That said, incremental progress was made, with several advances notable for investors, too. Regardless of whether COP26 was a success or failure, there are points worth highlighting for investors.
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The financial industry is stepping up to tackle climate change: The announcement of the Glasgow Financial Alliance for Net Zero (GFANZ), set to take a more permanent form as a body reporting to the G20, was a watershed moment. Critics pointed out that the claim of $130 trillion of private capital being “committed to transforming the economy to net zero” is misleading, given varying levels of commitment by underlying financial institutions.
However, the announcement showed that investors are moving from the sidelines to the centre, which bodes well for future collaboration between investors looking to take more action. It will be crucial for the investment management industry to work collectively to have a meaningful impact on climate changes; the Climate Action 100+ initiative is one example, though there is more scope for action across asset classes like corporate bonds and structured finance. -
Transparency remains central: Commitments were made at the conference on a wide range of themes, including cuts to methane and deforestation, but there was little detail. However, there were clear signs of progress towards transparency among corporates. The International Financial Reporting Standards (IFRS) Foundation announced the launch of the International Sustainability Standards Board to “deliver a comprehensive global baseline of sustainability-related disclosure standards … to help [investors] make informed decisions”.
Monitoring progress on carbon emissions and related metrics is crucial. Ideally, standardised approaches will be established at regional and/or global levels to ensure investor portfolios are taking comparable and appropriate metrics into account. -
A global carbon market is drawing closer: After six years of negotiation, rules for a global carbon market were agreed, setting out a framework for trading carbon credits representing carbon that has been reduced or removed from the atmosphere.
Establishing a market for pricing and trading carbon emissions has long been seen as key for reducing emissions. A prominent regional example is the EU carbon border adjustment mechanism expected by end-2022.
However, there are significant disagreements over whether a carbon market is the best approach, with some jurisdictions favouring policies and regulations that directly reduce emissions. There are also significant criticisms of the new rules, such as the inclusion of older carbon credits generally deemed to be of poor quality, and gaps that seemingly allow for double counting of carbon reductions. But the agreement is still a significant marker of progress towards a global market that could shape emissions trading for decades to come.
Applying effective climate change mitigation strategies is more difficult for investors without economic inputs to guide their decisions. Carbon markets have the potential to influence fixed income and equity markets by penalising high-emitting (non-abating) issuers. Global carbon markets may also influence future policy initiatives.
Expectations were set too high ahead of COP26
Eighteen months after the onset of the COVID-19 pandemic, support for tackling climate change had grown, and it is perhaps inevitable that in this context, COP26 would be seen as a failure. While public opinion was in favour of aggressive action, political realities were always going to limit progress. However, COP conferences have never been about taking a radical stance on climate-related issues, but about incremental improvements to policies.
The trajectory is clear, with a much greater willingness today to consider significant action on specific issues such as deforestation or selling zero emission vehicles. As the need to take more action becomes increasingly urgent, policymakers should consider climate change a year-round call to action and not a topic for focus at a single annual event. COP26 shows the potential for action but also its limits. This reflects a similar reality for investment portfolios balancing financial objectives with sustainability targets. For a challenge as wide-ranging as climate change, there will always be more work to do and difficult decisions to make.
Joshua Kendall is head of responsible investment research and stewardship at Insight Investment.
Neil Griffiths
Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.
Neil is also the host of the ifa show podcast.
