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COP26 – what’s the impact on investment trends?

Coal, cars, cash, and trees. These were the four themes which Boris Johnson urged COP26 to focus on during the recent global summit in Glasgow. Charlie Buxton, our Portfolio Manager, explores the key takeaways from the conference and what investors should be aware of.

In the most important climate conference of a decade, over 40,000 delegates from 200 countries came together to address an issue which has become of great importance to investors, and indeed the world: climate change.

One of the most encouraging aspects of the conference was the announcement that the US and China would collaborate. After the challenges of trade negotiations – including tech – the fact that both countries have co-operated through mutual activities, including the UNFCCC process, is significant. It also reinforces China’s recent attempts to step up in tackling climate change, driven not least by the sentiment of its people, who have become more concerned about pollution and inequality.

Expectations vs reality

However, the conference generally battled to meet the expectations of the rest of the world, with last minute wrangling seeing some agreements – including that all important one on coal – watered down. Nevertheless, the sentiment and intent for countries to move to a commitment where “inefficient fossil fuel” processes are phased out and coal is phased down, is a welcome step on the road. It’s likely that this mood will persist, as long as countries heed the request to return to Egypt in 2022 for COP27 with more impressive carbon reduction plans. There was also an acceptance that richer countries should have done more to help poorer ones and extend their funding to help those adapting to global warming; a move well received by companies and investors.

Despite these important steps, sadly the maths still doesn’t add up; the pledges and plans won’t meet the Paris Agreement goals of 2015 which aimed to peg global warming well below 2C from pre-industrial levels. Projections see those rates currently tracking around 2.4C and we’ve already seen the worrying impact of what’s in store at just 1.1C following recent fires and floods around the world. It’s clear, even if all the 2030 promises and 2050 net zero emissions goals are met, a collective effort might only just hit a 1.8C best-case scenario.

What now?

COP26 has reinforced both the Paris Agreement and demonstrated a shared global commitment to prioritise the topic of climate change. It’s clear that a goal of 1.5C maximum for global warming, halving global emissions by 2030 and achieving net zero by 2050, are non-negotiable milestones. The next steps are also clear: China’s work to reduce its emissions (which account for 27% of global greenhouse gas pollution), the West’s efforts to support South Africa in closing coal plants and convert to a clean energy economy, a ‘just transition’ from fossil fuel dependency, cutting methane, slowing deforestation and a switch to electric cars are all high on the agenda.

The investment impact

Taken as a whole, how does this translate into investment themes? The popularity of ESG or ethical investing has been with us for some time. COP26 solidifies the theory that this area of investing will fast become the status quo and over the coming months we should see how COP26 starts to translate into policy. Investors too are playing their part; Climate Action 100+, the investor-led programme working to ensure the largest corporate greenhouse gas emitters take action, has published its expectations for the food, steel and power sectors. Another project, the Transition Pathway Initiative, will report in January on the climate data of more than 10,000 major companies, and sovereign and corporate debt providers. Transparency and commitment are the new watchwords, and it’s fair to say a seismic shift in the economy will need to take place to accommodate the work needed. It’s a long but necessary road, but momentum is gathering pace, ensuring that investors can continue to take advantage of new opportunities which these changes will bring.

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