With the 26th United Nations Climate Change Conference currently underway in Glasgow, Union Bancaire Privée's Impact Investing team has compiled a list of important areas to focus on. The outcome of the conference will be crucial in determining how humanity can mitigate and adapt to climate change.
Some progress made, but still a long way to go
Only four of the top twenty carbon-emitting countries (accounting for 85% of global emissions) have strong carbon-emission reduction plans in place as defined by the 2050 net-zero targets. However, 192 nations and territories have submitted their first NDCs (nationally determined contributions) and 13 have submitted their second NDCs. Each Party to the Paris Agreement (2015) was required to establish their NDCs and to update them every five years.
The EU generates 8% of global CO2 emissions and its reduction plans are currently deemed to be “insufficient”. According to the International Energy Agency (IEA), big emitters still have much to do to develop low-carbon plans for the future and one of the most keenly anticipated is China’s 2030 carbon plan.
Any concrete advance on the NDCs set out in the Paris Agreement, including the publication of more detailed plans relating to 2030 targets and how they will be reached, would be good news.
Concrete policy announcements
Concrete policies include an acceleration of the switch to EVs, incentives for investment in renewables, deforestation curtailment initiatives and getting out of coal, as well as a focus on “adaptation communication”.
There will also be initiatives aimed at helping less wealthy countries to transition their energy infrastructure. Financial support worth some USD 100 billion per year would be an appreciable target. Much of the responsibility for climate change lies with the richer countries. Incentivisation and investment aid will help lower-income countries get on the path towards decarbonisation, whilst avoiding the potential loss of jobs that could come without financial support.
“Race to zero” global campaign
This UN initiative aims to bring about net-zero commitments outside of government and, among others, involves 799 cities, 4,475 companies, 731 educational institutions and 250 financial institutions. Morgan Stanley has calculated that 66% of S&P 500 and 78% of STOXX 600 index companies have adopted carbon-reduction targets.
Developments within the finance industry
One hugely ambitious initiative proposed by the UK would be the creation of coalitions of governments and financial institutions that could commit to ending the financing of oil and gas projects internationally. Another framework is focused on aligning lending and investment portfolios with net-zero frameworks. A further possible development would be a global move towards carbon disclosure.
First Movers Coalition
This partnership between the World Economic Forum and the US Office of the Special Presidential Envoy for Climate, John Kerry, focuses on emissions in hard-to-decarbonise industries, such as aviation, steel and shipping. The full list of companies involved will be announced at COP26. For investors, this initiative will provide a very solid platform for engagement in the future.
So far, corporate and other non-governmental targets have used different methodologies to come up with different commitments. Standardisation within those commitments, e.g. science-based targets with detailed explanations of how those targets will be achieved, is now needed.
Carbon Border Adjustment Mechanism (CBAM)
CBAM has been proposed by the EU and is supported by some quarters in the US administration. The topic is controversial, but it could potentially be key in ensuring regions do not simply offshore their carbon emissions to lower-income parts of the world.
CBAM aims to embed a cost into supply chains for failing to decarbonise global economies. The current price of carbon in the world’s largest trading market (the EU Emissions Trading System) is around EUR 60 per tonne, but the IEA considers that a scenario of net-zero emissions by 2050 will need a price of USD 250 per tonne in developed countries and USD 200 per tonne in countries such as China, Brazil and Russia. China introduced its carbon trading scheme in July of this year, which initially targets the power-generation sector.
EU leads the way
The EU remains one of the leading forces in terms of Paris targets, having updated its NDCs last December and written its net-zero commitment into EU climate law. Since then, the publication of its “Fit for 55” proposals has further explained how Europe would meet its 2030 target of a 55% reduction in emissions. The European Commission now requires all Member States to spend 37% of the EUR 750 billion Next Generation EU recovery fund on climate action.
Fossil-fuel advocates
It is imperative that proponents of fossil-fuel-based economies, whether countries, companies, or individuals, do not have the opportunity to dominate the debate by blaming short-term energy disruptions for proving the need to preserve the current global energy mix and not transition to a renewable energy infrastructure.
The general hope is that politicians will leave behind their particular national interests and protection of the status quo, and thus avoid playing politics by trying to confuse the links between fossil fuels or agriculture and climate change.
How will our impact investment approach build on COP26?
One of the key investment approaches will be to engage with companies directly in order to challenge what they are doing to reduce their climate footprint. This kind of engagement will help identify those companies doing a great job and those that are only “greenwashing” their businesses.
Second, identifying where investment will flow from and where it will flow to will be a key driver of investment performance in the coming years. The positive impact investment process at UBP embeds this analysis into the core of its stock-selection methodology, thereby investing in growing “fixer” industries and avoiding challenged, stranded-asset industries.
UBP Impact Team
