Investor expectations for COP26
Investor expectations for COP26
It has been billed as humanity's last chance to save the planet. Even if you are wary of the hyperbole, it is difficult to deny that COP26 marks an important moment in efforts to reduce carbon emissions and to mitigate climate change.
For investors, it is undoubtedly a conference to watch, digest and calculate the impact on portfolios.
As our chief executive Peter Harrison has previously suggested, the changes that must happen to tackle climate change are akin to a "1929 moment". Sweeping changes were made to accounting after the Wall Street Crash. As seismic a change is underway now, with the impact of companies' operations soon to be made clear.
Here, we have gathered the views of key people within our organisation – our sustainability specialists, but also fund managers who invest in climate change trends. They answer key questions and highlight nuances for investors to consider.
It is also worth reading our guide to COP26. In a nutshell, an agreement was reached at the Paris COP (Conference of the Parties) of 2015 to limit long-run temperatures to "well below two degrees" on pre-Industrial era levels. More than 120 world leaders will gather in Glasgow for the first few days before handing the baton to environment ministers and other senior officials. About 25,000 people are expected to attend on Friday 12 November, but past experience of COPs shows they are likely to extend into Saturday and perhaps even Sunday.
What is the significance of COP26 and the emergence of the concept of a "just transition"?
Andy Howard, Global Head of Sustainable Investment:
"The policies of individual governments fell far short of the global commitments made at Paris and they continue to do so.
"This conference provides a staging post. National leaders are expected to return to the forum with tougher commitments, closing the gap between that shared ambition and their individual actions.
“It could prove a make-or-break moment for global climate diplomacy. Pressure has been intensifying and we could see a real step change in climate policy at this year’s meeting.
“The principle of a ‘just transition’ – ensuring the transition to a low carbon global economy does not unduly disadvantage weaker economies or parts of societies – has also gathered pace. As a global challenge, climate change requires coordinated action. Through that lens, the just transition is both a goal and a requirement: global agreement across policymakers representing every part of the global economy will not be possible unless all consider the plan fair.
“Failure to reach such an agreement has been the major headwind to faster action at past global conferences. As a result, we expect the need for global coordination and support to less developed economies to be a major component of negotiations in the run up to, and throughout, COP26.”
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What are the aims of COP26 and what should investors look out for?
Kate Rogers, Head of Sustainability, Wealth:
"This is an opportunity, a moment in time on which I hope I will look back and say that coordinated action was taken.
"The landmark IPCC (International Panel on Climate Change) report published in August contained almost 4,000 pages of science spelling out the implications of inaction. Namely, that it is only possible to keep warming to below two degrees through 'deep reductions in CO2 and other greenhouse gas emissions in the coming decades'. The 2015 Paris Agreement has now been ratified by 191 countries with Turkey, Iran and Iraq the only major emitters yet to sign.
"According to this agreement, each country must set its own emissions reduction targets, known as Nationally Determined Contributions (NDCs). Currently, the sum of these NDCs is not enough to meet the 1.5 degree warming target, so we urgently need to see countries set more ambitious targets for emissions reduction.
"The UK's overarching aim for the conference is to 'keep 1.5 degrees alive' and as prime minister of the host nation, Boris Johnson has called for action on coal, cars, cash and trees:
- Coal: Phase out coal by 2030 (developed countries) and 2040 (developing countries)
- Cars: Abandon cars with fossil fuel engines
- Cash: For the richest nations to recommit $100bn to help poorer nations in their transition
- Trees: To commit to protecting and restoring nature and planting more trees than we are losing
"A successful conference would see both meaningful commitments and international collaboration. A powerful way to incentivise businesses to decarbonise would be an agreed carbon price. This would charge emitters based on the amount released into the atmosphere, aiming to put the cost back to the source.
"Many countries already have some form of carbon pricing, but in order to be effective we would need universal adoption. Could COP26 be that opportunity? Although a major positive in the fight against climate change, the implications for investment markets could be significant. Our Carbon Value at Risk model applies a carbon price of $100 per metric tonne (the level suggested by the UN Global Compact in 2016) and finds 14% of the MSCI World’s earnings at risk.”
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How will the China/US dynamic affect negotiations?
Simon Webber, a Lead Portfolio Manager who has invested in climate change trends for the past 15 years:
“Some conferences can be a formality, but COP26 is arguably the most important climate conference in a decade and there are a number of key unknowns ahead, with the China/US axis being the most important.
“We’re all aware of the trade friction between the two nations and in some ways the Biden administration has been tougher on China than the Trump administration was. We can see that that trade technology battle is still ongoing, but there are still lots of negotiations on climate change that have been happening behind the scenes.
“Climate is one issue where both countries seem to want to cooperate. The question is whether the relationship is good enough to have a supportive set of announcements on climate change at COP26.
“We need to see real detail on China’s policy position, given that last year they committed to reaching net zero by 2060.
“But the US position also needs to be firmed up and supported by detailed policies to implement change. In the coming weeks we need to see actual commitments and legislation that can pass Congress to give credibility to the US plans to decarbonise. That will be a key catalyst for climate change investing.
“As well as the long term benefits of preventing dangerous climate change, public concern has risen considerably in both countries, creating a stronger political incentive for both countries to work together on climate action. One of the drivers of China’s recent regulatory changes is that people are unhappy with pollution and inequality. China has got much tougher on a number of polluting industries recently and there are clear signs that environmental pollution and standards are being prioritised in a way that they weren’t three or five years ago.
“There is an alignment of interest between China and the Biden administration on this. It’s just whether or not the trade issues get in the way of it.”
What is the immediate priority?
Saida Eggerstedt, Head of Sustainable Credit, European and Sustainable Credit and a specialist in carbon neutral investing:
“I would like much more actionable commitments by all governments towards carbon neutrality. It is absolutely welcome that many countries have set themselves targets by reaching net zero. But to meet the science-based pathway of limiting global temperature rise they need to act in the shorter to medium term. Disclosure and governance on how countries will reach carbon neutrality, and to include the private sector to commit, are key.
“Aside from that, I would also like to see allocation of financial resources and technical help to developing countries and endangered areas, immediately and urgently.
“It would be great if the conference addressed the question of climate-related disclosure by companies, with further progress toward guidelines. Sharing of technologies to capture and recycle greenhouse gases needs to be prioritised too.”
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What will the impact on emerging markets be?
Jonathan Fletcher, Emerging Markets Fund Manager and Head of EM Sustainability Research:
“I’m really optimistic with regards to COP26, and the opportunity this brings to address the world’s climate challenges. As an investor in emerging markets, I’m all too aware of the impact of climate change. Of the top ten cities most vulnerable to climate change, nine are in emerging market countries. Air quality is a concern across many emerging countries. Of the top 50 cities ranked by highest air pollution, 45 are in EM. The need for coordinated action, and financial support to help these countries, is absolutely fundamental.
“Many of the companies which we invest in within emerging markets are facilitators of positive environmental impact. It is one of five key themes in our investment process. And while investors, together with the public companies in which they invest, can have a critical role, coordination with government, as well as coordination between governments, is also essential.”
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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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