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COP26: Key Outcomes and Takeaways

Written by Sara Bray | Nov 26, 2021 5:21:35 PM

Brad here. This post follows up on last week’s excellent post on the United Nations Climate Change Summit by Sarah Hargreaves. I would like to call your attention to the generational tilt of today’s guest author, Sara Bray. As one of Commonwealth’s youngest employees, she is attuned to what her generation (Generation Z) is thinking—which is not necessarily what old people like me are thinking. She offers valuable information about what is happening with climate change policy, insights into how future investors may see these issues, and some thoughts about what all this means for today. Thanks, Sara!

Negotiations at the 26th United Nations Climate Change Summit—officially known as the Conference of the Parties (COP26)—extended into overtime, as representatives from nearly 200 countries finalized a global deal to cut greenhouse gas emissions. As my colleague Sarah Hargreaves discussed in a prior post, the primary goal of these negotiations was to set the rules for implementation of the Paris Agreement and establish a framework for emissions reductions. Today, I’ll unpack the outcomes of COP26 and the impact for the investment community moving forward.

The Glasgow Climate Pact and Other COP26 Pledges

Throughout COP26 negotiations, there was a palpable sense of urgency in every conversation. The need to accelerate climate action and finalize the Paris Agreement was not lost on any entity present. After two weeks of discourse, world leaders, diplomats, businesses, and scientists reached unanimity and established the Glasgow Climate Pact, which seeks to limit global warming to 1.5 degrees Celsius. The deal entails the following:

  • An agreement to take action in 2022 and strengthen current emissions reduction targets to 2030
  • A universal agreement to a phasedown in constant coal power
  • A framework and standardization for carbon trading
  • A promise by developed countries to fulfill pledges from 2009 of $100 billion annually in climate finance, as well as to double funds for climate adaptation by 2025 for areas most devastated by climate events

In addition to the Glasgow Climate Pact, COP26 participants established many supplemental pledges to address climate-critical action. Significant pledges include the Declaration on Forests and Land Use to halt deforestation, the Global Methane Pledge to decelerate methane emissions, and a commitment to shift away from coal use (see the chart for current levels), including the cessation of investments in new coal power generation. These three pledges alone will help protect 90 percent of the world’s forests, slow global warming in the short-term, and confront coal dependency.

Takeaways for the Investing Community

Combating climate change is not possible without the financing required to make dramatic, global shifts in our energy consumption. Throughout COP26, it was evident that public financing alone will not be enough to enforce this shift—that will entail the intersection of public funding and private financing. To limit global warming to 1.5 degrees Celsius by 2050, the Intergovernmental Panel on Climate Change estimates that an annual investment of about $3.5 trillion is needed.

Shared responsibility. This stark reality reinforces the notion that solving this global issue is no longer solely the responsibility of world leaders. Rather, the responsibility must be shared among business leaders, banks, asset managers, and even investors. This action has already begun, as evidenced by the 2021 launch of the Glasgow Financial Alliance for Net Zero, a coalition of banks, firms, insurers, and investors that is committed to net zero emissions by 2050 and represents about $130 trillion in total assets.

For years, climate-conscious entities have called for transparent, comparable company reports on environmental, social, and governmental (ESG) engagement. COP26 delivered in this area through the formation of the International Sustainability Standards Board, a regulatory body that will ensure international common standards in sustainability disclosure. With standardization on the horizon and trillions of dollars available, the difficult question then becomes, how does private financing get to the right place?

Pledges for change. There is no easy answer, but the good news is we have solid examples to follow. The U.S., UK, and members of the EU have pledged $8.5 billion to South Africa over the next five years, in order to phase out coal. The International Finance Corporation and Amundi launched a $2 billion emerging markets sustainable bond fund to finance climate-friendly COVID-19 recovery plans. And, more than 30 financial institutions have pledged to eliminate investment in any activity linked to deforestation.

Possible Trends Moving Forward

While the global shift to a sustainable, climate-conscious economy remains top of mind for many governments, businesses, and regulators, investors may leverage ESG factors to start making an impact. As with any investment decision, a holistic approach is vital in conducting analysis. As a result, it may become increasingly important to take environmental factors into account as more government spending and private financing is allocated toward climate-friendly projects. The continuing risks of climate events will also be an important factor.

Investor actions. Those who are more likely to be uneasy about how climate change may affect the future are younger generations—our future clients in this industry. These future investors may be more likely to weigh climate-change factors into their decision-making. For these potential clients, investing in innovations for low-carbon technology or protecting nature may be paramount to their overall objectives. Investors like these are likely to increase demand for portfolios that align with net-zero commitments by shifting away from fossil fuels to energy-efficient and renewable sources—a trend gaining traction among thematic investors. Future clients may also begin to use shareholder engagements or proxy voting measures to demand more from the companies in which they invest.

Long-term perspective needed. With strategies like these already in place, investors know that financing can—and does—make a difference. The primary takeaway for them is to keep in mind the long-term horizon required to see sustainable projects come to fruition. By taking this long-term perspective, future clients may seek asset managers, financial advisors, and portfolios that align with their views on safeguarding the future through climate action.

No One-Size-Fits-All Approach

Despite making significant headway at COP26, many activists and representatives expressed concerns coming out of the conference. For some, hesitancy stemmed from the underperformance that resulted from prior climate summits. Others stepped away with a sense of cautious optimism—in terms of ongoing accountability for and implementation of the Glasgow Climate Pact. Despite the ongoing skepticism, COP26 was a necessary step in the right direction in aligning global parties to combat climate change. Involvement from private entities will serve as a major catalyst. And young activists advocating for climate change resolutions will remain embedded in minds across the globe for months and years to come.

Generational thinking. Since starting in this industry this past May, I have grown curious about the difference in thought processes between members of Generation Z and those of other generations. For colleagues with years of experience, ESG investing may be viewed as a buzzword or just another investing fad that will come and go. For myself, and many others in the early stages of a career, conversations surrounding ESG engagement are frequent—and, in some cases, even expected. Still, when reflecting upon the COP26 negotiations and generational ideas pertaining to ESG, I am reminded of the adage “We are not all in the same boat, but we are in the same storm.”

Future of investing. Although climate change is global, the degree of impact varies widely across geographical areas, people, and even generations. At COP26, BlackRock Chairman and CEO Larry Fink, noted, “We need to reimagine finance. We have the most magnificent global capital markets we ever imagined. We can make it happen if we do it together.” Why does Fink care that BlackRock is a leader in this change?

The answer is simple: because younger generations of clients care. In 10 or 20 years’ time, Generation Z will be the predominant group among investors. This future generation of clients is far more likely to demand climate-friendly, socially responsible, or thematic portfolios than any generation before them. With some of the world’s largest asset managers and banks beginning to prepare for this shift in client demand, the rest of the industry will bear watching.

Every representative at COP26 had a unique motivation for being at the forefront of tackling climate change. World leaders have a responsibility to protect their citizens, while investment professionals have a responsibility to look out for clients’ best interests and help meet their demand—both present and future. Overall, regardless of the boat one finds oneself in, the world seems set on us taking on this storm together. COP26 may have laid the foundation for us to do so.