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COP26: expect unprecedented investment flows if leaders act

The world’s spotlight is centred firmly on Glasgow, where the most pivotal climate change summit ever is now underway.

The investment industry’s eyes will be fixed on policymakers from across the world, with strong emissions reduction agreements needed to ensure global warming does not exceed 1.5°C by 2050.

Below, 12 investment professionals discuss desired outcomes of COP26, as well as various investment implications likely to arise from the critical conference.

Jonathan Bailey, head of ESG investing at Neuberger Berman

COP26 is about world leaders turning commitments into action. We are looking for progress in three key areas: nationally determined contributions (NDCs) to emissions reduction, support for developing nations, and finalisation of the Paris Rulebook. More than 70 countries missed a 31 July deadline to update NDCs, while others, such as Brazil and Mexico, ‘updated’ NDCs by restating 2015 targets. China, the world’s biggest polluter, has announced a new target, but has not formally submitted it to the UN.

In addition, developed nations have fallen well short of their commitment to provide an already inadequate $100bn per year in climate aid to the developing world. Even the most basic poverty-prevention needs imply energy provision in some poorer countries must double by 2030 and triple by 2040, and that investment is required to make this sustainable.

Finalisation of the Paris Rulebook will have a direct impact on financial markets and investors. In particular, agreement on Article 6 could help to establish a true international carbon market, tackling the current patchwork of local regimes that has led to often wide disparities in pricing. This could potentially transform the competitive landscape for businesses disadvantaged by the current fragmentation.

Eric Pedersen, head of responsible investments at Nordea Asset Management

We often feel there is very little we can do individually to combat and prevent such large-scale sustainability issues, like climate change, but our own experience tells us investors can make an impact. As an asset manager, there are many areas we will be watching intently at COP26. For example, we would like to see more commitment to implementing mandatory climate risk disclosure requirements – preferably aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

If we are able to witness strong commitments and policies, in line with limiting global warming to no more than 1.5°C, we expect investors to support the net-zero transition with historically unprecedented capital flows. We see significant investment opportunities across the global economy, not just in clean technologies and other areas of green infrastructure

In markets where climate policy ambitions are meaningfully stepped up, this should have immediate implications for investment flows. Corporates that are ahead of the climate policy curve today will stand to benefit, and laggards will struggle.

Natasha Landell-Mills, head of stewardship at Sarasin & Partners

Global institutional investors representing more than $100trn in assets have been calling on companies and auditors to deliver net zero-aligned accounts since last year. At COP26, governments should set a clear and urgent timeline for companies to produce accounts and audits that consider the global transition onto a 1.5°C pathway. This means companies should consider how the global decarbonisation effort will impact their businesses, and thus the reliability of their reported financial positions.

Furthermore, governments should require auditors to test whether company accounts adequately consider accelerating decarbonisation. When they determine the company has not done so, they should be required to report publicly where they believe the largest material risks lie.

Rising concern over the lack of financial disclosures has prompted a growing number of investors to call for Paris-aligned accounts. We do not have years to wait for companies to voluntarily review and revise financial statements. To ensure a sufficiently rapid system-wide change, governments should mandate 1.5°C-aligned accounts. The sooner governments act, the lower the cost – both financial and societal.

Maria Elena Drew, director of research, responsible investing at T. Rowe Price

One of the core goals of COP26 is to mobilise the world’s financial institutions around contributions to climate finance to help ensure we meet net-zero targets. As key financers of the economy, banks will play a pivotal role in the transition toward a low-carbon economy through both green financing and efforts to align lending portfolios to the goals of the Paris Agreement.

A key goal of COP26 is securing commitment from developed countries to mobilise climate finance of at least $100bn per year to help facilitate global net-zero. Banks will be crucial, and most leading institutions have now set targets for sustainable and green financing.

We believe there is a potential revenue opportunity for banks at the forefront of green financing. Banks may even receive capital incentives in the future, similar to programmes launched by central banks in the past to encourage lending to SMEs. For example, Pillar 1 capital requirements could be lowered for a bank’s exposure to green assets. With increased attention from regulators and growing scrutiny from shareholders and nongovernment organisations, banks could suffer reputational damage unless portfolios are aligned to the goals of the Paris Agreement.

David Kneale, head of UK equities at Mirabaud Asset Management

Just under 1,200 UK companies have joined the UN’s ‘Race to Zero’ campaign, including more than a third of the FTSE 100. This entails formal pledges to achieving net zero carbon dioxide emissions as soon as possible, or by 2050 at the latest.

Investors now expect as a matter of routine detailed disclosures on firms’ emissions and science-based targets for their emissions reduction strategies. As these become standard practice, very soon the failure to make a net zero commitment will become a significant source of pressure on management teams.

Events such as COP26 are vital to keeping the pressure on and momentum up, but the mammoth task of repositioning UK PLC is well under way. This is extremely good news and investors are right to be so supportive, but there remains a significant amount still to do – as was made clear by the recent release of the Intergovernmental Panel on Climate Change’s Sixth Assessment Report.

Rebecca Craddock-Taylor, director of sustainable investment at Gresham House Asset Management

The outcomes of COP26 will drive policy changes that will create significant investment opportunities, but also introduce new risks that need to be built into investment analysis. If policy commitments do not align to a 1.5˚C temperature pathway, investment capital will become less focused on supporting the transition and, by necessity, more focused on managing the physical risks associated with higher temperature pathways.

To ensure private capital continues to focus on financing the solutions supporting the transition, governments must be more ambitious with commitments to net zero and be held to account through legally binding and enforceable targets. We need a clear global framework to tackle climate change, anchored around clear investment requirements from the public and private sectors.

A successful outcome for COP26 would also be an agreement on a global carbon price that accurately reflects the risks of climate change. Those responsible for creating carbon emissions should pay the true costs of the damage it causes. Without an accurate carbon price, investors, businesses and governments will end up paying far more over the long term in order to manage and mitigate the physical risks of climate change.

Raphael Pitoun, portfolio manager of Trium’s Sustainable Innovators strategies

Unfortunately, rich countries have not met the $100bn commitment from the last COP to support decarbonisation in poorer countries. However, emerging countries – and particularly China and India – are expected to be responsible for most of the marginal emissions in the coming years. It remains unclear whether these countries will agree to a detailed carbon reduction plan with precise milestones.

In most cases, plans for asset managers to pressure listed corporates to reduce emissions have been unsuccessful, and corporates must go further in prioritising carbon reductions. Creating stronger incentives, such as linking carbon emissions to executive compensation, would be a welcome step.

Meanwhile, we continue to see nightmarish business models generously financed by the private world. There is a woeful lack of regulation to encourage sustainable investments from start-up financing and venture capital investors, who are supposed to fund tomorrow’s corporate leaders. This has been one of the most destabilising aspects of the financial sector’s response to the climate crisis and it urgently needs to be addressed at COP26.

Luc Pez, co-manager of the OYSTER Sustainable Europe Fund

We have limited expectations for COP26, with many G20 members still lagging on individual and collective ambitions. Public spending on fossil fuels continues to dominate, accounting for 45% of the G20’s $660bn energy recovery package and outpacing investments in clean energy. However, we remain hopeful major emitters will take the opportunity to show greater commitment to clean energy.

The EU is clearly willing to lead on the issue, recently unveiling an ambitious package of proposals, but its approach remains cumbersome and dogmatic and often lacks long-term industrial planning. With world energy requirements set to more than double by 2050, issues like the decarbonisation of energy, grid integration and EV charging infrastructure must be approached carefully to reach the 1.5°C target. Unfortunately, we remain concerned by a lack of understanding of the true complexities of the energy transition.

From an investment perspective, sectors like natural resources and transport will have a key role in creating a more sustainable future. While these sectors have historically had a poor track record on emissions, companies that can transform rapidly are particularly appealing and often undervalued by markets.

Christi Vosloo, head of ESG, UK at Mayfair Capital

The latest IPCC report sent a stark warning of a ‘code red for humanity’ and it is evident we are not on track for 1.5°C, with the possibility of achieving this becoming less and less likely. As a result, this summit is a critical point in time, requiring nations to go even further than agreed in Paris.

The outcomes of COP26, if positive and decisive, can accelerate the pace of climate action with have significant implications for the real estate industry. Existing portfolios will need to rapidly respond to more ambitious targets and increasingly stringent regulation to ensure these are resilient and future proofed.

The focus on adaption and resilience can enhance the requirements for planning, biodiversity considerations and resilient design. Increased finance support can serve to accelerate and enable the transition, providing key mechanisms/subsidies the sector can leverage.

Whitney Voûte, head of investor relations at US Solar Fund

Given the urgency of the UN IPCC report, I hope to see clearly defined deliverables and a commitment to more global collaboration and coordination from leaders at COP26. In particular, it would be pleasing to see more commitment to a true global carbon market.

In the immediate aftermath of COP26, we will hopefully see increased attention on and interest in ESG and sustainable investments already available to investors, driving more capital to support the energy transition and other critical sustainability initiatives.

Longer term, we would hope to see continued growth in the market opportunity for sustainable players like ourselves – we are seeing strong demand for solar given the Biden administration’s initiatives, as well as demand from corporates and other offtakers.

Michael Ackerman, CEO of EcoForests Asset Management

Developed countries have effectively forced the deforestation problem onto a developing world that has often lacked the governance and financial systems to resist the depletion of its natural capital – indirectly transferring massive wealth to the world’s wealthiest nations. The world’s poorest countries are on the front line of the battle for the planet and face the unenviable choice between the survival of natural resources and financial wealth. They need urgent help from the most powerful nations and deepest pocketed investors.

We want to see major institutions and powerful governments take action with a system of financial incentives and penalties, to rebalance financial returns from deforestation to reforestation – as well as direct capital investment into wholesale reforestation of the developing world. These will need to be mandatory and voluntary to work.

They could include, for example, tougher ESG screening on sovereign debt issues, increasing the cost of capital for nations who continue to permit environmental destruction, as well as greater law enforcement support to fight deforestation.  Combined with inflows of private capital, that will allow land to be acquired and reforested, and provide sustainable employment growth for local populations.

Corné Biemans, portfolio manager of the Boston Common Global Impact Equity fund, Boston Common Asset Management

Given the alarming findings of the UN’s recent IPCC report, we hope COP26 produces agreements that urgently push governments, companies, and investors to act on climate.

From a policy perspective, governments from across the world, in particular those of large emerging markets, have to work towards mandatory climate disclosure laws. Although many organisations large and small have embraced voluntary disclosure, this is simply not enough. Mandatory disclosure across markets – aligned with the Taskforce for Climate Related Financial Disclosure – would level the playing field for investors and financial supervisors.

Additionally, it’s vital that companies ramp up assessments of climate risks and impacts across their entire value chain, particularly those present in supply chains. Businesses should be required to provide robust transition plans aligned with the 1.5°C global temperature increase ceiling, including time-bound and science-based emissions reduction targets, strong interim goals for 2025, and enterprise-level climate strategy with board level oversight.

As for investors, we must ensure net-zero commitments are robust – not just a numbers game. This will involve utilising carbon accounting tools across a number of asset classes, and expanding expectations around political and lobbying activities.

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