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COP26 helps investors see green from brown
Amid summit's avalanche of data, investors and asset managers get some clarity on sustainability
Bayani S. Cruz 19 Nov 2021

Beyond the headlines, investors and asset managers say they have received some clarity amid the often-confusing universe of information and data surrounding climate change following COP26, the United Nations Climate Change Conference held in Glasgow on October 31 to November 13.

There is consensus that COP26 laid out a global roadmap on climate change from a policy perspective and that these policies will then guide and attract investment capital to certain sectors that will help address issues focusing on climate change. For example, before COP26 there was little clarity on how committed countries, governments and corporates were to their publicly pronounced commitments on carbon emission reduction, particularly those made under the Paris agreement and climate accords of 2015.

Among the major highlights of this roadmap cited by asset owners and managers are clarity on:
  • commitments of specific governments, countries and corporates to their carbon emission reduction targets
  • asset classes that will be phased out and those that will be developed
  • types of projects that will be suitable for climate-change transition
  • capital flows to specific sectors.

All of these factors will determine investment trends in the coming years.

“What I see come out of COP26 is a very strong signal towards greater ambition in respect to emissions reductions from all countries across the board,” says Hamish Chamberlayne, head of global sustainable equities and portfolio manager at Janus Henderson Investors. “As investors we always have to distinguish between the policy goals and the investment implications of climate change.”

Some asset owners and asset managers were critical of the fact that COP26 did not provide a clear answer to whether the targets for carbon emission reduction set during the Paris agreement will be met. Under the agreement, 195 countries committed to keep the rise in mean global temperature to well below 2 degrees Celsius above pre-industrial levels, and preferably limit the increase to 1.5 degrees Celsius, with the aim of reducing global carbon emissions to net zero by the middle of the 21th century. About 190 countries have ratified the agreement as of January 2021.

But Chamberlayne argues: “From an investment perspective, it is perhaps not necessarily all that relevant whether we stay within the Paris agreement for the temperature. What is important is the trend in terms of where the investment is going to go, and what is very, very clear is we are entering into a decade of increased policy ambition.”

Under COP26, all countries have committed to revisit their nationally determined carbon reduction targets annually from 2022, which is a step up from the previous commitment of every five years.

“This sends a signal that there is a very strong sense of urgency to increase the pace of decarbonization,” Chamberlayne shares. “So, we will say this is the decade of decarbonization. This is the decade where we’re going to see a greater acceleration in investments in the clean energy and clean technology sectors.”

Following COP26, there are also strong indications that investors will pursue sustainability investing without necessarily waiting for governments to form or implement policy agreements that will have lasting impact on climate change.

“Whether it’s leading investment managers or asset owners, they’re setting the tone here by voting the proxies that they hold in their funds and encouraging the kind of scoring systems that allow investors to see green from brown,” says Carl Tannenbaum, chief economist of Northern Trust. “It’s a positive thing and frankly the research shows that investors don’t have to give up return or take on more risks to have ESG [environment, social and governance criteria].”

The road map coming out of COP26 may also help in terms of unifying the various ESG rating approaches and sustainability standards that currently proliferate in the financial industry. As sustainability and the ESG framework becomes core to building portfolios asset owners and managers need to increase their focus on it and events like COP26 help in this aspect.

“We’re trying to build our entire portfolio based on sustainability and ESG frameworks,” notes Bhaskar Laxminarayan, chief investment officer for Asia-Pacific at Julius Baer. “Where we also see challenges are in terms of struggling with unified rating approaches. We’re still struggling with some places that have higher amounts of ratings than other places simply because we don’t have time to look at it. So, there is some inequity in this process, which we need to be aware of and provide for. But, over the next decade, I don’t think we’ll hear people talking about sustainable investing anymore. It will be just accepted as the only way to do it.”

The Asset Events+ is hosting the 4th ESG Summit with the theme Rising Expectations. The Summit, on 23rd and 24th of November 2021 features stakeholders sharing their experience. Session One on Covid Conversations gathers an issuer, ESG advisers and auditors, and financial advisers on the work-in-progress in building sustainable supply chain. Session Two on Towards a Green Recovery features transition and green energy companies together with an investor, multilateral development bank, and an ESG rating agency. Join The Asset Events+ 4th ESG Summit. Click here to register for the 4th ESG Summit and for more details.

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