Webinar: Sustainable investment - against the backdrop of COP26

What came out of COP26 ?

There were some positive surprises from COP26, but more work is needed to ensure temperature rises are limited to 1.5 degrees Celcius.

• For the first time, countries signed up to specific commitments on fossil fuels

• Countries have now agreed to rules governing the trading of carbon allowances

• Participants also committed to ending deforestation – and importantly this included commitments from Russia and Brazil

There were plenty of new “net-zero” pledges, with countries promising to cut their net emissions to zero. However, while these long-term commitments are welcome, they really need to be coupled with shorter-term targets that allow governments and companies to be held to account.

Sustainable investment: the conversation matures

Accountability is key if action around climate change is to mature. Understanding the trade-offs within less-than-perfect industries is also important.

For many years, sustainable investors could simply choose to avoid owning mining companies - and the environmental and social risk that came with them. But things are changing.

The transition to a more renewable energy system will be resource-intensive – requiring steel, copper and many other commodities – meaning sustainable investors can’t simply ignore these important suppliers.

“Someone is going to have to do mining and someone is going to have to own mining companies,” says Katherine Davidson, a Schroders portfolio manager specialising in sustainable businesses. “We need to engage with these companies and develop a view on best practice.”

Those working in mining are essential to the energy transition, adds Alexander Monk, a Schroders portfolio manager specialising in global resource equities. “They know how to decarbonise their industries better than anyone as they have such an in-depth knowledge of the science behind fossil fuels,” he explains.

The evolving position is symptomatic of some of the trade-offs that sustainable investors are increasingly grappling with.

What do we mean by energy transition?

The global energy system accounts for around half to two-thirds of global carbon emissions and it has a crucial role to play in helping limit climate change. We need to transition towards an economy powered by renewable sources. “We need to produce a lot of renewable energy cheaply,” says Monk. “If we can’t get this right, it is going to be hard to reduce carbon emissions anywhere else,” he says.

Today, we get around 20 – 30% of our energy from renewable sources. We need to get it to 85 – 90% by 2050. However, this will have to play out over time: we aren’t ready to turn off fossil fuels just yet. For example, the UK has recently had lower amounts of wind than expected. That has affected the energy mix, so coal has been burnt to support our energy supply.

We see an important role for natural gas, a cleaner fossil fuel, and nuclear as we develop the renewable energy system we need. Renewables produce electricity, so we will need to increase our use of electricity as a power source. Today, it accounts for just 20% of energy.

“Green hydrogen” – hydrogen produced using renewable energy – will also have an important role to play in decarbonising our energy system. Electricity is not a very efficient way of getting things very hot - an essential part of many industrial processes. Hydrogen is likely to be one answer.