COP26 - a recap and what it means for investors

COP26 – a recap and what it means for investors

Tue 30 Nov 2021

The latest United Nations climate summit, or COP26, officially concluded on November 14th, ending two long weeks of negotiations in Glasgow, among almost 200 countries.

Scientists and experts have long agreed that it’s crucial for levels of warming to stay below the pivotal threshold of 1.5 degrees Celsius above pre-industrial levels, a vital objective of the Paris Agreement (2015) and the point at which the risk of deadly climate disasters surges. The world is currently 1.1 degrees Celsius above pre-industrial levels.

COP26 produced the Glasgow Climate Pact, the first-ever global climate deal to explicitly plan to reduce coal, the worst fossil fuel for greenhouse gases. The pact acknowledges that commitments made by countries so far to cut emissions are nowhere near enough. To solve this, it asks governments to strengthen those targets by the end of next year, rather than every five years, as previously required.

During the conference, some countries did make positive strides in this direction. More than 100 countries agreed to slash their methane emissions by 30%, relative to output in 2020 – and that matters because methane is an incredibly potent greenhouse gas. Another 100-plus nations – holding more than 85% of the world’s forests – pledged to halt deforestation and land degradation by 2030.

The United States and China surprised onlookers when they agreed to curb emissions and limit warming over the next decade. The two countries jointly are the world’s biggest greenhouse gas emitters, accounting for an estimated 40% of global annual carbon output. China is the world’s top emitter, exceeding all developed countries’ emissions combined, while the United States is second.

According to the Climate Action Tracker, existing national policies would see the world on track to heat up by 2.4 degrees Celsius by 2100. In acknowledgement of this, countries have agreed to return next year with greater cuts and new targets, accelerating, in theory, their efforts to bend the curve.

Ultimately, COP26 saw nations make some brave promises. In the absence of clear government policies to drive change, the key breakthrough was the agreement to ensure the financial system will deploy capital in a manner consistent with climate objectives. The Glasgow Financial Alliance for Net Zero, an initiative tabled by Mark Carney, saw over 450 financial institutions commit more than USD 130 trillion of private capital to support the net zero transition. Yet governments will still have a key role to play here: a combination of policy incentives and clearer guidance on future regulation will be necessary to enable the financial sector to effectively put its capital to work.

Investors will need to pay more attention to the climate risks in their portfolio. The potential for macroeconomic disruption, not just in carbon-intensive industries but extending across the economy, will increasingly need to be factored in by long-term investors. Physical climate risks will also require careful consideration.

Even before COP26, ESG issues continued to garner more attention in the investment management sphere, much driven by demand from clients and their stakeholders. The landscape for ‘responsible’ investment has developed at pace, and the focus has turned to the need to demonstrate positive impact. This aspect of portfolio governance is still in its infancy, with little agreement on how best to measure and represent environmental and societal benefits and challenges around the authenticity of the claims of some financial and corporate institutions, so called ‘greenwashing’. We expect further evolution, refinement, and consensus on these issues over the next few years.

We are pleased to provide our annual ESG impact report. The report considers the positioning of our sustainable model portfolios through our proprietary Sustainability Score which is based upon the key characteristics of each of the underlying funds within portfolios. We then look to bring to life some of the key themes within the portfolio together with individual stock examples, assess the portfolio’s alignment with the UN SDGs, highlight positive engagement by fund managers, and look forward to anticipated developments in the ESG arena.