In focus

Investor expectations for COP27

COP27 will get under way in Sharm El Sheikh, Egypt, on 6 November and will run until 18 November. It’s the United Nations’ annual climate change conference with attendees coming from all over the world with the aim of agreeing actions to tackle the climate crisis.

We asked our investment experts for their views on the conference, why it matters for investors, and what they think will be the main issues under discussion.

Focus on implementation, not new commitments

This COP is not expected to generate many new commitments or regulations designed to reduce emissions. Environmental economist Irene Lauro said: “COP27 has been framed as an implementation summit, so conversations are unlikely to focus on new mitigation measures to reduce emissions, but rather on how to implement climate actions in order to fully operationalise the Paris Agreement.”

The Paris Agreement is a legally binding international treaty, agreed at COP21 in Paris in 2015. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.

Irene Lauro added: “Discussions at COP27 will have a focus on how decisions and pledges that countries made at COP26 in Glasgow can be implemented. Therefore, stricter regulation is not a likely outcome.”

Adaptation high on the agenda

But even if new commitments may be thin on the ground, there’s plenty to discuss. Yumna Yusuf, Engagement Associate – Climate, said: “Unlike previous COPs, which have focused heavily on climate mitigation, a key priority of the COP27 Presidency is to ramp up global efforts on adaptation and resilience and place this at the forefront of the climate action agenda.

This COP is being held in Africa, a fact that has helped to shape the agenda for the conference. “Africa is one of the continents most affected by a warmer world,” explained Irene Lauro, “and ‘adaptation’, how to prepare for the impacts of global warming and more extreme weather events, is a top item on the COP27 agenda.”

It’s not just the location of this year’s COP, but also the events of the year that have pushed adaptation up the agenda. Irene Lauro pointed out that in 2022 Europe experienced its hottest summer in 500 years, Pakistan declared a state of emergency after two thirds of the country was flooded and both Cuba and the Philippines were hit by typhoons and hurricanes simultaneously.

Saida Eggerstedt, Head of Sustainable Credit, said: “With 2022 showing record temperatures as well as floods and droughts, I hope there is a lot more focus on climate change adaptation across industries and countries.”

Maria Teresa Zappia, Head of Sustainability and Impact at Schroders Capital, is attending part of COP27 in person. “We will be there for three days with the Luxembourg Ministry of Finance delegation, “ she said. “The days we are there will be ones where there are a number of activities around climate adaptation.”

“Just Transition” in the spotlight

As well as adaptation, our experts also highlighted the importance of considering the wider impact of reducing harmful emissions. “The extreme energy insecurity felt this year – related to fossil fuel supply being used as a weapon, among others – is not only reducing growth potential globally, but many jobs might be lost as a result,” said Saida Eggerstedt.

“I hope the generation of renewable energy as a percentage of total energy generation, as well as energy consumption reduction and efficiency, are widely discussed and implemented. And not with long term goals – but with medium term actions.”

The need to consider all stakeholders in pursuing climate targets is a crucial one for companies and their investors. Carol Storey, Active Ownership Manager – Climate, said: “We speak to many companies in energy-intensive sectors where the use of renewables and low-carbon fuels is increasingly a viable option. However, companies don’t usually have equal access to low-carbon energy across all of their locations. Simply shutting down sites and moving elsewhere can be devastating for local communities.

“We would welcome discussion on how governments, companies and investors can better work together to plug gaps in low-carbon infrastructure, or alternatively develop new sustainable industries in these areas.

“Companies have told us of the challenges of pursuing climate goals while trying to limit the impact on jobs, energy security and inflation. Others have highlighted human rights risks linked to energy transition metals and offsetting projects. Some companies have expressed concerns that emerging markets might not be able to attract the same level of green investment as developed markets.

“This is a complex area with a wide range of interests that don’t always align. We’d like to see conversations that consider the Just Transition from all angles.”

Can COP27 achieve its aims?

Some of our experts are sceptical of COP’s ability to deliver the policies required to limit global warming, as per the Paris Agreement. Global equities portfolio manager Simon Webber said: “After 26 COPs the world has achieved very little in the way of actual emission reductions necessary to avoid dangerous climate change.

“Furthermore, this is a time of heightening geographical tensions between major economic players. That makes it hard to see negotiators having the political will required to make the necessary difficult decisions and compromises.”

Andy Howard, Global Head of Sustainable Investment, echoed this view, saying: “In practice, I am not expecting huge things from COP27. It seems very improbable that major steps forward or statements of intent will be announced in the current political context.”

This may also be to do with the fact that COP26 in 2021 was such a large event, because no COP was held in 2020 due to the Covid-19 pandemic. Maria Teresa Zappia said: “I have a feeling there will not be as many people as there were in Glasgow last year. The government delegations will be more junior, there will be fewer presidents.

“I think the last one was very particular because it was the first after Covid and a lot of people travelled to get together. This one is almost so close time-wise that people may say to themselves ‘I haven’t delivered what I was supposed to do between COP26 and COP27 so I might as well not to go so as not to be embarrassed’.”

COP’s not the only place for progress

But while expectations for COP27 are muted, there’s still progress to point to this year on the policymaking front. Isabella Hervey-Bathurst, Global Sector Specialist, Multi Regional Equity, said: “I’d be surprised if COP27 delivered something more meaningful than the US Inflation Reduction Act or the EU’s RePowerEU package. Both of these plans represent ambitious decarbonisation targets and billions of dollars of funding to back them up.

“Perhaps one cause for optimism is that passage of the Inflation Reduction Act should strengthen the US’s role in global climate negotiations since they can now point to credible policy progress domestically, which has been lacking in recent years.”

This is a view shared by Simon Webber, who said: “The most encouraging thing at the moment is that with the passing of the US Inflation Reduction Act there is more global competition and investment going into climate technologies. This is likely to speed up the pace of adoption in climate technologies around the world.”

Pressure for progress can come from local levels too. Tom Walker, a real estate specialist, said: “I continue to believe that cities hold the answer to climate change. If cities can get things right, then we can achieve goals set out in the Paris Agreement. So far agreements at previous conferences have fallen short. We see this as an opportunity for cities to adopt their own, ambitious policies and increase pressure on national and regional governments to act faster.”

Even if COP27 itself fails to deliver the progress many want to see, it still represents an opportunity for discussion between policymakers, corporates, civil society groups and more. Carol Storey, Active Ownership Manager – Climate, said: “We spend a lot of time speaking to companies about the practical steps they are taking to transition their businesses. One theme that crops up repeatedly is that companies need the co-operation of many different stakeholders in order to meet their net zero goals.

“At COP27, I would like to see new partnerships between sectors, value chains, investors and governments to support companies to transition in a fair and responsible way.”

It’s also an opportunity to apply pressure for climate promises to be kept. Maria Teresa Zappia said “One thing that is frustrating is the flow of funds that keeps being committed every year, particularly to emerging markets, and simply doesn’t arrive. The numbers are striking on the gap between what was committed and what has been deployed.

“In my view, the aim is just to make sure things are moving and some of these commitments are materialising. It’s about keeping the pressure on policymakers and governments to stick to their commitments.”

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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