Speculation has been mounting about COP26 in Glasgow and what new measures world leaders might produce to tackle climate change. Our experts look at what to expect and what LGPS needs.
Pete Smith
In November, world leaders will gather in Glasgow for the COP26 conference “Mobilising finance” is one of the four key pillars of COP26’s agenda. What should you look out for in COP26?
Net zero. There have been many pledges to have net zero carbon emissions by the middle of the century. COP26 will hope to push targets into more meaningful and verifiable action. As countries enact these targets, requirements will likely be pushed down to investors and investee companies in order to align investment strategies with net zero transition.
Carbon markets. There are two main carbon pricing mechanisms: emission trading schemes (ETS) and carbon tax. COP26 will seek to increase incentives to reduce carbon emissions in the private sector. This translates into finding a solution on carbon markets through carbon pricing initiatives and an agreement on a global carbon price. We believe agreement on these is unlikely in this conference, but it will come.
To be ready, investors should anticipate and stress test future carbon price scenarios.
Data. There is an absence of a global reporting framework for climate risk, leading to the current poor climate data quality, and rising cases of “greenwashing”.
COP26 will be encouraging governments to make some climate-related reporting frameworks mandatory for more standardised climate data. Investors should expect, and be ready for, more regulatory interventions.
Just transition. One of the main issues of mitigating and adapting to climate change are the adverse impacts our low-carbon transition can have on certain regions, communities, and workers, creating global inequalities.
The drive for climate justice is embedded in the Paris Agreement. COP26 will address this social side of climate change and the role of the private sector to deliver a Just Transition. “Are my investments benefitting local communities?” is an example question investors need to understand, monitor and evaluate. Look out for opportunities.
COP26 will encourage new green investments. This creates opportunity in green infrastructure, renewable energy, smart mobility, sustainable agriculture, and digital technology. While many will need to change business strategies, some companies will benefit from the transition.
Managing climate change is about using less and using what we do more efficiently. To do this creates opportunities beyond simply infrastructure. It creates them in equities, in credit, in property and in real assets. It creates them in public and private markets, developed and emerging economies.
Pete Smith is head of sustainable investment and senior investment consultant at Barnett Waddingham.
Ryan Boothroyd
One thing we are guaranteed from COP 26 is a litany of impressive sounding policy announcements, joint working groups, and decision texts. However, what investors really want to see is comprehensive measures that lead to tangible action.
Strong and substantial commitments by the international community on renewables deployment, industrial de-carbonisation and energy transmission, paired with the prospect of a fair return, will be critical if private capital remains a central source of long-term financing for the transition.
There are a few things I will be watching with particular interest:
Politicking versus pragmatism. COP26 is more an exercise in diplomacy than climate science. Genuine progress will be made only if nations can look beyond self-interested posturing and focus on actual collaboration. Look out for the relationship between China and the United States and the lobbying power of the lesser-developed nations who will be seeking significant compensation to decarbonise their economies.
Realistic, short-term goals. There is a tendency for long-term climate aspiration to undermine short-term action. The transition will be phased and different technologies will be appropriate for different nations at different points. Low hanging fruit such as reducing methane leakage from natural gas or phasing out of coal is likely to be more impactful than another wind turbine in the UK or Norway, however such tangible short-term measures are often overlooked in favour of grand gestures. It would be useful to see a granular roadmap over the next 5-10 years as well as 2050 targets.
Clear roadmaps. Some of the World’s largest emitters are due an update on their de-carbonisation pathway and associated targets. An obvious example is China which looks likely to submit an updated 5-year plan for climate action. This could have significant ramifications for both the Chinese and wider global market for renewables and their supply chains.
A common language for investors. In a recent Financial Times article, Linda-Eling Lee (head of ESG research at MSCI) called on policymakers to provide clarity on the different approaches investors can take in fighting climate change. This starts with a clear common language for describing climate-related investments strategies via a group of clearly measurable outcomes and alignment to temperature targets. Developments in this space would be much encouraged.
Ryan Boothroyd is portfolio manager, Border to Coast Pensions Partnership.
29th November, 2021
London Stock Exchange
6th Annual FDs’ Summit
Lead sponsor PFM/UKMBA
Public sector finance directors can register here
Doug McMurdo
The COP26 summit in Glasgow is seen as the “must attend” event of the year for all investment practitioners seeking concrete commitments for action to implement the goals of the Paris Agreement.
For the Local Authority Pension Fund Forum (LAPFF), this is a unique opportunity to promote to national and local governments the importance of addressing the just transition imperative.
I will be in Glasgow for the COP, and our particular focus for LAPFF is enshrined in the Paris agreement, which is of “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs.”
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The All-Party Parliamentary Group (APPG) for Local Authority Pension Funds has just issued a report based on a nine-month inquiry led by Clive Betts MP, entitled Responsible investment in a just transition.
The report calls for a UK-wide just transition commission to bring stakeholders together and outline how investment in a just transition to net zero can be delivered.
We are emphatic that as responsible long-term investors we aim to ensure our work to achieve net zero actively always supports a just transition. But we cannot do it alone. The scale of challenge and potential opportunities will require sustained commitment across society and from government.
This need for urgent climate action is recognised and reflected in all climate engagement by LAPFF: in its call for companies globally to provide an annual vote at their annual meetings for shareholders on their climate action transition plans; in its work with the Powering Past Coal Alliance to encourage financial institutions to commit to ending finance for coal; and in feeding in to government on meeting the UK’s own commitments on carbon reductions.
Cllr Doug McMurdo is chair of LAPFF.
