COP26 – can investors really save the planet?

The event in Glasgow has presented world leaders and businesses with an opportunity to change the trajectory of rising global temperatures, but how can investors best support this?

| 7 min read

Little wonder there is a growing army of climate conscious investors. Greenhouse-gas concentrations hit a record last year, and according to UN we are "way off track" in capping rising temperatures. Much is at stake as the human, environmental and financial costs of failing to act are likely to be vast. But what can investors do to help?

Good COP or Bad COP?

The COP26 event in Glasgow has presented world leaders and businesses with an opportunity to change the trajectory: to speed up the roll out of renewable infrastructure, to determine a more universal price for carbon and to agree on global industrial standards.

The event, characterised by some as a ‘last chance saloon’ for limiting climate change, has made some progress thus far. In particular, at least 110 countries representing 85% of the world's forests, agreed to reverse deforestation by 2030. Meanwhile, India came forward with a net zero target of 2070, two decades later than the more commonly-held ambition of 2050 but still a major step forward given it also committed to cut emissions significantly by 2030.

China, however, has already made it clear it will tread its own decarbonisation path in its own time. In the near term, it has decided to open more mines and burn more coal as an immediate response to its energy shortage this autumn.

The conference also contained a day dedicated to finance, which was dominated by the headline announcement that 450 firms controlling around 40% of global assets – about $130tn – would align themselves to the Paris Agreement 1.5C warming limit. This is potentially a landmark moment, but it doesn’t appear to be mandatory for signatories to halt investments in fossil fuel expansion across all assets, plus it is somewhat unclear on what counts as net zero.

Further encouragement came from the announcement of the ISSB, or International Sustainability Standards Board, which will aim to create a global set of standards to meet investors' information needs. This could unlock more consistent data across industries and companies to better inform decision making.

Beyond COP

It is widely accepted that two factors, globally coordinated agreement from governments regarding emissions regulations and an international carbon price, will yield the most significant positive results towards net zero. Time will tell if the pledges made in Glasgow coalesce into a coherent and universal framework, but once one is established investors can better play a major role in directing capital in the best ways to engender change.

Backing companies with long-term solutions to the transition to a low carbon economy is one obvious way to foster innovation and bring about change. Given the world still relies on fossil fuels for over 80% of its energy, a multitude of new technologies need to be developed. Meanwhile, divestment (selling out of high polluting or other controversial areas) and ‘tilting’ portfolios towards better corporate citizens are both means of diverting capital out of unsustainable investments by making it harder for companies not tackling the issue seriously to access capital.

Yet simply avoiding investments in fossil fuel extraction and other problem industries isn’t going to lead to net zero. If an investor disposes of an asset, another party is on the other side of the deal – and they may not be sympathetic to emissions targets, or any other ESG issues for that matter. Shunning fossil fuel companies altogether or driving ‘bad’ assets out of businesses might make investors feel better at a portfolio ‘scoring’ level but it won’t necessarily lead to a better environmental outcome – the assets still exist but in someone else’s hands.

Importance of engagement

As Larry Fink, CEO of Blackrock, described it during one COP briefing, public companies have moved first but the "opaque world" of private markets isn’t subject to the same disclosure regulations and governance requirements. Being outside the realms of close scrutiny potentially gives them an unfair advantage, and it could result in poor environmental outcomes as less responsible owners are left to run ‘problem assets’ unchecked.

Investors might therefore have a more powerful impact by demanding clear transition plans rather than just using the blunt tool of divestment. As Hendrik du Toit, chief executive of Ninety One, recently remarked, “This requires patient pragmatism rather than instant purity – or a focus on ‘transition finance’ instead of on ‘net zero finance’.”

This implies an increasingly important role for company engagement as shareholders’ voices carry the power to vote for change in a way that divestment cannot. A prime example was seen at oil giant Exxon where investor pressure from activist investor Engine No 1, backed by various institutions and asset managers, was able to enact personnel changes in the boardroom and push the company to address climate change by reducing its carbon footprint and starting to transition away from fossil fuels.

This Exxon coup, the very opposite of divestment, was a spark for great change and potentially sets a template for other investors, large and small, to unite in using their voices and votes. The way to get results faster may be through rational engagement, ensuring these companies have roadmaps to making material progress on carbon emissions, rather than shunning them altogether.

A spectrum of approaches

This is why there isn’t a ‘right’ or ‘wrong’ way to invest responsibly. There is a spectrum of approaches and techniques that together are more powerful in enacting change than a single one. Whatever the strategy, the most important thing is that the intention is genuine and considered, and that it contributes to raising standards at a company or industry level. Ultimately, what matters is change in the real world, not the precise ‘attribution’ or ‘score’ in an individual investor’s portfolio.

There are of course obstacles for all responsible investors. Some companies simply won’t act until mandated to do so, and for private markets it is government regulation, taxes and incentives that likely represent the only credible avenues for enacting real change. However, as COP26 has shown, policymakers do have the finance sector as a whole on their side, which bodes well for greater progress towards net zero goals.

Read a recent article how to get started as a responsible investor talking about Good Money Week, an initiative aimed at identifying and overcoming the barriers that prevent people from managing their money sustainably.

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COP26 – can investors really save the planet?

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