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  • COP26 roundup – what was agreed, and how does it impact investors?

    We look at some of the highlights of COP26 and what this could all mean for investors.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Between 31 October and 12 November 2021, 200 world leaders and more than 20,000 delegates met in Glasgow for the 26th annual Conference of Parties (also known as COP26). The annual COP summits aim to facilitate a united, global response to the climate emergency.

    COP26 was seen as a successor to COP 21, where the landmark Paris Agreement, which aims to keep the temperature rise caused by global emissions ‘well below 2°C’, was signed. Under the agreement, countries committed to bring forward national plans setting out how much they would reduce their emissions – known as Nationally Determined Contributions, or ‘NDCs’.

    COP26 was an opportunity to review what’s been achieved since the Paris Agreement and lay out more plans to reach the target.

    What new agreements were made at COP26?

    Commitments came in thick and fast during the two weeks from both attendees, and corporates keen to use the conference to prioritise the climate in their future business strategy. We’ve highlighted some of the main ones below.

    Geopolitical commitments

    • Over 140 countries signed up to a forests and land use pledge. Leaders of countries that are home to 90% of the planet’s forests committed to ‘halt and reverse’ forest loss and land degradation by the end of the decade.
    • Almost 100 countries agreed to slash methane emissions 30% by 2030.
    • India is set to get 50% of its energy from renewable sources by 2030 and reach net zero by 2070. This is some way past the mid-century date that most scientists agree is necessary to avoid dangerous levels of warming. But it’s a big step forward for the world’s third largest emitter.
    • The US and China, two of the world’s biggest emitters, pledged to work together on a range of issues including methane emissions, the transition to clean energy and decarbonisation.
    • A plan was also made to reduce use of coal, the most polluting fossil fuel. Although a watered-down commitment to ‘phase down’ rather than ‘phase out’ coal use was made after a late intervention by China and India. Around 20 countries also said they would end overseas funding of fossil fuels by 2022.
    • 40 nations backed the ‘Glasgow Breakthroughs’ commitment to give developing countries access to the technology and innovation needed to reach net zero.
    • In the UK, all large companies and public enterprises will be required to publish a net-zero transition plan by the end of 2024.

    Corporate announcements

    • 450 global banks, insurers and asset managers holding a combined $130tn of capital committed to reaching net zero by 2050.
    • A raft of new companies, countries and regions signed up to the Powering Past Coal Alliance, the world’s largest alliance on phasing out coal, bringing the total number of signatories to 165. That includes 33 financial services companies with a combined $17tn under management.
    • The International Financial Reporting Standards Foundation (IFRS) announced the formation of a new International Sustainability Standards Board to develop a set of global sustainability reporting standards. This makes it easier for investors to view and compare the sustainability commitments made by companies.

    The above pledges, and the many others from COP26, look set to limit temperature rises to between 1.8°C and 2.4°C. It means more needs to be done if we’re going to successfully limit global warming to 1.5°C above pre-industrial times, but it’s positive that progress is being made. Of course, setting targets is the easy bit – delivering them is what counts.

    Good COP or bad COP? Thoughts from the experts

    We asked two sustainability experts, Miranda Beecham and Therese Niklasson, for their views on the success of COP26.

    Miranda Beecham, Aegon Asset Management

    “I think we all headed in to COP26 with an element of despair. Much of the analysis we were seeing told a similar story – that we are not on track to meet the Paris goals. We come away from COP26 cautiously optimistic. We cannot deny that the climate conference has sent a strong signal that over this next crucial decade – decarbonisation must remain a key structural trend.

    It's also brought an increased focus on 1.5°C as opposed to 2°C, and on 2030 rather than 2050. Biodiversity was particularly promising, with over 140 countries covering more than 90% of the world's forests endorsing the Glasgow Leaders' Declaration on Forests & Land Use.

    Are the commitments enough to keep us within 1.5°C? They've certainly moved us in the right direction, but not yet with the urgency we require. Thus, we welcome the commitment from governments to report annually on progress, and to strengthen the targets again before COP27.

    The real work comes now in delivering and we remain cautious until we see roadmaps and interim targets that will allow the many various pledges to come to fruition. The role of finance is now more important than ever. We will continue to use the levers available to us and collaborate with our stakeholders to continue to mobilise finance and drive meaningful change.”

    Therese Niklasson, Ninety One Asset Management

    “The watered-down final agreement was clearly disappointing for many people. It is however interesting to see that companies may now be moving faster than governments and encouragingly, the investment community is recognising the need for a fair and inclusive net zero. There was a distinct step change in the way that the asset management industry talks about investing in the net-zero transition, with a shift towards engagement & collaboration and away from divestment & exclusion.

    Whilst the increased involvement by the financial industry is encouraging and critical, it is important that there is substance behind the pledges and commitments.

    Ninety One has consistently advocated for a focus on portfolios that work for net zero and not net-zero portfolios. Similarly, when it comes to net-zero pledges, we think it’s critical that we approach it with substance and treat the climate crisis as a real-world problem. This means we must engage with the carbon intense industries first, including scope 3, and focus on the concentration of emissions across our financed emissions. We also anticipate a real challenge around communication given the complexity and variety of methodology approaches.

    Regardless of approach, we think it’s critical we apply appropriate pathways for Developed Markets versus Emerging Markets, ensuring the pressure is on for a quicker transition in Developed Market regions. By doing so we will focus our attention and more patient capital where it is needed, emerging markets and the industries most in need of the capital to transition.”

    What does this mean for investors?

    COP26 demonstrated that fighting climate change is high on the political agenda for almost all countries across the globe.

    It’s important for investors to consider the impact that increased political and regulatory scrutiny will have on the companies they invest in. Companies not seen to be doing enough to combat climate change could become the target of future regulation. But also could face a customer backlash, negative press, and reputational damage.

    Being alive to the risks of climate change could also help uncover opportunities. For example, a company could be making more progress when it comes to reducing carbon emissions than its competition. But if this isn’t being reflected in the share price, an opportunity could be on the cards, providing the rest of your analysis stacks up.

    If you invest in funds, it’s more important than ever to make sure they’re run by managers that consider the impact climate change will have on the funds’ investments.

    Lots of investment management companies have signed up to groups like the Net Zero Asset Managers Initiative, signifying their intention to invest with the goal of reaching net-zero emissions by 2050. You can find out which groups and initiatives each fund management company has committed to by going on their websites.

    Want to learn more?

    For responsible investment fund ideas and to learn more about investing with environmental factors in mind, have a look at the new Responsible Investment section of our website.

    This isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember all investments can fall as well as rise in value so you could get back less than you invest.

    What did you think of this article?

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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