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The countdown to COP26

Chris Dodwell  |  31 Oct 2021Text size  Decrease  Increase  |  
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This is a contributed article. The views expressed here are those of the author and do not necessarily reflect the views of Morningstar.

This November, Glasgow plays host to what may prove a pivotal moment in the challenge to tackle climate change.

Policymakers from nearly 200 countries will be descending on the Scottish city known, perhaps auspiciously, as “The Dear Green Place”, for the next major United Nations climate change conference, referred to as COP26. They will discuss the actions needed to meet the climate goals negotiated in the landmark Paris Agreement of 2015.

The summit comes at a critical juncture. In the summer of 2021, the scientists of the Intergovernmental Panel on Climate Change (IPCC) published their latest evaluation of our changing climate. It was, in effect, a clear warning that urgent action is needed to keep the Paris goals within reach.

After modelling possible trajectories for emissions, the IPCC concluded that “global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades”.

Impax believes the world must use COP26 to put the global economy on track to achieve net zero emissions by 2050 by taking action on three fronts:

1. Governments must develop frameworks for mobilising private finance

While most of the investment needed for the transition to net zero will come from the private sector, efforts to mobilise this finance have so far been a source of frustration – for investors concerned about the lack of project pipeline, for policymakers trying to attract capital at scale, and for public financial institutions such as multilateral and national development banks seeking to bridge the gap between these two groups.
We believe policymakers must agree to and publish clear objectives at a sector level and the investment required.

2. Financial institutions must integrate climate risks and opportunities into investment decisions

As investors dedicated to investing in the transition to a more sustainable economy, we believe there are significant long-term opportunities where companies can help address the climate challenge or mitigate the risks it poses.

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From a fiduciary perspective, the potential consequences of climate change cannot be ignored by asset managers or asset owners. One area where we have focused much of our engagement activity in the last two years has been around physical climate risks. These include the consequences of rising sea levels and biodiversity loss, which carry enormous risks for investors. One study estimated the value of worldwide assets at risk due to climate change could reach US$24.2 trillion by 2100.

To drive the integration of climate risks into investment processes, and so create a more resilient financial system, we encourage financial regulators to adopt the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Ensuring that the TCFD framework is effectively implemented without imposing unnecessary burdens will be no easy task with many technical challenges to overcome, not least in relation to scenario analysis.

Regulation of ‘sustainable finance’ should focus on ensuring that climate-related risks and opportunities are universally integrated. We have previously warned against the temptation of being distracted by well-intentioned initiatives with potential unintended consequences, such as the adoption of mandatory net zero targets for financial institutions. Similarly, efforts to address greenwashing risks through the adoption of green taxonomies should build on experience to maximise their effectiveness.

3. Companies must become more climate resilient and drive innovation

The private sector holds the key to decarbonising the economy. As countries set “net zero” or equivalent targets, there’s a widespread assumption that “national net zero” should mean “net zero for all”, including “corporate net zero” (CNZ) for today’s businesses.

There are drawbacks to unpacking national net-zero targets in this way. Some industries that are key to the transition to a sustainable economy will, by their nature, be unable to achieve net zero based on today’s technologies. Additionally, the merits of carbon offsetting – a practice used by companies across sectors to balance out polluting their activities, usually by planting trees or restoring natural habitats – are hotly debated.

We believe a more thoughtful approach is needed. Rather than effectively insisting all companies adopt net zero targets, we believe it is more useful for investors to consider companies’ resilience to climate change and their alignment with the sustainable transition.
Companies must also drive innovation in new technologies such as hydrogen, carbon capture and zero carbon fuels for shipping and aviation. It is crucial that they collaborate with science, policy and investment communities to drive down production costs, whilst also stimulating demand and building public consensus.

To achieve real change, and start global emissions on a downward trajectory, we must instead all focus on pragmatic solutions that can address the greatest challenge facing global society. It is important that investors push for clear and ambitious real economy policies that, ultimately, should mobilise climate finance.

These reflections on steps to help drive progress towards global net zero are especially pertinent as we approach COP26.

is Head of Policy and Advocacy at Impax Asset Management, a specialist asset manager based in London, England.

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