After two weeks of negotiations in November last year, COP26 concluded with all 197 countries represented at the conference signing the Glasgow Climate Pact.

Broadly aimed at limiting global warming to 1.5°C and finalising the Paris Rulebook, the Glasgow Climate Pact is designed to accelerate action on climate change over the next 10 years, and will therefore have an outsized impact on the commodities sector.

As described by COP26 President Alok Sharma, the Glasgow Climate Pact is focused on four key areas of climate action:

• Mitigation – reducing emissions 

• Adaptation – helping those already impacted by climate change 

• Finance – enabling countries to deliver on their climate goals

• Collaboration – working together to deliver even greater action

For the commodities sector, let’s take a look at what that means in practice, noting that some parties went much further than the baseline commitments laid out in the pact.

Phasing out of fossil fuels in energy and transport

After COP26, 90% of global GDP is now covered by net-zero commitments, and 153 countries put forward new emissions targets – known as nationally determined contributions (NDCs) – for 2030. 

Additionally, 34 countries and five public finance institutions committed to ending direct public support for international fossil fuel extraction and the unabated fossil fuel energy sector by the end of 2022.

It is hoped that this commitment – which covers all of the G7 except Japan – will free up an estimated $24 billion a year to flow into clean energy, and will avoid burdening countries with stranded assets.

Similarly, international partners mobilised over $20 billion for a green transition from fossil fuels to clean energy.

This includes a new $10 billion energy fund, the Global Energy Alliance for People and Planet, which aims to bring renewable electricity to a billion people by 2030 and avoid 4 billion tonnes of CO2 emissions.

Vehicle manufacturers representing more than 30% of the global market have also made commitments to phase out fossil fuelled vehicles – a goal that had almost zero carmakers behind it only two years ago.

Changes to business models and financing

Without question, the global shift towards greener products and greener power will cause significant disruption to the business model of many commodities producers and traders, and to their ability to access finance.

Greg McNab, a partner at multinational law firm Baker McKenzie, said he believes that for some, the transition will be seen as a challenge to be overcome, but for others, it will be an opportunity to be seized.

“Either way, it’s certainly an interesting time to be either a commodities trader or a producer,” he said.

“Historically, both businesses have significantly relied on the ability to model or forecast both demand and supply, and in the last few years, we’ve seen massive disruptions on both sides of that equation.”

Coinciding with the global shift in sentiment towards fossil fuels commodities is, of course, the global pandemic, which has led to its own set of supply chain disruptions and price volatility.

Secondly, as McNab points out, a global focus on the energy transition not only shifts the demand for energy products, but also increases the cost of one of the largest commodities production and transportation input costs – i.e. the energy required to extract and deliver.

Thirdly, dramatic changes in weather can further impact production and demand, and finally, there is the commodities supercycle that has emerged out of the COVID-19 pandemic, contributing to record high prices and volatility in much of the energy sector.

“The trick seems to be how to market these increased costs and delivery times as being connected with a more responsible way of doing business,” said McNab.

“Some producers have embraced that, but others are still struggling with it. It’s a pretty long list of things that they’re now dealing with.”

Tasneem Krueger-Vally, CEO of Krueger Vally Consulting, agreed with McNab that commodities businesses that fail to adapt to the changes taking place will struggle in the years ahead.

“The simple fact is that businesses that fail to embrace energy transition or net-zero commitments are likely to fall behind their competitors,” she said.

Krueger-Vally emphasised that this applies as much to larger corporates as it does to their supply chains, a significant proportion of which is made up of small and medium-sized enterprises (SMEs).

“You can already see that the pain is passing down the supply chain, and what that means is companies need to have a collaborative approach from top to bottom in any supply chain, because that’s going to be the key to achieving net zero.

“But the reality is that only some will be willing and only some will be able to work together in this way.”

Early-mover advantages

Among the approaches to a successful transition strategy, Krueger-Vally said it is important for companies to plan ahead to maintain their competitive advantages.

“Businesses will need to identify and address the financial needs and consequences of adopting that early-mover position,” she said.

“They will also need to ensure that the ability to trade competitively in the short-term with sufficient cash reserves is not lost in the process, and they need to be aware of the pressures likely to come from the rest of their supply chain.”

On staying profitable in a net-zero business environment, Krueger-Vally said it can be done through a mixture of innovation and education, by switching to renewables and green financing, and by offering support and guidance on transition to suppliers.

“At the end of the day, significant transformation has to be a top-down approach embedded in the organisation – it’s very important that this is something that’s represented at the board,” she said.

Adam Hearne, CEO of emissions tracking firm CarbonChain, said he has already seen that board-level transformation taking place among clients and among COP26 attendees.

“I think decarbonisation has really found its place on the executive agenda,” he said.

“And if you haven’t got that, as an executive, your board is probably looking at CVs for other suitors for the job, who can take that approach and bring modernisation to the strategy.

“So, if I take an old saying: the future is here, it’s just not evenly distributed yet.”

Find out more about Reuters’ Events upcoming conference Commodities Trading USA 2022 – Examining the changing face of commodities here.