What do fund managers want from COP26?
Twelve prominent asset managers weigh in on what they hope to see at the major climate summit in Glasgow next week.
The UN climate change conference that begins next week in Glasgow, Scotland, is slated to be the most consequential gathering since the 2015 Paris Agreement. That climate accord coordinated global action on climate change, including strengthening support for keeping global warming to well below 2 degrees, and better yet, 1.5 degrees.
Success requires massive cuts in greenhouse gas emissions, with the aim of achieving net-zero emissions by 2050. That's why you've seen a blizzard of net-zero announcements from nations, municipalities, companies, and others.
So, what do asset managers want from the conference?
Officially, the Glasgow climate summit, known as COP26, has four goals. But Jackie Cook, Morningstar's director of sustainability stewardship research, along with co-authors Martin Vezér and Hortense Bioy, recently surveyed 12 prominent asset managers, on the condition of anonymity, about their net-zero challenges and their expectations for COP26.
Here's what asset managers told Morningstar they're hoping to see at the climate summit:
Big new promises. COP26 is really focused on policymaking at the multilateral and sovereign levels, but asset managers may use the meeting to announce new targets or discuss climate change with even greater urgency. As one asset manager said, "COP26 is an opportunity to continue to raise the profile and urgency of climate change within our own organizations." According to another asset manager, "Investors should be braced for a wave of new climate ambitions … both the public and private sectors will be keen to stress the extent of their ambitions, with potentially market-moving implications."
More information on paying for the transition. One asset manager hopes to see "clear transition road maps from government and subgovernment entities and meaningful commitment toward alignment and direct financing of the energy transition, involving clear capital expenditure plans." Those policies may have dramatic consequences for the markets. "If countries can implement and follow the Paris Agreement, that will lead to significant investment opportunities in clean technologies, green infrastructure, and other necessary assets, products, and services," another asset manager said. "Companies that prove they can be a part of the solution will likely benefit from a lower cost of financing in the years to come, as both governments and the private sector look to tilt their spending toward green initiatives." On the other hand, securities linked to climate targets could penalize issuers that fail to achieve such goals.
Consensus on carbon pricing. A price on carbon would make polluting expensive, instead of free, and many view it as a critical tool to address climate change. One asset manager expects "agreement upon and rapid implementation of carbon market mechanisms to allow the buying and selling of credits between countries." Another asset manager hopes to see progress on multiple fronts, including "clearer road maps, commitments for the development of credible carbon pricing, trading, and offset markets, and supporting regulation on disclosures."
A deal on paying for climate damage. "While this is a core part of the Paris Agreement, there is, alarmingly, no mechanism as yet within the UNFCCC [the United Nations Framework Convention on Climate Change] to fund responses when vulnerable countries experience loss and damage," said one asset manager. "This is viewed as a critical factor by the least developed countries to unlock the negotiations but is resisted by many wealthy nations. An acceptable deal has to be struck."
Attention to so-called "nature-based solutions." The best-known landscapes that can reduce emissions and adapt to global warming are forests, but wetlands, peatlands, and other landscapes can also help. "A significant scale-up in nature-based solutions may be one of our most powerful levers to mitigate climate change and other nature losses and will hopefully gain increased traction after COP26," an asset manager said.
We'll be posting more content from the conference next week. Stay tuned.