What to Watch at COP26

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Aaron White, vice-president of sustainable investments at CIBC Asset Management.

With the 26th UN Conference of Parties or COP26 coming in November, there are significant possible implications for investors post-conference and beyond. But first let’s give a little background for the listeners that are not familiar with what COP26 is. Nearly every year since 1995, world leaders have met in person to discuss the global response to the climate crisis. This is known as the Conference of Parties or COP. The parties consist of more than 190 countries that have signed the UN Framework Convention on Climate Change. The most famous meeting was COP21 in 2015 where the Paris Agreement was struck to limit global warming to two degrees and ideally to one-and-a-half degrees, and to submit their own nationally determined action plans on how each country will achieve this.

Why is COP26 so important? This is the first time the parties will review the up-to-date nationally determined contributions and revisit the commitments established under the Paris Agreement. We also have the United States back at the table under the Biden administration, which may provide additional momentum.

COP26 is coming on the heels of the Intergovernmental Panel on Climate Change releasing their report highlighting the need for immediate global action.

Research now shows that climate is in worse shape than had been anticipated by prior scenarios and only by immediate action to achieve net zero by 2050 can we hope to accomplish the objectives set out in the Paris Agreement and limit warming under two degrees.

The last few years we have also experienced significant extreme weather events, including forest fires, drought and extreme precipitation across much of the world. It is more clearly linked to changes in our climate than ever before.

Though many governments have already begun to accelerate their plans led by the EU with their commitment to reduce emissions by 55% by 2030, and many corporations have accelerated their net-zero ambitions, we will likely see consensus at COP26 that more immediate and significant action is needed than has previously been agreed upon.

So what should investors be looking out for? Net-zero emissions may become the target of choice. It is measurable and a direct root cause of warming. This will allow progress to be tracked and interim targets to be established. This will require a dramatic shift in the global economy, including policy action and announcements related to the investment in green energy and infrastructure. While government action is important, expect to see incentives to push the private sector towards net zero as well.

This will take the form of carbon pricing initiatives, with a potential push towards a global carbon price. Governments will incentivize the private sector through taxation and emissions trading schemes. We will have a clear picture of what the future holds for the cost of emissions and how this will impact corporate costs. Global standard for carbon taxation is not achieved. We may also see the introduction of carbon tariffs to equalize the cost of emissions in domestic markets to ensure that local producers aren’t penalized by lower carbon taxes in foreign markets.

Investors should also watch for the mobilization of the green finance market. Investors have already been piling into green assets and renewable energy investments, with the expectation that they will generate outsized returns. But COP26 is likely to accelerate the market as a major objective is to help private finance facilitate the global economy’s transition to net zero. Greener companies will benefit, as the market will gain clarity on the increased risks to extractive and polluting business models. It is expected that the energy sector will need upwards of $130 trillion of investment by 2050 to transition the world economy. COP26 will provide more direction of where we will see the winners and losers from this capital allocation. Many risks and opportunities will present themselves to investors as the economy shifts and a new way of thinking takes hold.

Finally, the conference will continue to accelerate the trend of innovation in tackling the greatest crisis humans have ever encountered. The rising cost of carbon will create opportunities for businesses to develop new products and services that tackle the need for change. One example taking shape today is to look at the Scandinavian joint effort to transform the steel industry to hydrogen fuel and away from coking coal, and many more innovative industries will pop up post-COP26.

Companies will also play a part in carbon removal as the value of credits increase and the need for sequestration of the last mile of emissions reduction takes hold. New and innovative technologies will merge as more accessible capital is made available.

We are at an inflection point in tackling this crisis and, like any transformative event, investors that pay attention to these developments will be rewarded with lower risk and new and exciting investment opportunities.