COP26 conference spotlight: outcomes, agreements, and investment implications

PAID CONTENT

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Transcript

Speaker

Maria Elena Drew Director of Research, Responsible Investing

So, COP26 had one big overarching agenda and that was to get the world on a path to limit global warming to 1.5 degrees Celsius. To do this, we needed every single country to submit a plan for how they were going to be reducing their greenhouse gas emissions up until 2030, and then beyond in order to eventually reach a net zero goal.

COP26 was tackling a whole host of climate issues, but we’ll boil it down to four basic ones.

The first and the most important was really about the Nationally Determined Contributions, (or NDCs), that each country was submitting. And these NDCs are the commitments that countries make to reduce their greenhouse gas emissions. Ideally, we wanted to see NDCs that were in line with a 1.5-degree warming scenario.

The second area was to secure financing of $100 billion per annum that had been promised to the developing world way back at the Copenhagen COP, which was in 2009.

The third was about finalizing some of the rules of the Paris Agreement, particularly as it related to carbon offsets and trading credits between countries.

And then lastly there was a focus on deforestation and protecting forests in order to make sure that the carbon absorption mechanisms remained.

So, when we think about the outcome of the conference, you really have to put it into different perspectives.

I guess, the main perspective–the scientific one–you’d have to say the outcome of the conference was not very positive, because we’ve fallen short of hitting targets that would put us on a 1.5-degree pathway.

But if we take step back and really think about how realistic it was that COP26 would actually have all countries sign up to a net zero 2050 target, you know, that just was not a likely outcome of the summit.

So, if we think of the hand that the politicians were dealt, they probably have come out with a fairly constructive outcome of this conference. And I say it’s constructive for a couple of reasons.

The first one, probably the main one, is that we do seem to have much stronger global alignment, that we need to strive for 1.5 degrees and also there’s an urgency to strive for that 1.5 degrees.

And the key anecdotal or supporting evidence of this is that all of the countries will meet again next year at COP27 in Egypt, and they’ve been asked to specifically come back with better targets for 2030 at that conference.

If we were to look at all of the aggregate NDCs that have been submitted for COP26 and at their targets to 2030, we see that those are putting us on a pathway of at least 2.4 degrees of global warming. And so that’s why we need all the countries to come back next year and really put a focus on that 2030 target to see what they can do to start lowering emissions right away.

If we look at some of the outcomes from the COP26 conference, the big one is that we now have more than three-quarters of the world’s emissions tied to a net zero target, based on all the countries that now have some form of net zero target in place.

But there were some other big items that came out of the conference as well.

The first one is securing $100 billion per annum of financing for developing countries. This is to be paid by the richer nations. This is a promise that was made in Copenhagen in 2009 and it was meant to materialize by 2020–unfortunately, it didn’t. So there now is a commitment from these richer nations to pay at least $100 billion per annum through 2025.

Some of the other outcomes from the COP26 conference were a resolution on carbon offset markets. This was an outstanding issue from the Paris Agreement which was reached in 2015 and this will allow for better rules around systems for countries to trade carbon credits.

The addition of two items related to fossil fuels were groundbreaking in the Glasgow Climate Pact. The two items were related to coal and also fossil fuel subsidies.

Aside from the formal pact that was signed, there were also some additional deals and pledges made at the COP26 summit. One of the big ones was the Glasgow Leaders’ Declaration on Forests and Land Use. More than 120 countries covering more than 85% of the world’s forests have signed on to this pledge, and they have committed to halt and reverse forest loss and land degradation by 2030.

Another agreement was on methane. So, over 100 countries signed up to the Global Methane Pledge to reduce methane by 30% by 2030.

There’s some really notable players that are unfortunately absent from the methane pledge–and they include China, India, and Russia–and it’s also worth noting that this methane pledge is not actually in line with the 1.5-degree scenario. A 1.5-degree scenario would require a 45% reduction in emissions by 2030 based off 2010 levels, and of course this one is looking for 30% by 2030, and based off 2020 levels.

So, the commitments made at COP26 are going to be important to investors. They’re important because each country has signed up to this global agreement and promised that they are going to be cutting their emissions by X amount. These commitments should then later materialize as actual legislation and regulation, which is going to impact industries.

So, we think there are a couple of key areas that investors need to focus on.

The first would be around greenhouse gas mitigation.

The next will be around investments that can help with climate change adaptation. Because in a best-case scenario now we are looking at the world striving for 1.5 degrees of global warming. And we know that 1.5 degrees of global warming still means that we will be living in a different world than we are today, so that investment for adaptation is really important.

The third thing would be sustainable finance. What we’ve found is that as regulation has been coming through, it’s easiest for the politicians to start addressing sustainable finance first. It’s a lot harder to make these changes directly onto industry and directly onto consumers. So, we expect to see a lot more ESG regulation hitting us as financial participants coming out of this. If we look at, say, the European Union, which had put its net zero pledge in earlier years, then they have already started to roll out some of the sustainable finance actions that will help them to carry out their pledge to hit net zero. We could expect to see more of that type of thing coming in other parts of the world.

Also, we’ve seen a significant portion of the financial services industry sign up to net zero pledges, so from our perspective, we may be seeing more and more clients having interest in orienting their capital towards more sustainable funds.

When we think about the research that we’re doing at T. Rowe, on the one hand it doesn’t change that much. So, we’re already looking at the environmental, social and ethical profile of all the companies and other securities that we’re investing in at T. Rowe, and factoring that into our investment process.

But where I think we might get a lot more help is in the area of having better disclosure from those securities that we invest in. Today, one of the big things that we struggle with is data availability, and with these new regulations that may stem from COP26, we could expect more regulators around the world to start forcing better disclosure from companies.

Because if you think about it, a lot of the greenhouse gas mitigation is going to have to take place coming from industry. Governments can’t do this on their own.

And you really can’t start to take action on reducing emissions until you know what they are. So, getting that transparency out there is going to be a really important critical step.