as institutional investors rebalance their portfolios to reflect climate risks or divest from stocks of carbon-intensive companies.

There will likely be even more green bonds issued to fund a transition to a low-carbon economy. Finance professionals should look out for announcements on transitional financial instruments, subsidies, and tax credits that can incentivise a company's plans to go green.  

Reputational risk

A media storm on COP26 is already brewing, and public scrutiny on companies is likely to get more heated. Stakeholders may intensify their review of companies' strategies and plans and whether they disclose climate risks and GHG emissions in their supply chain. Ambiguous claims like "low carbon", "climate-neutral", and "net zero" will be more clearly defined by regulators, and companies will need to explain what they mean by their claims. Does your company have ready answers? Not knowing how to answer or providing dubious evidence is a reputational risk that could affect future returns.

Finance professionals should help their organisations gain clarity on their contribution to the climate problem, starting with understanding the carbon footprint of their company's operations. For organisations that are already aware of this, such information will help the business make more informed decisions to reduce its GHG emissions.

New ideas and partnerships

Many companies will be introducing new products, technologies, and innovative ideas that help reduce carbon emissions in the "green zone" — a publicly accessible section of COP26. Renewable energy solutions such as wind power are more cost-effective today than a decade ago. We will see more advancements in the use of green hydrogen and other renewable sources.

The civil society, businesses, academics, and artists will be holding talks, exhibitions, and workshops in the green zone. Some are running virtual events parallel to their physical ones that offer opportunities to learn the latest technology and creative ways to reduce GHG emissions, which could lead to potential collaborations.

What's after COP26?

While the world examines the extent of each country's climate ambition and commitment in the next two weeks, the public and investors will similarly look at how willing organisations and corporates are to address climate issues. COP26 is an opportunity to learn more about the potential future of your business and be prepared for the coming changes.

AICPA & CIMA will partner with the Center for Audit Quality and the Value Reporting Foundation to offer a free live virtual session addressing key ESG reporting and assurance topics post-COP26 on 15 November from 11am to 12.30pm EST. There will be a debriefing from COP26 attendees and discussions on the shape of global sustainability standards, new considerations around climate goals, SEC rulemaking, and what's on the horizon for internal controls and assurance. You can register for the event here.

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.