05) This article series will keep you informed in the lead-up to the COP 26 climate meeting in November. Stay tuned…
Opinions on whether COP 26 will deliver any breakthrough agreements vary along a broad spectrum. Some suggest it’s our ‘last-best hope’ for avoiding the worst impact of climate change; others simply point to this being the 26th meeting and ask, ‘surely the first 5 were enough?’
Whether or not you hold out hope that global heads of state will manage to reach any substantive agreement, the finance sector isn’t waiting to find out.
Sustainable finance, in all its shades of green, have used the attention focussed on the COP 26 meeting to be loud and proud about their efforts and their ambitions. In 2021, investors are more engaged with proceedings than ever before.
COP26 Private Finance Hub
Investors play a key role because they can help to shift capital towards the innovations required to fight climate change, and they also have the individual prerogative to manage the present and future risks of climate change on their portfolios.
The Private Finance Hub is taking the conversations beyond just heads of state, and aims to help the finance sector make progress towards Paris Agreement targets.
It’s led by Mark Carney, UN Special Envoy for Climate Action and Finance, and its objective for COP26 is to ensure that every professional financial decision takes climate change into account.
It’s focussed on four key targets:
- Reporting:
- TCFD has been adopted by more than 2000 organisations across the world, yet still, data provided is inconsistent and far too few organisations are reporting climate risk in their sustainability reports, rather than their financial reports.
- Risk management
- Risks are many, from individual portfolio risk from companies being left with stranded assets, to macro risks from extreme weather disrupting supply chains and increasing insurance costs.
- Returns
- The opportunities around investing into the energy transition are likely the key reason the finance sector is so engaged in this space, while world leaders are lagging. Investors are well-versed in valuing likely future returns, and in 2021, there’s little doubt climate resilience is a good bet.
- Mobilisation
- While Europe and the US have mature sustainable finance markets, developing countries are in dire need of huge amounts of capital. Offshore opportunities are inevitably more challenging, with a long list of challenges, but while returns can be strong, the impact potential is far greater!
Global Rules on Carbon Markets
Net Zero emissions targets have become the baseline for corporate decarbonisation planning. Some sectors will find this easier than others. Many tech firms, with little manufacturing or physical products, have already achieved the goal, but, to my surprise, we have seen some of the biggest oil and gas companies, like BP and Shell, make the commitment.
For these firms that have carbon emissions at every stage of their supply chain, it will take either a technological miracle to decarbonise, or… they’ll rely on carbon credits.
As discussed in a previous article, there’s a growing market for voluntary carbon offsets, which follows on from the mandatory carbon offset rules that were imposed by governments in order to meet requirements of the Kyoto Protocol in 1997.
It is the voluntary market that will be under the spotlight at COP26. Mark Carney is UN Special Envoy for Climate Action and Finance, but he’s also head of The Taskforce on Scaling Voluntary Carbon Markets.
A key agenda item for COP 26 is to build upon Article 6 of the Paris Agreement, which defined a framework for voluntary credits to contribute towards a country’s Nationally Determined Contributions (NDCs). Attention will focus on whether parties can negotiate rules and milestones for a global carbon market.
What do Investors Think?
Schroders
Kate Rogers, Head of Sustainability, Wealth
“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.”
Saida Eggerstedt, Head of Sustainable Credit, European and Sustainable Credit
“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.”
ING
Samuel Abettan, economist
“COP26 has been described as the ‘last best chance’ of saving the planet. Weary campaigners and world leaders are well aware that we’ve heard that many times before. Let’s hope we’ll be surprised.”
Investor Group on Climate Change
Rebecca Mikula-Wright, CEO of the IGCC, and AIGCC
“Our analysis shows that the investment opportunities in the Asian energy sector alone from a Paris-aligned transition to net-zero emissions could reach US$37 trillion by 2050 – a century-defining investment theme. Meanwhile in Australia, stronger climate policies would create around US$46 billion in fresh investment opportunities to 2025. By working with investors to put in place robust policies, strong targets and a clear roadmap to reach net-zero emissions, Asian, Australian and New Zealand governments can unlock these enormous investment opportunities and the jobs, economic growth and competitive advantage they will bring.”
CERES
Mindy Lubber, Ceres CEO
“The stakes could not be higher as we come off another summer of extreme heat, hurricanes, and drought. This is a make-or-break decade for mitigating the climate crisis. Investors must invest more of the trillions under their management into climate solutions and support mandatory climate risk disclosure rules. With the right climate policies in place, massive investments can flow into economies, create jobs and opportunity and accelerate the transition to a more just and sustainable net zero emissions future.”