Why investors mustn’t COP out of making climate-related portfolio decisions
Nearly every year, world leaders come together to discuss the climate crisis. So, why is November’s United Nations climate summit, known as COP26, seen as the most important yet in the fight against global warming? And, crucially, what does it all mean for investors?
Back in 2015 at COP21 in Paris, countries made firm commitments to try to limit average global temperatures to 2 degrees above pre-industrial levels. This landmark global accord became known as the Paris Agreement.
Since Paris, climate science has moved on and scientists now think there are significant dangers if we exceed just 1.5 degrees of warming. Scientists also believe that on our current path, we’ll fall short of the goals of even 2015 – with temperatures predicted to rise a catastrophic 3 degrees this century.
COP26, to be held in Glasgow, had to be postponed in 2020 due to the COVID-19 pandemic. It’s seen as the last chance to review earlier commitments and further strengthen ambitions – including setting stringent new emissions targets for 2030 that will put the world on a path to net-zero emissions by 2050.
Rhetoric to be translated into real change
Because of the ground-breaking policies needed to radically reduce emissions, the climate is likely to become one of the main drivers of macroeconomics and geopolitics far into the 21st century.
Most firms and businesses are likely to be impacted in some way by the inevitable diktats to reduce greenhouse gas emissions and the global transition to renewable energy.
Any new climate change legislation could also boost the appetite for accountability and transparency, including more scrutiny and consistency around firms having to reveal their climate-related financial risks.
For investors, such disclosures would serve as a guide on how a company may profit or be hurt by a net-zero economy.
Of course, investors can always help in the fight against climate change by investing responsibly – or by going the extra mile and “leaning in” through stewardship to change outdated corporate behaviours.
Topics on the COP26 agenda
Some of the key climate issues that will be discussed at COP26 include:
- Adaptation, resilience and “just transition”: Delivering practical solutions to help people, economies and the environment adapt and prepare for the impacts of climate change and address loss and damage
- Nature: Safeguarding nature and ecosystems. Ensuring sustainable land use is part of the action on climate change and the green recovery (such as biodiversity, land and forest conservation, and climate-friendly farming)
- Energy transition: Accelerating the global transition to clean energy (such as renewables and storage)
- Transport: Accelerating the move to zero-emission transport (for instance, electric vehicles)
- Cities, regions and the built environment: Advancing action in the places we live, from communities through to cities and regions (such as circular cities, sustainable buildings and infrastructure)
- Finance: Mobilising public and private finance flows at scale to make the transition to a climate-conscious society and power the shift to a zero-carbon economy
Shifting to this low-carbon future will require real commitments from governments, the private sector and investors alike. But the real skill will be making changes without impacting too much on global economic growth and on how people go about their daily lives.
Creating an international carbon market?
An international carbon market may be one way of cutting emissions faster.
But how will this work in practice? One option would be to agree on a global carbon ‘budget’ where countries and companies determine a set limit of emissions each year. Emissions would then be traded in a marketplace. And for those struggling to meet emissions targets, they could then buy carbon credits from nations or businesses that have already beaten their climate pledges.
However, agreement is yet to be reached on how international carbon markets will work – with complexities still to be ironed out1. But if compromise could be found at COP26, the door could open to a global carbon market. This could further increase climate ambition globally and give those already using climate strategies a competitive advantage.
Green finance solutions
In 2009, richer nations pledged to provide $100 billion a year in funding by 2020 to help poorer countries fight climate change, a target that’s yet to be met2. Despite this, various investment opportunities from the pledge are still likely to emerge.
COP26 is also expected to unlock further green finance solutions. Initiatives such as the UN-convened Net-Zero Banking Alliance3 are likely to provide investors and organisations with a new rulebook to evaluate sustainability. This will signal that share prices, asset valuations and the cost of capital will be affected if urgent climate action is not taken.
There are also trillions of dollars of assets under management committed to net zero across the globe. Assuming these commitments are credible, it could help drive demand and shift capital flows in a particular direction – a sustainable one.
Now is the time to act
The COVID-19 pandemic accelerated the sustainable investing global megatrend. Investment decisions taken now have the potential to allow you to stay ahead of the climate risk curve, as well as being able to position your portfolio to capitalise on future opportunities in a zero-carbon world.
But those who continue to do nothing – ignoring both COP26 and climate change – risk endangering both the planet and their investments over the longer term.