Guide to COP26
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COP26 wishlist
ESG Clarity’s editorial panel set out what they want to see from this year’s climate summit
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Welcome to ESG Clarity’s special COP26 channel, covering the UN Climate Change Conference in Glasgow. The event will bring together 120 world leaders to discuss and take action to mitigate the devastating effects of global warming. Our journalists will be bringing you exclusive news, analysis, reaction and comment from on the ground in this dynamic and interactive format.
Targets, coal phase-outs and better data needed at COP26 if we are to reach net-zero by the middle of this century, says Quilter Cheviot’s Gemma Woodward
‘It’s make or break time’
Tackling something as big as climate change can’t be done unless political and economic forces add up, writes Matt Crossman of Rathbones
COP26 is a numbers game
Wellington’s impact portfolio managers Campe Goodman and Tara Stilwell answer questions on impact investing and how to access it
The what, where and how of impact investing
partner content
@ESGClarity
Tara Stilwell describes how Wellington’s Climate Research Team is vital in helping to identify impact investing opportunities
Applying climate research to impact investing
Why equity investors need to start reducing exposure to climate risk and outline a balanced approach to moving portfolios towards net zero
Tangible steps to decarbonise portfolios
As leaders gather for the upcoming COP26, LGIM CEO and COP26 Business Leaders Group co-chair Michelle Scrimgeour looks at how buildings emissions can be reduced
Delivering climate progress in real assets
LGIM CEO and COP26 Business Leaders Group co-chair Michelle Scrimgeour looks at how building emissions can be reduced
Global population growth, whole irresponsibility and inefficient products should not be overlooked during tough conversations at the summit, says Mark Northway of Sparrows Capital
Sensitive issues that must be addressed at COP26
Global population growth, whole irresponsibility and inefficient products should not be overlooked during tough conversations
The sensitive issues that must be addressed at COP26
Wellington’s impact portfolio managers answer questions on impact investing and how to access it
COP26 opened yesterday with urgent pleas from Alok Sharma and a warning from the WMO
First day warnings
Open letter to COP26 leaders calls for every pound/dollar/euro put towards fossil fuel financing to be matched with another to mitigate climate risk
‘One-for-one’ standards
Speaking with ESG Clarity at COP26, Henry Fernandez says ESG ratings are opinions and thus should not be regulated, and discusses his expectations for the conference this week
MSCI CEO: ‘Don’t regulate ratings’
Speaking with ESG Clarity at COP26, Henry Fernandez says ESG ratings are opinions and thus should not be regulated
Aviva, Schroders, Axa and others commit £5.3bn
30 finance firms pledge to end deforestation
Aviva, Schroders, Axa and others commit £5.3bn, writes Natasha Turner
Wellington’s Climate Research Team is vital in helping to identify impact investing opportunities
The existential risk of rising sea levels
Wellington Management believes companies and governments in coastal regions will need to spend enormous sums on resiliency measures to protect human life and urban infrastructure
UK and Nordic pension funds to invest $130bn in green solutions
Pension funds make climate commitment
BlackRock CEO says public markets can’t navigate to net zero alone
Fink takes aim at private companies
Key announcements relating to net-zero targets, the ISSB and $130trn in private capital funding
UK sets out ambitious plans on Finance Day
UK and Nordic pension funds to invest $130bn in green solutions, reports Natasha Turner
BlackRock CEO Larry Fink says public markets can’t navigate path to net zero alone, and shares his view on ‘reimagining emerging markets’. Natalie Kenway reports
Three key announcements were made this morning relating to net-zero targets, the ISSB and $130trn in private capital funding, write Natasha Turner and Christine Dawson
Natalie Kenway spoke to Jupiter’s Jon Wallace at COP26 about governments accelerating climate policy
Jupiter Green Trust positioned for COP benefits
Lewis Pugh, endurance swimmer and UN patron of the oceans backed by LGIM, on how our oceans have deteriorated and where blue finance can help
Asset managers can help save the ocean
Natalie Kenway spoke to three members of the fund industry about the impact of the key Finance Day announcements
Finance Day and what it means for investment managers
Jupiter’s Jon Wallace spoke at COP26 about governments accelerating climate policy
Lewis Pugh, UN patron of the oceans backed by LGIM, on how our oceans have deteriorated and where blue finance can help
Natalie Kenway spoke to members of the fund industry about the impact of key announcements
What Finance Day means for investment managers
Panellists at the COP26 Green Horizon Summit discuss the route to a just transition
Voters worldwide could undo green transition momentum
Ninety One’s Deirdre Cooper and Nazmeera Moola on uniting developed and emerging markets
Bringing together voices from around the world
Christine Dawson listened to panellists at the COP26 Green Horizon Summit discuss the route to a just transition
Natalie Kenway speaks to Ninety One’s Deirdre Cooper and Nazmeera Moola about how COP26 is bringing together developed and emerging markets
Thursday was Energy Day at COP26 bringing with it various fossil fuel phase-out commitments
Countries distance themselves from coal
Thursday was Energy Day at the climate change summit bringing with it various fossil fuel phase-out commitments, says Christine Dawson
The first week of the conference from on the ground in Glasgow
What it’s really like at COP26
Nature Day saw farming, agricultural and ‘nature positive’ pledges from governments and companies
Protecting nature is best shot at achieving net zero
Nature Day on Saturday saw farming, agricultural and ‘nature positive’ pledges from governments and companies
Protecting nature is best shot at reaching net zero
Investment Association CEO Chris Cummings on regulatory challenges and accountability
Scrutiny post-COP26 will be on asset managers
Scottish first minister Nicola Sturgeon urges financial firms to support real investment in decarbonisation
Green tech and collaboration is the way forward
PRI chief responsibility officer Nathan Fabian explains why COP26 is a wake-up call for the industry
‘Every allocation decision will need to be climate-aligned’
COP26 panel says anyone running money should listen to a climate lecture before qualifying
‘Grasp planetary boundaries before managing money’
Companies and governments in coastal regions will need to spend enormous sums to protect human life and urban infrastructure
COP26 panel says anyone running money should listen to a climate lecture before achieving their financial qualification
‘Understand planetary boundaries before managing money’
PRI chief responsibility officer Nathan Fabian discusses why COP26 is a wake-up call for the investment industry
Scottish first minister Nicola Sturgeon urges financial firms to support real investment in decarbonisation at COP26, says Natasha Turner
Green tech and collaboration is way forward
Investment Association CEO Chris Cummings on regulatory challenges, accountability and why COP is not just for Christmas
Announcements on climate resilience, ocean risk and from Obama on eighth day of conference
Climate resilience metrics launched at COP26
Announcements on climate resilience, ocean risk and from Obama on eighth day of conference, Christine Dawson reports
EQ Investors’ Louisiana Salge on the detail in the finance day announcements – or lack of
Why we need to look beyond the COP26 headlines
Women face a greater burden from the impacts of climate change
UK govt commits £145m to women impacted by climate disaster
Natalie Kenway speaks to senior sustainability specialist at EQ Investors Louisiana Salge about the detail in the finance day announcements – or lack of
Look beyond the COP26 headlines
Women commonly face higher risks and greater burdens from the impacts of climate change
UK government commits £145m to women impacted by climate disaster
Julie Delongchamp, climate change risk analyst at Wellington Management, discusses her key takeaways from Finance day at COP26
‘Net zero is not a silver bullet’
Equity investors need to start reducing exposure to climate risk and outline a balanced approach to moving portfolios towards net zero
BlueBay’s Graham Stock says we need policy changes in EMs in order to benefit their long-term sustainability prospects
‘We need concrete action’
Director of climate change outlines industry steps in this clip from ESG Clarity’s upcoming COP26 podcast
PRI’s Chatterjee on the roadmap to net zero
‘We’ve heard the commitments before, we need concrete action’
Director of climate change Sagarika Chatterjee outlines steps for the industry in this clip from ESG Clarity’s upcoming COP26 podcast
COP draft agreement references the phasing out of coal financing – but will it make the final version?
Historic mention of ‘fossil fuel’ in draft agreement
For the first time, a draft agreement from COP references the phasing out of coal financing – but will it make the final cut?
Historic mention of ‘fossil fuel’ in draft agreement applauded
Nine industry experts discuss ‘radical collaboration’, carbon pricing, youth voices and more
Reaction to the final agreement from COP26 discussions is mixed, says Natasha Turner
Glasgow Climate Pact sealed – but is it enough?
Podcast: On the ground in Glasgow
Natasha Turner speaks with nine industry experts over the course of COP26 about ‘radical collaboration’, carbon pricing, youth voices and more
What Investment editor Rory Palmer is cautiously optimistic about the role finance will play in combatting climate change
Keeping momentum going after COP26
Rory Palmer is cautiously optimistic about the role finance will play in tackling climate change
Hortense Bioy discusses the implications of commitments made by firms that are ‘greenwashing’
COP26 will lead to legal action
Morningstar’s Hortense Bioy discusses the implications of the commitments made at COP26 by firms that are ‘greenwashing’
Morningstar’s Hortense Bioy discusses the implications of the commitments made at COP26 for firms that are ‘greenwashing’
There will be more “naming and shaming” of companies that are greenwashing, and increased legal activity as a result of the announcements from COP26, said Morningstar’s Hortense Bioy. Speaking to ESG Clarity during the second week of the Glasgow climate change conference, the global director of sustainability research and ESG Clarity panellist explained while there will be more collaboration within and across sectors, it will also mean more companies that are greenwashing or not aligning themselves with climate friendly initiatives will be exposed. “We expect there to be more filing of shareholder resolutions, and more collaboration – we have already seen a lot but I think we will see more. “But there will also be more naming and shaming as well as legal implications – like we saw with Shell. This will put more pressure on the biggest managers to really act on climate.” Specifically, she said she looks forward to seeing what BlackRock comes up with after Larry Fink spoke on several occasions about the weight asset managers carry in terms of delivering on climate. ESG Clarity also reported how the CEO took aim at private companies for not pulling their weight on environmental commitments and initiatives. “BlackRock have had since March to come up with net-zero targets and I look forward to what Larry’s letter comes up with in January. “This is going to be very challenging for the passive managers – I am not even sure how much companies like Vanguard can commit to net zero,” she pondered. Make it happen Overall, Bioy said she is positive on the news and initiatives coming out of the finance industry at COP26 but added “this is just the beginning.” She highlights the challenges around creating the ISSB standards that are applicable to so many different companies, as an example. “But we need to make it happen,” she adds. She also expressed some slight disappointment that not all the asset managers involved in the Net Zero Asset Managers Initiative announced targets during COP26. “We expected the first wave of signatories would come up with the target. I haven’t yet looked closely at those that have come up with a target, but I did notice there was quite a wide range. “Some are not transparent enough, and don’t have a plan in place.” Bioy added given the focus on private market capital mobilisation at COP26, she will be keeping an eye on the number of private equity firms that begin to announce net-zero plans. She said: “The largest private equity firms should be making similar commitments to what the asset management industry has done over the next few months if they want to attract business.”
‘There will be more pressure on the biggest managers to really act on climate’
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By Natalie Kenway
Reflecting on the last few days in Scotland, I decided to finish this column in a cafe in Edinburgh. Not because I wanted some JK Rowling-esque inspiration, but because of Airbnb’s helpful 10am checkout. Despite that, and the general reaction the media, I’ve been impressed by what I’ve heard here in Scotland and have come away more optimistic than I was. I do share the view that coverage of COP has been exhaustive, and we’re all suffering from a bit of COP-fatigue, but spare a thought for ESG Clarity’s Natasha Turner who has been up in Scotland for the whole show – great effort! As a relative newcomer, I’m conscious I might be sounding quite green (wahey) but I think it’s with good reason. Investment COP Both Natasha and I were present at Investment COP events on Sunday and Monday, hosted by Janus Henderson and Schroders. I’m under no illusions about the scale of the climate change problem – but I am confident the asset management industry is repositioning in a way it hasn’t before. The tone has changed, the stakes have changed, and there is no room for error. It was refreshing to hear the differences of opinion at the event; there wasn’t a uniform voice about how we get to the end goal but instead lots of perspectives that will hopefully combine to form a strategy to tackle this. Some have been cynical of the pledges, for example, and research group Climate Action Tracker rated both the policies and actions as “insufficient” to be consistent with keeping global temperature rises to 1.5C. There was also a heavy focus on private markets, but while private capital will be key in shaping how the crisis plays out, it needs co-ordinated government policy to work alongside it. Governments have committed, at least in words, to serious reductions and targets, but without China and Russia present, the whole exercise feels incomplete. That said, as I started writing this the US and China have agreed to work together to reduce their emissions in line with the Paris Agreement, which should be cause for optimism. Finding solutions If the investment industry is serious and wants to make an impact, new money has to spent on taking the high-emitting emerging markets with us and developing sustainable infrastructure. The best phrase I’ve heard over the past few days has been that reducing emissions and switching to renewable energy in Europe is akin to shuffling deck chairs on the Titanic; it’s pretty but it won’t make a difference. But continuing to invest in Europe without spending more in fast-growing markets is also a deck chair shuffling exercise. Currently, despite emerging economies accounting for half of global emissions, only 20% of global funding goes there – that doesn’t go anywhere near enough. We only need to read some of ESG Clarity’s columns from the United Nations Capital Development Fund to realise that. Interestingly, a new investment trust is planning to float in early December, ThomasLloyd Energy, which has received seed funding of up to £25m from the UK government, a first for investment trusts. ThomasLloyd has matched this amount, marking a partnership between both government and private capital. This is something that needs to happen more often in order to hit the targets and fulfil the promises made over the past two weeks. As I head back to London, I will do so confident in what has taken place here. I wouldn’t go as far to say the event was a turning point, I think that happened in the months preceding the summit. In 2021, floods, wildfires and extreme heat occurred all over the world. It’s been a record-breaking 12 months for all the wrong reasons, and things may get worse before they get better. But for now, I remain hopefully optimistic. This article first appeared in What Investment.
‘I am confident the asset management industry is repositioning in a way it hasn’t before’
By Natasha Turner
Natasha Turner speaks with nine industry experts over the course of COP26 about ‘radical collaboration’, carbon pricing, youth voices and more. Click here to listen
The investment industry has welcomed elements of the Glasgow Climate Pact such as the inclusion of the just transition and impact investing, but has called the COP26 conference overall “unfinished business”. Following the draft agreement of financial pledges discussed at COP26, a Glasgow Climate Pact has been reached, committing nearly 200 countries to 1.5C and the outstanding areas of the Paris Agreement. On Friday, the draft was deemed “quite significant” by members of the investment industry for calling on parties to accelerate the phase-out of coal. The now-agreed pact commits countries that have agreed to revisit and strengthen their current emissions targets to 2030, in 2022. Matt Christensen, global head sustainable and impact investing at Allianz Global Investors, and Abbie Llewellyn-Waters, head of sustainable Investing at Jupiter, were among those who welcomed the inclusion of the just transition, net-zero strategies and impact investing. Llewellyn-Waters noted the climate and equity gap featured heavily in the negotiations surrounding the just transition and said the most vulnerable countries were given better representation in the negotiations. Coal However, the final pact includes an amendment from India to the language of the coal agreement, which now reads as “phase down” rather than “phase out”. During negotiations, India and Iran were among countries opposed to “phase out”. Gilles Moëc, group chief economist at AXA Investment Managers, said: “COP26 left a lot of ‘unfinished business’ and governments are now requested to produce new Nationally Defined Contributions to decarbonisation, with a focus on 2030, by the next COP in Sharm el-Sheikh at the end of next year. “Optimists will probably choose to focus on the fact that finally, fossil fuels and particularly coal are now explicitly targeted, but the contorted wording leaves a lot of room for interpretation. “Yes, the general direction of travel is clearer, but attention should shift from big international events to closely monitoring implementation country by country.” Analysis received by ESG Clarity noted that although the unprecedented fossil fuels phase-out pledge was weakened by a last-minute deal between China (the world’s largest fossil fuel consumer), the US (the world’s largest fossil-fuel producer), the EU and India, it is still there. Despite the watering down from ‘phase out’ to ‘phase down’, the cause of the climate crisis has for the first time since the Kyoto Protocol been called out by the 198 signatories of the Paris Agreement. Science The Paris Rulebook, the guidelines for how the Paris Agreement is delivered, was also completed today during negotiations, including agreement of a transparency process for tracking how countries deliver their targets. This includes Article 6, which establishes a framework for countries to exchange carbon credits through the United Nations Framework Convention on Climate Change. The investment industry welcomed the references to being guided by science in the draft announcement last week. The final draft appears to strengthen this proposal by adding “science and urgency” to the agreement. There were also commitments to significantly increase financial support through the Adaptation Fund as developed countries were urged to double their support to developing countries by 2025. COP26 president Alok Sharma said: “We can now say with credibility that we have kept 1.5C alive. But its pulse is weak and it will only survive if we keep our promises and translate commitments into rapid action. “From here, we must now move forward together and deliver on the expectations set out in the Glasgow Climate Pact, and close the vast gap which remains. Because as prime minister Mia Mottley told us at the start of this conference, for Barbados and other small island states, ‘two degrees is a death sentence’. “It is up to all of us to sustain our lodestar of keeping 1.5C within reach and to continue our efforts to get finance flowing and boost adaptation. After the collective dedication which has delivered the Glasgow Climate Pact, our work here cannot be wasted.”
‘Attention should shift from big international events to monitoring implementation country by country’
Gilles Moëc, group chief economist, AXA Investment Managers
Mia Mottley, prime minister of Barbados
Mention of ‘fossil fuel’ in draft agreement applauded
For the first time, a draft agreement from COP references the phasing out of coal financing – but will it make the final version?
The draft agreement of the financial pledges discussed at COP26 is giving “a market signal of the level of ambition” from leaders to step up their climate efforts, according to Matt Crossman, stewardship director at Rathbones. He said the language used in the draft agreement is “quite significant” from policymakers as for the first time in history the phasing out of fossil fuel and coal financing has been referenced to. The draft deal “calls upon parties to accelerate the phasing out of coal and subsidies for fossil fuels”. “This is quite significant,” ESG Clarity editorial panellist Crossman said. “It is the first ever mention of fossil fuels and coal in a first draft, sending the market a signal of the level of ambition. “But to be meaningful it has to stay in there.” Countries will finalise the agreement next week, after COP26 has drawn to a close, but Crossman said he is “cautiously optimistic” the reference will not be removed. “We hope it is left in there and then next year they come back with even stronger revised text. “This could lead to year-on-year progress with annually revised targets – rather than talking about it every five years,” Crossman added, as has been the case since the Paris Agreement. “If it is taken out, questions will be asked,” he also noted. Beyond COP26 The next 12 months are crucial in terms of putting into place the practicalities of the promises made at COP26, with Crossman highlighting only the initial decisions can be decided in the fortnight in Glasgow – the detail is to come. “The practicalities are big,” he said. However, the signals given by policymakers will help asset manager engagement with investee companies on climate. The big announcement on phasing out of coal power will aid these conversations, Crossman said, and a big surprise to come out of the commitments was that Poland – one of Europe’s largest consumers of coal – was among the 190 countries and organisations that committed to phasing out the use of the fossil fuel by 2030-2040. “That was not expected. As part of our work with Climate Action 100+, we talk to utilities companies in Europe and now we can go to them and highlight that Poland is on board. It is a real shift and gives us more of a foothold that Poland has committed – it is a big deal,” Crossman says. “This political will and market signals for where the future lies really helps our dialogue,” he added. China and US declare joint climate effort Meanwhile, China and the US shocked markets by coming together to sign a deal on climate. The world’s two biggest emitters unexpectedly announced in a joint declaration they will be working together to reduce emissions. They have agreed to implement “concrete and pragmatic” regulations in decarbonisation, reducing methane emissions and fighting deforestation, Chinese climate envoy Xie Zhenhua said in Glasgow. A working group will bring the two countries together on a regular basis to “a multilateral process, focusing on enhancing concrete actions in this decade,” the declaration said. Fiona Reynolds, CEO at the Principles for Responsible Investment, said the closer collaboration between the world’s two largest emitters is a positive development in efforts to address climate change. “The US and China’s acknowledgement of the significant gaps in current efforts to address the climate crisis is an important step, and closer working on key areas such as methane, deforestation and electricity echo key areas of focus from COP26 so far, which should be viewed as a welcome move. “Moving forwards, this partnership should provide the foundation for closer policy tightening between the two nations, with expanded scope for consistent legislative and regulatory action to address systemic climate change issues. With this said, we still need to see action taken further and faster on key areas such as reduction of fossil fuel usage.” Science-based targets More than 1,000 companies are setting 1.5C-aligned science-based targets, the Science Based Targets initiative (SBTi) and the United Nations Global Compact announced at COP26. The 1,045 companies represent over $23trn (£17.2trn) in market capitalisation, cover 53 sectors in 60 countries and have more than 32 million employees. The Business Ambition for 1.5C campaign was initiated by the UN Global Compact in 2019 and is led by the SBTi. The SBTi said 75% of submissions from corporates this year have been 1.5C-aligned targets and from June 2022, the SBTi will not accept targets from corporates that are anything other than 1.5C-aligned. SBTi recently launched a net-zero standard, saying it is the first of its kind – providing “a credible assessment” of net-zero target setting and helping companies ensure their climate goals are Paris-aligned. The standard applies to Scope 1, 2 and 3 emissions, but SBTi said corporate climate action should go further and include investment in climate mitigation beyond their value chains. SBTi explained once a company has made a commitment they must submit their targets to SBTi for validation within 24 months. Companies are then required to report company-wide greenhouse gas emissions and progress against their targets on an annual basis. Of the companies that have submitted targets to SBTi, one-third have completed validation of near-term emission reduction targets and over half have committed to reach net-zero emissions across their value chain by 2050. SBTi explained it will use the SBTi Net Zero Standard to validate the integrity of these targets. Sanda Ojiambo, CEO and executive director of the UN Global Compact, said the rise in corporate climate commitments has been unprecedented. “Ahead of the UN secretary-general’s Climate Summit in 2019, we challenged corporate leaders to limit the worst impacts of climate change and make the 1.5C goal the new normal for corporate action. Today, through the Business Ambition for 1.5C campaign we have witnessed an unprecedented increase in corporate commitments to tackle the climate emergency. “Leading companies must now build trust by setting credible and independently-validated emission reduction targets and report on their progress. Greenwashing and misleading commitments have no place on our path to net zero,” she said.
‘This could lead to year-on-year progress with annually revised targets – rather than talking about it every five years’
Matt Crossman, stewardship director, Rathbones
By Natalie Kenway and Christine Dawson
‘We must hit the ground running to develop the solutions we need’
Alok Sharma, COP president
Graham Stock, partner and senior emerging markets sovereign strategist at BlueBay, says we need policy changes in EMs in order to benefit their long-term sustainability prospects
The majority of the world’s poor are women, therefore they commonly face higher risks and greater burdens from the impacts of climate change
Some £165m was committed by the UK government to supporting women most vulnerable to climate change, it was announced on Gender Day at COP26. The UN found that women around the world constitute a larger majority of the world’s poor, which often depends on small-scale farming that is more vulnerable to climate change. Additionally, women and children comprise 80% of those displaced by climate-related disaster. Addressing this link between climate and gender inequality, the UK government earmarked £45m of for local communities and grassroots women’s groups in Asia and the Pacific to challenge gender inequalities and adapt to the impacts of climate change, while £120m was dedicated to building resilience, preventing pollution, protecting biodiversity, strengthening renewable energy and managing waste. Furthermore, this segment will support women’s leadership and provide access to finance, education and skills in Bangladesh. UK international champion on adaptation and resilience for the COP26 presidency, Anne-Marie Trevelyan, commented: “It is women, girls and those who are already most marginalised, that will be most severely impacted by climate change. But they also have a critical role to play to address the climate crisis. “The UK is committed to addressing this dual challenge head on, committing new funding to empower communities and women’s groups to take locally-led adaptation action, to build local, national and global resilience. I urge more countries to make commitments to implement the UNFCCC Gender Action Plan and deliver the goals of the Feminist Action for Climate Justice.” Fatou Jeng, founder of Clean Earth Gambia and co-lead of the YOUNGO Women and Gender working group, said: “Gender inequality creates additional burdens and barriers for women and girls during times of conflict and climate-related crisis, which increases their risks of hunger, food insecurity and violence. But women play fundamental roles in local food systems and are carers and activists, which make them uniquely placed to drive longer term climate resilience. “Women should be involved in the policymaking, project planning and implementation of climate adaptation projects, and gender equality should be a key portion in climate financing. “If gender equality is not taken as a serious issue in our climate decision-making, climate financing and climate adaptation processes, it will undermine opportunities for women in vulnerable communities to drive effective climate change adaptation and mitigation approaches that meet their needs.”
‘Gender inequality creates additional burdens and barriers for women and girls during times of conflict and climate-related crisis’
Fatou Jeng, founder, Clean Earth Gambia
A common framework of climate resilience metrics for businesses, investors, cities and regions was launched by the UN-backed Race to Resilience campaign on Adaptation, Loss and Damage Day at COP26. The framework allows non-state actors to quantify and verify the benefit of climate resilience actions for people and hectares of natural ecosystems. It aims to make four billion people and more than 100 natural systems – including mangroves, forests and coastal zones – more resilient by 2030. Nigel Topping, climate action champion at COP26, said: “After a summer of fire and flood and a code red from climate scientists, we must reckon with the scale, immediacy and inequity of the climate crisis right now. We need urgent, innovative breakthroughs on resilience and to address loss and damage. “The Race to Resilience set out with a necessary goal of building the resilience of four billion people to climate hazards by 2030. The metrics framework and analytics underneath them will ensure we are backing the actions we know can increase resilience and help mobilise more resources toward them. This is just the start though. We need greater ambition and action from all actors to help communities adapt and build resilience to climate change.” Sagarika Chatterjee, director of climate change at the Principles for Responsible Investment, added: “We need to focus more on resilience. Four billion people are susceptible to the physical impact of climate change. “We need to be taking actions on how we’re going to assess the risks of the physical impact and how we’re going to protect and help those people so they’re not just rebuilding and rebuilding but can withstand the shocks.” Ocean risk and resilience An investment into resilience of coastal communities was also announced on Adaptation, Loss and Damage Day, the eighth day of COP26. The UK’s Blue Planet Fund and Swiss Re announced they will put over $500,000 (£368,042) into the Ocean Resilience Innovation Challenge, an initiative investing in and supporting locally-led projects designed to build resilience in coastal communities adapting to climate change. The project is run by Ocean Risk and Resilience Action Alliance (ORRAA), which aims to drive $500m of investment to ocean nature-based solutions, establish at least 50 novel finance products and build the resilience of 250 million climate-vulnerable coastal people by 2030. ORRAA executive director and co-chair Karen Sack said: “The UK and Swiss Re Foundation’s backing of the Ocean Resilience Innovation Challenge comes amid a growing urgency for private and public finance leaders to increase ocean finance commitments and build resilience in some of the Earth’s most valuable ecosystems and most exposed communities. “This is about how we nurture and scale locally-led solutions to some of the most serious challenges we face.” Funding adaptation Elsewhere at the conference in Glasgow, contributing governments and fund stakeholders discussed the Adaptation Fund, with the US making its first donation of $50m. Since 2010, the fund has had over $850m allocated for climate adaptation projects in developing countries. John Kerry, special envoy for climate US, said: “There has been a shift in thinking under the Biden administration about the criticality of adaptation.” Qatar also made its first donation of $500,000 and a host of other countries made renewed pledges. Obama calls for urgency On the same day, former US president Barack Obama addressed COP26 delegates in Glasgow. Speaking at the event Partnerships for Island Resilience: sharing solutions in the great ocean states, he said island states were the “canary in the coalmine” when it came to the climate crisis. In a later address to the conference, Obama encouraged young people to stay angry about the climate crisis and to channel their frustration in to politics and addressing the challenges older generations have created but failed to solve. He also said it was “discouraging” Russia and China’s leaders were not attending COP26: “It was particularly discouraging to see the leaders of two of the world’s largest emitters, China and Russia, declined to even attend the proceedings, and their plans so far reflect what appears to be a dangerous lack of urgency – a willingness to maintain the status quo, on behalf of those governments.”
‘We need to focus more on resilience. Four billion people are susceptible to the physical impact of climate change’
Sagarika Chatterjee, director of climate change, Principles for Responsible Investment
By Christine Dawson
Investment Association CEO Chris Cummings discussed regulatory challenges, accountability and why COP is not just for Christmas with Natalie Kenway in Glasgow
The UK investment industry is in prime position to set the standards for the climate transition by working with international regulators as well as re-engaging with end-investors in the aftermath of COP26, said Chris Cummings, chief executive of the Investment Association (IA). Speaking at the COP26 conference in Glasgow to ESG Clarity, Cummings noted the difference in tone for this COP with finance being at the centre. “The first COP in Berlin didn’t have a finance day, it was more about the ministers and leaders. “Here, there is clear intent for finance to be the link to bring about change and bring us all together. “We have massive role to play, and policymakers are firmly fixed on our part of the industry, which I am not sure would have been the case five to 10 years ago.” He added that the UK is the “pre-eminent centre of asset management” and therefore in “a very fortunate position to bring change”. Regulatory challenge Cummings said IA members will continue to work with regulators on what is needed for the climate transition in terms of company disclosure and fund labelling. He added: “We need to make sure regulators are comfortable with the scale of change that is to come and for this to be a partnership between regulators and companies. It will be a challenge.” The establishment of the International Sustainability Standards Board announced last week was “a breakthrough moment” he said, and he looks forward to seeing the Taskforce for Climate-related Financial Disclosure (TCFD) being embedded next year. But he also urges regulators to speak to the end-consumer and use this as an opportunity to re-engage investors on the good that can be done through savings and investment portfolios. “The disclosure regime matters critically. We need to start off with the people that need to understand – the consumers – and then talk to the industry, it shouldn’t be the other way round. We don’t want another Priips,” he said, referring to the confusion caused by the Regulation for Packaged Retail and Insurance-based Investment Products that is being reformed in the UK. “We need this to be a communication exercise, we want to see the regulators and the industry crossing the street to speak to the consumers, not the regulators telling the industry how to speak.” The IA CEO also highlighted the importance of making sure fund labelling is clear and transparent, from fund design, operations, communications, governance, management etc. “Fund labels need to be something we can engage with as retail investors; it is a wonderful opportunity to re-engage with people about their investments. “We are seeing the monthly flow figures [produced by the IA] that ESG funds are beating the trend in terms of retail investments, and I wouldn’t be surprised if they are even higher a month on from COP26. “This moment in time it isn’t just about millennials, people from all age ranges have become more thoughtful about what they are investing in.” The aftermath Cummings also told ESG Clarity he felt this COP was “very ambitious” due partly to its high profile but also because we are facing scrutiny. Speaking on 4 November, he stated: “COP26 has already been a success as it has created the platform to have a conversation. It will be a fascinating next 12 months. COP is not just for Christmas! “There is so much to be done and we are going to be held to account. We have seen some big commitments made and undoubtedly our good friends in the media and other onlookers will be asking ‘what’s happening’ as we move forward. “We have the opportunity to prove that the asset management industry can deliver.”
‘We want to see the regulators and the industry crossing the street to speak to consumers’
Chris Cummings, chief executive, Investment Association
“The future of the planet literally depends on investment in green technology and decarbonisation,” Scottish first minister Nicola Sturgeon said in her closing remarks at Investment COP yesterday. Speaking to the investment attendees, Sturgeon said what came through really strongly on Finance Day was the need to come together to support real investment in decarbonisation. Particularly important and welcome on Finance Day were the announcements on financial reporting, she said, referencing financial institutions agreeing to vote transparently on how they are supporting the shift to net zero. She added Scotland was a leader in green technology and innovation, and would be fighting strongly for fair financing for developing countries, as well as ensuring the transition is just. “We’re also arguing strongly for emissions pledges,” she added. “This is a defining moment in the history of our planet. The appetite for green investing is increasing around the world.” Elsewhere at the conference, which ran for two days as a side event to the main COP26 conference, debates centred around the role of governments and regulators in green investment, and what roadmaps to reach interim targets asset managers should be using. Global carbon taxing was fairly unanimously called for by the investment community in attendance, as well as greater collaboration involving the need to bring in voices from outside the finance world.
‘This is a defining moment in the history of our planet’
Nicola Sturgeon, Scottish first minister
COP26 panel says anyone running money should listen to a climate lecture before achieving their financial qualification. Christine Dawson reports
Finance professionals should be required to hear an expert explain planetary boundaries before they are allowed to manage any assets on behalf of savers, argued Faith Ward, chief responsible investment officer for Brunel Pension Partnership, at COP26. Speaking at a Lombard Odier event on Friday, Ward, who is also chair of the Institutional Investors Group on Climate Change, said: “If you asked me what was the one single thing we have to do … you are not allowed to manage money unless you have listened to a lecture by Dr Johan Rockström and really internalised what he has to say. That level of skills and awareness is what we need in our industry.” Mark Carney, United Nations special envoy for climate action and finance, backed Ward’s argument by saying: “One of the most important suggestions was that everyone should have to listen to a lecture from Johan as part of their qualification to be a financial professional. “After all, if every financial decision is going to have to take climate in to account, understanding the core basics of the feedbacks and the dynamics should be part of the understanding.” The panellists had previously heard from Rockström, who is joint director of the Postdam Institute for Climate Impact Research, about global temperature changes Earth has experienced in history and how the temperature rise trajectory we are on would take us “outside the corridor of life”. He also spoke of how firmly the climate science now shows we are in the midst of a climate crisis. “If those in the business sector want to stand firmly on a solid floor of evidence, well you’ve got it. There is absolutely no hesitation anymore. “The Intergovernmental Panel on Climate Change does not talk about unequivocal proof that we are causing global warming. Today, they use the term ‘fact’. It is a fact. There is as much fact as there is gravity.” Taking the lead David Blood, co-founder and managing director of Generation Investment Management, explained the responsibility financial services have to the climate and ecological emergency, and why the Glasgow Financial Alliance for Net Zero with its total $130trn (£95.8trn) available to put towards meeting the Paris Agreement is a critical step. “The world expects that the finance sector should lead on the transition to net zero because we are part of the problem. We are the capital allocators, and while government and civil society will be critical it will be the private sector that will be the most important, and many of our portfolios are aligned with a 3C world as opposed to a 1.5C one,” he said. Blood stated finance professionals now have climate embedded in fiduciary responsibility: “We must add climate impact into this calculation so that it is climate impact and a just transition, impact plus risk and return as a broader capital allocation framework.” He also said we are seeing “the most significant economic transformation in history”. “Make no mistake, it isn’t just the energy sector. From an asset owner or manager perspective, we are talking about impact across all of our portfolios, in every asset class and every industry segment.” “This is an exciting time to be in finance. It will probably be the most significant five to 10 years in our careers.”
‘If every financial decision is going to have to take climate in to account, understanding the core basics should be part of the understanding’
Mark Carney, United Nations special envoy for climate action and finance
Climate and nature agendas are “finally starting to connect”, experts said following an abundance of commitments from governments and corporates during Saturday’s Nature Day at COP26. Country and business leaders met with farmers and agriculture representatives in Glasgow to discuss policies leading to 45 governments pledging to take urgent action to protect nature and shift to more sustainable ways of farming. Meanwhile, 95 companies from the private sector, including supermarkets and fashion brands, committed to becoming ‘nature positive’ by halting the reverse of decline in nature by 2030. Examples included: • Brazil’s plan to scale its ABC+ low-carbon farming programme to 72m hectares, saving 1bn tonnes of emissions by 2030 • Germany’s plans to lower emissions from land use by 25m tonnes by 2030 • The UK’s aim to engage 75% of farmers in low-carbon practices by 2030 Action agenda All continents were represented in the pledges, with India, Colombia, Vietnam, Germany, Ghana and Australia also laying out ‘action agendas’ to change their agricultural policies to become more sustainable and less polluting, and to invest in the science needed for sustainable agriculture and for protecting food supplies against climate change. At COP26, Vian Sharif, head of sustainability at FNZ and member of the Taskforce for Nature-related Financial Disclosures (TNFD) committee, said: “We’re finally seeing the nature and climate agendas start to connect. It recognises what the science has shown us – that these are synergistic paths, so that protecting biodiversity and nature is one of our best shots at achieving net zero. “COP highlighted some of the leading financial institutions globally who are recognising that nature is at the heart of business - not least because of the systemic risks that nature degradation poses to business and investment, and the opportunity that nature restoration poses both for net-zero outcomes and returns through innovative investment. “For all this, the development of science-based metrics enabling investors to integrate nature into their risk and due diligence decision-making is crucial. Insights providers like NatureAlpha, Naturemetrics and Sustainix are working alongside business and finance to support this.” She added, for example, protecting forests is one of the most effective ways of ensuring carbon is absorbed from the atmosphere. That is why the landmark agreement last week at COP26 on deforestation is so important. Leaders representing over 85% of the world’s forests committed to halt and reverse deforestation and land degradation by 2030, alongside £8.75bn of public funds committed to protect and restore forests coupled with £5.3bn of private investment. The business of nature At COP26, the TNFD announced it would be working closely with the new International Sustainability Standards Board on nature-related disclosures. In terms of the UK, the government announced funding of £500m to support the implementation of the Forest, Agriculture and Commodity Trade Roadmap – the landmark agreement announced during the World Leaders Summit last week – and a further £65m will support a ‘just rural transition’ to help developing countries shift policies and practices to more sustainable agriculture and food production. The World Bank has also committed to spending $25bn (£18.5bn) in climate finance annually to 2025 through its Climate Action Plan, including a focus on agriculture and food systems. COP26 president Alok Sharma said: “If we are to limit global warming and keep the goal of 1.5C alive, then the world needs to use land sustainably and put protection and restoration of nature at the heart of all we do. “The commitments being made today show that nature and land use is being recognised as essential to meeting the Paris Agreement goals, and will contribute to addressing the twin crises of climate change and biodiversity loss.”
‘We’re finally seeing the nature and climate agendas start to connect’
Vian Sharif, head of sustainability, FNZ
Lord Zac Goldsmith
Energy Day at COP26 saw two major agreements on the phasing out of coal with more than 40 countries committed to moving away from the fossil fuel, while some 20 countries stated that, from 2022, they will no longer fund unabated fossil fuel projects abroad. Among the states committing to “accelerate a transition away from unabated coal power generation” were the UK, Canada and Poland, but the heavily coal-reliant India, China, Australia and the US did not sign the agreement. The Financial Times reported the timeframe for major economies to transition away from coal was originally 2030, but following negotiations the Global Coal To Clean Power Transition Statement now has the goal as “in the 2030s (or as soon as possible thereafter)”. For the rest of the world the timeframe for transitioning away from coal is the “2040s (or as soon as possible thereafter)”. The countries and organisations supporting the statement committed to “rapidly scale up deployment of clean power generation and energy efficiency measures” and to “rapidly scale up technologies and policies in this decade to achieve a transition away from unabated coal power generation”. Cutting coal finance Meanwhile, signatories to the Statement on International Public Support For The Clean Energy Transition were a broad mix of countries, including the US and the UK. Here, they agreed to “end new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except in limited and clearly defined circumstances that are consistent with a 1.5C warming limit and the goals of the Paris Agreement”. According to a statement from think tank E3G, signatories to the pledge cover around a third of global GDP and put a deadline on public oil and gas finance as well as coal, but the commitment was described as “long overdue”. It noted G20 countries invested at least $188bn (£139.8bn) into oil, gas and coal projects abroad in the past three years. “This statement is a powerful signal to policymakers and investors alike that high climate and investment risks are an inherent part of oil and gas finance, and that no investment in new oil and gas supply is necessary,” said E3G programme leader, climate-neutral energy systems, Lisa Fischer. “It shows growing confidence that employment and revenue opportunities are strongest in the clean energy sector. Every cent of public finance in energy overseas should be used to opening these opportunities for nations across the globe.”
‘This statement is a powerful signal to policymakers and investors alike that no investment in new oil and gas supply is necessary’
Lisa Fischer, programme leader, E3G
There is a risk the current momentum towards the green transition will be “unstuck” if voters are not brought along and convinced it is a just transition, Nick Hurd, chair of the G7 Impact Taskforce told a Green Horizon Summit on Finance Day at COP26. Hurd told panellists the public need to see it as “an agenda to prosperity” because where a referendum on net-zero targets is being mooted in the UK, the conversation will also be happening in other countries around the world such as South Africa, India and Indonesia. “Don’t underestimate political difficulty,” he warned. “We’re about to step into the difficult bit of the energy transition, which is changing how we heat our homes etc. Arguably, we have done the relatively easy bit. The [UK] prime minister knows that you’ve got to have a story, and you have got to bring people along with you.” Anne Valentine Andrews, global head of real assets, managing director at BlackRock, also expressed concern that although the green transition is full of exciting opportunities, which the public should know about, many voters around the world are not on board. She said they need to feel more fear about the consequences of not acting fast enough on climate: “There does need to be a more unifying, scary message out there to get people to act, but also to [convey] this is a hugely exciting opportunity in our lifetime.” China’s route Meanwhile, Dr Ma Jun, founder and president of the Institute of Finance and Sustainability discussed getting the pace of change right in China. He said when it came to working with the private sector on sustainable finance, it was important they should not be left to their own devices on things that needed to move rapidly, like establishing a green taxonomy. “It would take [the private sector] many years to come up with a taxonomy, but within the government … we can quickly mobilise the expertise and develop the taxonomy within six months or 12 months – that’s what we did for [China’s] green bond taxonomy,” said Jun. He also said corporate disclosures on climate in China were not moving fast enough with the current voluntary regime: “[There is consensus that] disclosure needs to move towards a mandatory arrangement. We started with some voluntary and semi-voluntary guidance – it’s not working well. “You have to force the corporates and financial institutions to disclose information on the environment, climate and also biodiversity.” Jun added China’s recent increase in coal power was no major setback to its national climate goal. “There are lots of reasons contributing to the shutdown of factories and traffic lights in China. It’s a short-term reaction that involved some additional coal consumption, but it has very little impact on the long-term trajectory of our carbon neutrality goal.” Net-zero finance for emerging markets Later in the session, Stephanie von Friedeburg, senior vice-president, operations, at International Finance Corporation (IFC) said climate projects in emerging markets should seek funding from the $100trn (£74.1trn) of capital available for net-zero goals to attract investors looking for yield. She told panellists not enough projects in emerging markets are bankable, but this could be addressed with targeted capital including with philanthropic money, public-private partnerships structured by international financial institutions like IFC. “The third place we need to be looking for capital is the $100trn of companies that have pledged to get to net zero by 2050. They don’t know how to get off the taxi rank and they need carbon credits. I think we can marry those two things together and create some of the first loss and blended finance that we need to pull in to those. “If we get that right then we can turn to the institutional investors that are looking for the yield we can pull out of emerging markets,” said Von Friedeburg. Hurd added there was an “enormous” role in emerging markets for multilaterals such as international financial institutions who could co-invest with other actors because they can do things mainstream commercial institutions could not. “[They can deploy] capital that adjusts the risk profile for others such as guarantees where the evidence shows they have an enormously catalytic effect. But they are clearly under-deployed by the institutions we are looking to for leadership and courage in this space.” Tech solutions Von Friedeburg also noted some caution around technology solutions expecting to provide environmental aid in emerging markets, highlighting the cost of solar panels has gone up 25% during the past couple of months, largely due to supply chain disruptions. She said we need to consider how blended finance could be used to quickly drive down the cost curve of renewable energy technologies like green hydrogen and carbon capture, which are currently “too expensive for Africa.” “I’m not convinced that wind and solar are the long-term solution. They’ve helped us reach where we are today but I think there are going to be some really interesting new technologies. “Green hydrogen is coming rapidly but it’s too expensive; it’s four cents, when it needs to be a cent and a half to actually work in emerging markets, but I think we can drive the cost curves down.”
‘There needs to be a more unifying, scary message out there to get people to act’
Anne Valentine Andrews, global head of real assets, managing director, BlackRock
Natalie Kenway speaks to Lewis Pugh, endurance swimmer and UN patron of the oceans backed by LGIM, about how our oceans have deteriorated and where blue finance can help
Jupiter’s Green Investment Trust manager Jon Wallace has positioned the portfolio to benefit from an acceleration in climate policy, as he said COP26 is like no other COP in terms of governments stepping up their commitments. Speaking with ESG Clarity at COP26 in Glasgow, Wallace pointed to the recent Build Back Better act, a historic bill in the US that president Biden has said he is confident will pass both houses of Congress and be signed into law, as a sign of change. “There are still things up in the air but the framework passed last week shows there is a chance of things getting through Washington – this differs from the COP in 2009 when Obama came without anything like that,” he said. “It’s a big change from previous COPs and sends a very powerful signal to those in the US and everywhere else.” He added with caution that leaders only have “a very small window” to make progress, but is confident steps will be taken over the next two weeks. Trust in energy efficiency The principle theme on the investment trust – as well as the Jupiter Ecology Fund Wallace also runs – that would benefit from any acceleration in policy development would be energy efficiency. The trust holds First Solar in the US, Hannon Armstrong, a financer of renewable energy companies, and some onshore and offshore wind brands such as Vestas Wind Systems. Wallace commented: “There is an assumption in a lot of the marketplace that onshore wind will decline over the next two to three years, but what Biden is seeking to do will reverse that. “This is not a cliff edge or boom/bust promise, it’s a 10-year drive linked to the climate.”
‘It’s a big change from previous COPs and sends a very powerful signal to those in the US and everywhere else’
Jon Wallace, fund manager, environmental solutions, Jupiter
Three key announcements were made this morning relating to net-zero targets, the ISSB and $130trn in private capital funding. Natasha Turner and Christine Dawson report
The UK government has announced a host of commitments on Finance Day at COP26, including requirements for UK financial institutions and listed companies to publish net-zero transition plans and 450 finance firms with asset totalling $130trn (£95.4trn) pledging to limit greenhouse gas emissions in line with the Paris Agreement. UK chancellor Rishi Sunak announced to COP26 attendees in Glasgow this morning that the City of London is to become a world’s first net-zero aligned financial centre, and the UK is committing £100m on enabling developing countries to access climate finance and £576m to mobilise finance into emerging markets and developing economies. Sunak added the mobilisation of finance must be met with investor confidence: “What matters now is action, to invest that capital now in our low-carbon future. “To do that, investors need to have as much clarity and confidence in climate impact of their investments as they do in the traditional financial metric of profit and loss. So, [we will act] to rewire the entire global financial system for net zero.” Sunak confirmed developed nations would not be meeting the target of £100bn of climate finance for developing nations until 2023. But said its £576m package of initiatives to mobilise climate finance included £66m to expand the UK’s Mobilist programme, which develops listed investment products and the launch of the Climate Investment Funds’ Capital Markets Mechanism to boost investment in clean energy developing countries. $130trn committed UN special envoy on climate action and finance Mark Carney announced up to $130trn in private capital would be committed to targeting net zero by 2050. His group, the Glasgow Finance Alliance for Net Zero (GFANZ), said it would deliver $100trn over the next three decades. Speaking at COP26 in Glasgow, Carney also reiterated the importance of blended finance, and said “right here, right now is where we draw the line”. He added: “The money is here if the world wants to use it.” To make effective use of the funding committed, Carney said what is needed is mandatory Task Force on Climate-Related Financial Disclosures (TCFD) reporting, climate stress testing, science-based transition, portfolio alignment and frameworks to wind down stranded assets. He also said new country platforms with ambitious targets and new structures are needed, and welcomed the joined-up approach and expertise of multilateral banks such as the IMF and World Bank. Following these announcements, ministers from Kenya and Indonesia laid out plans for using the financing committed, and were joined by representatives from the IMF and World Bank in discussing the importance of planning the working together on the programmes that will receive the funding. Reactions Reacting to the announcements, Shaun Carazzo, UK sustainable finance banking partner at EY, said: “While the plan published today is a strong step forward, what is urgently needed is action. Regulated financial entities must now rapidly undergo a structured process to understand their current financed emissions, develop appropriate metrics and targets for tomorrow, and develop an appropriate decarbonisation strategy to report on, on an ongoing basis.” James Alexander, CEO of UKSIF, added: “UKSIF and our members look forward to actively engaging in these next steps, particularly helping to build a shared definition of a good quality transition plan and more broadly a net-zero finance sector.” Neil Robson, partner at Katten Muchin Rosenman, called the commitments “promising” but expressed concerns over how they will be regulated. “This is really promising and shows that the UK financial services sector, and notably the UK’s funds and asset management sector, take their ESG and sustainability obligations seriously,” he said. “However, with most UK financial services firms already having to comply with an ‘alphabet soup’ of ESG disclosures (including the EU SFDR and, starting 1 January 2022, the FCA’s own TCFD disclosures in the UK under the FCA’s new ESG Rulebook), firms will be concerned as to what these commitments actually mean and what they will have to do to both publish their plans on how to transition to net zero and, fundamentally, how they will actually achieve that.” ISSB The third announcement at Finance Day at COP26 is that the International Sustainability Standards Board (ISSB) is being set up by the IFRS Foundation. It aims to replace voluntary guidance with a single set of norms for firms reporting the impact of climate change on their business. Speaking at the conference this morning, Erkki Liikanen, chair of the IFRS Foundation Trustees, said: “First, we are announcing the formation of the International Sustainability Standards Board, or ISSB. Its purpose is to develop, in the public interest, a comprehensive global baseline of sustainability disclosures for the financial markets, IFRS Sustainability Disclosure Standards. “This is what the G20, IOSCO and many others asked for. The ISSB will sit within the IFRS Foundation, alongside the IASB, and will work closely with it. “Second, we are today announcing a commitment to consolidate two investor-focused international sustainability standard-setters into the ISSB. The Value Reporting Foundation (VRF), which is home to SASB Standards and Integrated Reporting, and the Climate Disclosure Standards Board (CDSB) will become part of the IFRS family. “Third, we are publishing two prototypes: one on climate-related disclosures and the other on general sustainability disclosure requirements. This is the outcome of the work by the TCFD, the VRF, the CDSB, the World Economic Forum and the IASB, supported by IOSCO. The aim is to consolidate key aspects of this content into an enhanced, unified set of recommendations for consideration by the ISSB.” The new board will be overseen by IOSCO. “IOSCO is convinced this convergence of standards and standard-setters is absolutely essential,” an IOSCO representative said at COP26. Professor Kevin Haines, director of Sustainable Capital, which joined GFANZ today, said: “There is currently a huge amount of energy and thought going into attempts to resolve the question about how best to measure sustainability and impact. This new body from the IFRS is just one piece of the puzzle. “Lots of companies make use of one of the many ESG rating agencies to demonstrate sustainability and impact. The problem with this approach is that it is highly individualistic and idiosyncratic as each company chooses its own key performance indicators and it is well known that ratings agencies give divergent ratings. “The difficulty we have is that people do not like inconsistency, meaning there is demand from investors for consistent sustainability reporting internationally. However, how can we achieve order and consistency when the businesses that are the target of regulation are almost infinitely diverse? “Furthermore, sustainability and impact are two quite different things, potentially leading to further confusion. Therefore regulation of the type being proposed might just be a chimera.”
‘With most UK financial services firms already having to comply with an ‘alphabet soup’ of ESG disclosures, firms will be concerned as to what these commitments actually mean’
Neil Robson, partner, Katten Muchin Rosenman
BlackRock CEO Larry Fink has said the economy is facing the “biggest capital arbitrage of our lifetimes” unless private sector companies follow public firms and step up their climate commitments. Speaking at the virtual Global Horizon Summit on the panel titled ‘Mobilising private capital in the transition to net zero’, Fink told Lord Mayor William Russell there is an urgent need to bring together public and private financing in order to reach net zero. He highlighted the work of the Glasgow Financial Alliance for Net Zero, where financial institutions are collaborating with other sectors – airlines, steel, industrials and construction, for example – on accelerating their position in decarbonising the economy. “The key issue is finance is very important, it drives everything in society. But we have to look beyond finance to get it done. I am very impressed with how public companies have moved forward on this. But if we are serious about getting it done, we can’t just ask public markets to do it, we would be fooling ourselves if we believed that.” Russell noted that Fink had praised companies for following the Taskforce for Climate-related Financial Disclosures on a voluntary basis in his annual letters, and suggested the BlackRock CEO would support making this mandatory for private companies – it is to become law for public companies in April 2022. “We all understand that time is running out and it is our fiduciary duty towards net zero, and we are rapidly building on that,” Fink said. “But if we don’t focus on the private sector we will see the biggest capital arbitrage of our lifetimes – it has already begun. We need a much better holistic solution to try to navigate all this.” Emerging world Much of the COP26 conference so far has focused on how developing countries can transition to a more sustainable future and this week India and Brazil have both announced net-zero commitments. But to really bring these countries along with developed economies for the transition, Fink said investors need to “reimagine” their approach when it comes to investing in emerging markets. “If we are serious about climate change in the emerging regions we have to focus on a reimagination of the world.” He noted there is a certain amount of trepidation, particularly when it comes to private capital investing in emerging markets, due to “political or brown field risk”. To tackle climate change and ensure a just transition, this needs to be changed, he said. “I’ve been enthusiastic about addressing climate change from a global level, not just in one specific country. We are urging the equity owners in all major countries to reimagine how we finance this in an emerging world.”
‘If we are serious about climate change in the emerging regions we have to focus on a reimagination of the world’
Larry Fink, CEO, BlackRock
UK and Nordic pension funds have committed $130bn (£95.4bn) to clean energy and climate investments at COP26. Asset owners in Sweden, Norway, Finland, Denmark, Iceland, the Faroe Islands and the UK announced the commitment on the third day of the conference, saying the investments will be made by 2030 and reported on annually. “These pledges signal to policymakers, project developers and corporates that investors are seeking additional investable opportunities,” said Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change. The funds include the UK’s Nest, the Icelandic Pension Funds Association, ATP in Denmark and Lív Pension Fund in the Faroe Islands, and follow commitments made in 2019 by members of Insurance & Pension Denmark. Denmark said $75bn of the funds were new commitments. The investments will be made in listed and unlisted equity, green energy infrastructure, green bonds and debt, property and other investments. Holly McElhone, a campaigner at pension not-for-profit Make My Money Matter, said: “COP26 promised to host the most important climate talks of our lifetime and put finance at the top of the agenda. On pensions, we’ve gotten off to a good start.” She added: “While these announcements have set the tone, we need to see more providers follow in the footsteps of Nest, EAPF and the Nordic schemes by pledging to invest billions more into climate solutions and green technology. “We also need the government to use this unparalleled platform to make net zero mandatory for all pensions schemes; ensuring the UK leads the world on green pensions, and ensure our money is helping create a world worth retiring into.”
‘These pledges signal to policymakers, project developers and corporates that investors are seeking additional investable opportunities’
Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change
Aviva, Schroders and Axa are among more than 30 financial institutions with over $8.7trn (£6.4trn) in assets that have committed £5.3bn to eliminate investment with activities linked to deforestation. Amanda Blanc, group CEO of Aviva, said: “Protecting our forests and their biodiversity is fundamental to the fight against climate change. “Financial institutions have a pivotal role, using our influence on the companies we invest in to encourage and ensure best practice.” This comes alongside a pledge at COP26 today to provide £8.75bn of public finance from 12 countries from 2021 to 2025, although this pledge was originally made in 2014. This will support activities in developing countries, including restoring degraded land, tackling wildfires and supporting the rights of indigenous communities. UK prime minister Boris Johnson said at the Forest and Land Use event at COP26 today: “At COP26, leaders have signed a landmark agreement to protect and restore the earth’s forests. “These great teeming ecosystems – these cathedrals of nature - are the lungs of our planet. Forests support communities, livelihoods and food supply, and absorb the carbon we pump into the atmosphere. They are essential to our very survival.”
‘Protecting our forests and their biodiversity is fundamental to the fight against climate change’
Amanda Blanc, group CEO, Aviva
Speaking with ESG Clarity at COP26, Henry Fernandez says ESG ratings are opinions and thus should not be regulated, and discusses his expectations for the conference
Open letter to COP26 leaders calls for every pound/dollar/euro put towards fossil fuel financing to be matched with another to mitigate climate risk. Christine Dawson reports
Global action must be taken to prevent fossil fuel financing causing another global financial crisis, a group of academics and civil society groups have told the world leaders, including Alok Sharma, president of COP26. In an open letter to the leaders of the EU, US, UK, G20, COP26 and the Basel Committee on Banking Supervision, signatories said a one-to-one capital requirement should be obligatory for any new fossil fuel financing to curb the risk of stranded assets from the rapid devaluation of fossil fuels that would come with the transition to a low-carbon economy. “Every euro/dollar/pound etc of financing provided must be matched by one euro/dollar/pound of institutions’ own funds, to be held liable,” the letter stated. It added there has been “a failure to regulate” and calls for the one-for-one capital requirements to be part of prudential regulation so that for each pound that finances new fossil fuel projects, banks and insurers hold a pound to guard against future risks. Among the 171 Signatories were New Economics Foundation, ClientEarth, ShareAction, WWF European Policy Office and economists Stephany Griffith Jones and Ann Pettifor. High risks Speaking about the proposed rule change, Griffith-Jones said it may be “radical”, but it is also justified: “I think it is absolutely key that the regulators step in so there is more action. “This capital reserve requirement, it has not really been done. [In regulation] there is not an explicit incorporation of climate change risks, which are extremely high for financial stability.” Benoît Lallemand, secretary general at Finance Watch – the group that co-ordinated the letter – said climate risks were currently still too easy for financial institutions to ignore: “Markets are notoriously bad at self-correcting, as we discovered in 2008. Voluntary measures by financial institutions will not be sufficient, as there are limited incentives for financial institutions to change their behaviour as long as profits can be made in the short term, while ignoring climate-related risks. “A one-for-one standard is the robust regulation needed to prevent advantages for banks and insurers to finance fossil fuels. It is a way to guide the market away from mutually assured destruction.” Footing the bill The prudential regulation would mean banks and insurers backing new fossil fuel exploration or production would hold the risk, rather than the general public footing the bill via public bailouts of financial institutions. Lallemand said the global financial crisis of 2008 and the “disastrous” political aftermath showed the consequences of leaving systemic risks in the financial system unaddressed. “Without action we face an even bigger economic crisis. This will be a failure to regulate of historic proportions, with the burden falling on taxpayers around the world when banks and insurers come begging for government bailouts. Our message to banks and insurance firms is this: If you want to finance new fossil fuel projects, do it at your own risk,” he commented. As well as posing a systemic risk to the global economy, Finance Watch said current prudential risk-weighting of fossil fuels is, in effect, subsidising finance projects that distort markets and make fossil fuels artificially cheap. Finance Watch cited a recent IMF report that stated the fossil fuel industry already enjoys £1.11m a minute in direct subsidies and tax breaks provided by governments. Avoiding shock Speaking about the risk such a change in prudential regulation itself may pose to the global financial system, Griffith Jones said a schedule would be required so markets could prepare. While it would not be very long-term, it would allow for phasing the in the one-to-one capital requirement. Alongside the open letter, Finance Watch and civil society network Sunrise Project have launched the One-for-One campaign – a global movement pushing for prudential regulation for fossil fuel financing in line with the real systemic risks it poses.
‘A one-for-one standard is the robust regulation needed to prevent advantages for banks and insurers to finance fossil fuels’
Benoît Lallemand, secretary general, Finance Watch
COP26 opened yesterday with urgent pleas from Alok Sharma and a warning from the WMO. Natasha Turner reports
COP26 opened in Glasgow yesterday, with statements from delegates welcoming the challenging negotiations ahead. “We have no choice but to make COP26 a success,” said Patricia Espinosa, executive secretary of UN Climate Change. Finance will form a critical part of the conference, particularly in relation to meeting the Paris Agreement and the mobilisation of $100bn (£73.2bn) per year to support developing countries. COP president Alok Sharma thanked delegates for travelling to Glasgow and outlined the urgent need for action. “As COP president I am committed to promoting transparency and inclusivity. And I will lead this conference in accordance with the draft rules of procedure, and with the utmost respect for the party-driven nature of our process. In that spirit I believe we can resolve the outstanding issues. We can move the negotiations forward. We can launch a decade of ever-increasing ambition and action. “Together, we can seize the enormous opportunities for green growth, for good green jobs, for cheaper, cleaner power. But we must hit the ground running to develop the solutions we need. And that work starts today. We will succeed, or fail, as one.” WMO climate report These statements come as the World Meteorological Organization (WMO) releases a report showing the past seven years have been the warmest on record. The WMO State of the Global Climate 2021 report found global sea levels rose to a new high in 2021, as did greenhouse gas emissions. Arctic sea ice was below the 1981-2010 average at its maximum in March. Sea-ice extent then decreased rapidly in June and early July in the Laptev Sea and East Greenland Sea regions. As a result, the Arctic-wide sea-ice extent was at a record low in the first half of July. There has also been mass loss from North American glaciers accelerated over the past two decades, nearly doubling for the period 2015-2019 compared with 2000-2004. The global mean temperature for 2021 (based on data from January to September) was about 1.09C above the 1850-1900 average. Extreme weather events around the world have led to economic instability, which has impacted food security. “The provisional WMO State of the Global Climate 2021 report draws from the latest scientific evidence to show how our planet is changing before our eyes,” said United Nations secretary-general António Guterres. “From the ocean depths to mountain tops, from melting glaciers to relentless extreme weather events, ecosystems and communities around the globe are being devastated. COP26 must be a turning point for people and planet.”
Global population growth, whole irresponsibility and inefficient products should not be overlooked during tough conversations at the summit
COP26 is one in a series of vital steps in creating a globally shared sense of the issues facing the planet, and a chance to instil a sense of urgency about the time pressures we are under. It’s also a real opportunity to address some of the underlying drivers still regarded as too sensitive to address head on. At the top of that list lies population growth. The global population has exploded fourfold in the 20th and early 21st century, a growth driven by our economic paradigm and enabled by industrialisation, by wholesale food production, increased longevity and improved medical care. The global governmental response is focused on reducing the ecological footprint of 7.9 billion people, while watching that number increase by around 250,000 per day. Yes, we need to dramatically reduce the harm we are doing as a global population, and we need to do it right now; but no matter how efficient we get there will always be a natural cap to the number of people the planet can sustain. That discussion is sensitive, politically fraught and not even on the agenda. This brings with it the whole hustle and bustle of how to distribute the pain globally. It is true that industrialised nations have had a free ride for years, but that doesn’t give new arrivals to the pollution club free reign to try to catch up. We are where we are, and while a levelling up is needed and justified, that mustn’t be used as an excuse for wholesale irresponsibility. Shared responsibility Instilling the concept of a shared responsibility is the key goal for COP26. Nations, particularly some that should know better such as the US, have too long been allowed to foster domestic interests while directly adding to a common crisis. The situation needs leaders, not shirkers. But is Boris up to the task? The UK illustrates the issues well. The country recognises a deep, urgent need to force change, but is faced with the economic realities of doing what needs to be done. There isn’t yet the political will to accept the inefficiency and reduced productivity associated with a solution. Human nature will always look over the brink for longer than is justified and will only take the leap when the opportunity has passed. The investment industry is at a crossroads. It has reorganised itself to cover the whole sustainability spectrum of investor choice, from ESG ranking and filters through to impact investing and ultimately philanthropy. But the language of sustainable investing is still in its infancy, and the competing needs of environment and social inequality still need to be defined in a way to allow capital to be allocated intelligently and with a realistic return expectation. The good news is that recent years have awakened an ever-more strident global social conscience. The task now is to harness that conscience into action through the medium of self-interested politicians. Lots to do ...
‘The situation needs leaders, not shirkers. But is Boris up to the task?’
James Alexander, CEO, UKSIF
Mark Northway Investment manager, Sparrows Capital
As leaders gather for the upcoming COP26, LGIM CEO and COP26 Business Leaders Group co-chair looks at how building emissions can be reduced
More and more of us have been returning to our workplaces over the past few months and there is a real energy in face-to-face collaboration after so long working predominantly remotely. It is also a time for reflection, for rethinking how and where we want to work. This gives us – as owners and managers of property across the office, retail, industrial, leisure and other sectors – a once-in-a-generation opportunity to rethink much of our physical environment. With COP26 now days away, this is the time to be bold. We know that buildings contribute up to 40% of global greenhouse-gas emissions. For the built environment, inaction is not an option if we are to meet our commitment to the UN Paris Agreement. The G20 policy agenda rightly emphasises the importance of investing in green infrastructure as part of the world’s Covid-19 economic recovery plans to support the transition to net-zero emissions and enhance resilience. LGIM and 586 other investors with $46trn (£33.5trn) in assets under management recently signed the 2021 Global Investor Statement to Governments on the Climate Crisis in support of this objective. Future proofing As important and exciting as the potential of new green buildings and infrastructure is, we cannot overlook existing stock – the buildings in which we currently live, shop and work today, which will still be around in 2050. Just as we must engage across the ‘old’ economy, while continuing to invest in the new green economy, a major priority is decarbonising our existing assets while allocating capital to tomorrow’s. This is possible, and we are taking steps every day that move our real-assets portfolios closer to our target of net zero by 2050 or sooner. For example, one of the portfolio’s large office buildings in Hillswood Park, Chertsey, was in need of refurbishment. We have been able to put in place plans to make the property operationally net-zero carbon enabled through measures including removing the gas boilers and replacing with air-source heat pumps, reducing energy demand through plant and fabric upgrades, and reusing what would otherwise have been waste material. As well as installing photovoltaic cells to generate renewable electricity onsite, we have cut its base-build operational energy consumption by almost 75%. We can also make buildings more attractive for occupiers by providing new amenities such as electric vehicle charging points and enhancing health and wellbeing through improvements in indoor air quality. For our clients, these enhancements should help ‘future proof’ assets and potentially increase their value through improved rents, lease terms and yields. Real assets, real change It’s not just on the bricks-and-mortar side that real-assets investors can effect positive change. In our private-credit business, for instance, we have helped finance the rollout of air-source heat pumps. The UK government has set a target of installing 600,000 such heat pumps every year by 2028, as part of a bid to ensure homes are greener, warmer and more energy efficient – a vitally important effort given over 23m UK homes use carbon-intensive gas as their heating fuel. The funding we have provided explicitly focuses on affordable housing and local authorities, where private capital support is essential. It’s an example of how private credit investors can channel capital towards climate solutions and help meet policy objectives, while generating secure income over the long term. These are just some of the ways in which we can invest in and remodel our built environment so it aligns with our climate ambitions. LGIM has reduced landlord operational carbon emissions by 20% in the past 10 years, yet we know more can – and must – be done. An invitation to act This is an imperative, not just for policymakers but for our clients – the pension scheme members and many others who rely on real assets for income and steady performance. As new regulations come into force, the buildings that do not meet the required levels of energy performance risk being stranded, becoming unattractive to occupiers and losing value. As investors and real assets owners, we have a responsibility to future-proof our portfolios as far as possible. As the We Mean Business Coalition recently wrote to G20 Leaders: “We can build stronger, just and more resilient economies: bringing prosperity and creating decent jobs while protecting health and the planet.” Responsible real assets investors can and will make a meaningful contribution to doing precisely that.
‘For the built environment, inaction is not an option if we are to meet our commitment to the UN Paris Agreement’
Michelle Scrimgeour Chief executive officer, Legal & General Investment Management, and co-chair of the UK government’s COP26 Business Leaders Group
Investment managers issue COP26 wishlist
Climate policies Our long ‘wishlist’ includes a strengthening of carbon pricing, the phasing out of fossil fuel subsidies, and regulatory action to accelerate the decommissioning of thermal coal installations, said Eric Pedersen, head of responsible investments at Nordea Asset Management. Diane Earnshaw, head of consulting at Square Mile Investment Consulting and Research, said this ties in to a wide range of policy announcements that are expected. “From carbon pricing policies, coal phase-out, targets to move towards clean power, policies to support biodiversity and finance initiatives among others,” she said. Gemma Woodward, director of responsible investment at Quilter Cheviot, added: “Countries are also being asked to come forward at COP with ambitious 2030 emissions reductions targets that keep 1.5C within reach. In my view, this cannot be achieved without a global agreement on carbon pricing as this is the only way to provide the economic incentives to reduce carbon emissions. But domestically, we’d also like the government to take a holistic view on transitioning the whole economy so that it is aligned to net zero by mid-century.” Tim Cockerill, investment director, head of responsible investing at Rowan Dartington, would like to see a global carbon credit scheme similar to that in the EU, but one that brings into scope more industries and transport. Just transition Pedersen and Earnshaw are also hoping for mechanisms that facilitate a just transition. Ashley Hamilton Claxton, head of responsible investment at RLAM, added: “The key thing I am looking for at COP26 is a renewed focus on the ‘just transition’. The climate crisis is fundamentally a socio-economic problem and not an environmental one. “Ensuring a just transition to net zero is vital to maintain the rapid pace needed to beat global warming. This will prevent disenfranchising vulnerable people and make sure support for societal change is not lost. Ensuring local social considerations are embedded in climate policy design and implementation is essential.”
‘Clearer policy signals from governments on the way forward will be critical’
Click to listen to the ESG Clarity podcast ‘Countdown to COP26: Putting pressure on regulators’
Mandatory disclosure Mandatory disclosure is on the wishlist for several ESG Clarity panellists. Woodward said: “For the investment management industry, and discretionary fund managers in particular, what we want to see from COP is increased data standardisation driven by global agreements on the provision of climate-related data. One of the four main goals of COP is for finance to be mobilised to secure global net zero. All well and good, but on the ground what we really need is global agreements on data. “What would help is mandatory disclosure of climate reporting – using the Task Force on Climate-related Financial Disclosure (TCFD) framework. The G7 backed this during their stay in Cornwall and this would be helpful to all of us in the investment community if companies generated the same data.” Natasha Landell-Mills, head of stewardship at Sarasin & Partners, added: “Rising concern over the lack of financial disclosures has prompted a growing number of investors to call for Paris-aligned accounts. While this has started to have an impact and demonstrated the ability of companies to produce Paris-aligned accounts, time is not on our side. We do not have years to wait for companies to voluntarily review and revise financial statements. To ensure a sufficiently rapid system-wide change, governments should mandate 1.5C-aligned accounts.” Commitments and targets “We want to see more countries recommit to the objectives set out in the Paris Agreement – to outline and communicate proposed climate actions,” said Sarah Woodfield, stewardship manager at the Investment Association. Leon Kamhi, head of responsibility at the international business of Federated Hermes, said: “We need to see more ambitious nationally determined contributions (NDCs) by countries to reduce emissions. To achieve 1.5C, global emissions need to fall by 40-60% from today’s levels by 2030, whereas published NDCs indicate that global emissions would barely fall by 2030 compared with today’s levels. “Further, the NDCs need to cater for 2025-2030 as well as beyond, and, crucially, they need to be underpinned by a detailed roadmap including specific policies (such as carbon taxes) impacting consumer and company behaviours, and the promotion and implementation of green solutions by sector.” Cockerill would like to see a commitment to reducing demand for consumer goods and raw materials, particularly in wealthy nations, through product innovation that focuses on longevity, serviceability and recyclability. Also an acknowledgment that livestock farming as a major cause of greenhouse gas (GHG) emissions, forest loss and biodiversity loss, has to be committed to reducing its impact. “This is a global challenge requiring the whole supply chain to work together and COP26 could provide the framework for this to happen,” he said. He added he would like to see an acknowledgement that “population growth is a challenge and that education in the developing world, especially of women and girls, is key to reducing the birth rate when they have greater control of their futures. I’d like to see education actively encouraged and targets set on a yearly basis”. UKSIF CEO James Alexander wants to make sure any commitments or policies have clear roadmaps. “The investment industry will be able to much more effectively play its part in the years ahead, should high-level NDCs be accompanied by detailed policy plans,” he said. “Far clearer policy signals and certainty from governments on the way forward will be critical, helping our members better understand where government intends to deploy capital, particularly as anticipatory support will be key to back newer industries and new green technology.” But comprehensive doesn’t have to mean complex. “My hope for COP26 is as equally simple as the Paris Climate Agreement,” said Julia Dreblow, founder and director of SRI services at Fund EcoMarket. “Too many governments, our own in the UK included, continue to convey mixed messages. As a result, although many companies and investors do now take the issue seriously, many are effectively rearranging deckchairs.” Industry action Kamhi added he also wants to see central banks and regulators thinking about the resilience to climate change, but that for the investment industry, stewardship is key. “Stewardship intentions must go way beyond slogans and generic commitments to practical specifics in each sector invested in,” he said. “For banks and others providing fresh capital to new projects and investments, we are looking to see a move away from funding of the high-carbon economy as continues today.” Hortense Bioy, global director of sustainability research at Morningstar, said: “My hope for COP26 is that by then leading global asset managers are communicating concrete plans to achieve the goal of net-zero GHG emissions by 2050, lighting the way for others to follow. Some managers will find it easier than others to set targets and fulfil commitments because they already have a strong climate policy, processes and investment strategies in line with net-zero ambitions. “Other managers are at the beginning of their journey, still building or acquiring climate-related expertise and analytical capabilities. Some may have exposure to companies that will never want or be able to reduce GHG emissions and will need to convince investors they are exercising their influence as investment stewards. “If some managers are not ready to announce their net-zero plans, I hope COP26 instils a sense of urgency, spurring them into action. There really is no time to waste.”
Climate policies
‘Our ‘wishlist’ includes the phasing out of fossil fuel subsidies, and regulatory action to accelerate the decommissioning of thermal coal installations’
Eric Pedersen, head of responsible investments, Nordea Asset Management
‘Ensuring local social considerations are embedded in climate policy design and implementation is essential’
Ashley Hamilton Claxton, head of responsible investment, RLAM
Just transition
‘To ensure a sufficiently rapid system-wide change, governments should mandate 1.5C-aligned accounts’
Natasha Landell-Mills, head of stewardship, Sarasin & Partners
Mandatory disclosure
‘This is a global challenge requiring the whole supply chain to work together and COP26 could provide the framework for this to happen’
Tim Cockerill, investment director, head of responsible investing , Rowan Dartington
Commitments and targets
‘If some managers are not ready to announce their net-zero plans, I hope COP26 instils a sense of urgency, spurring them into action. There really is no time to waste’
Hortense Bioy, global director of sustainability research, Morningstar
Industry action
Targets, coal phase-outs and better data needed at COP26 if we are to reach net-zero goals, says Quilter Cheviot’s Gemma Woodward
Increased ambition, coal phase-outs and a commitment to better data are what’s needed at this year’s COP summit, which could well be make or break for efforts to reach net zero by the middle of this century. Ambition is the order of the day when it comes to setting emission reduction targets as the aim to keep 1.5C within reach is an immensely ambitious one. Countries constituting 70% of the world’s GDP have committed to the objective of net zero by 2050, but what we really need are solid and achievable 2030 targets to get us on the right path quickly. The UK has already set a new target to reduce emissions by at least 68% by 2030 and 78% by 2035, and we need similar commitments from all countries at the summit, with clear sector-specific targets for achieving emissions reductions across the entire economy. Coal We’ve reached an inflection point in the history of the global economy. Coal has powered the cogs of the global economy ever since the industrial revolution and our addiction to the black stuff has existed ever since. But it’s well established that coal is the single biggest contributor to climate change and accounts for three-quarters of emissions from the electricity sector. Clearly, this is going to be easier said than done. Governments are by no means united on the climate and will have different aims and be working to different timelines. China, for example, is currently facing an energy supply crisis so certainly won’t be in the mood to limit domestic coal use just yet. It has said it will end financing of new coal-fired power stations abroad, but has stopped short of making commitments on domestic power stations. The UK will also be facing claims of hypocrisy for firing up coal power stations again, and diverting money from the aid budget to meet climate funding targets. We need to see specific commitments from governments on yhe phasing out of thermal coal-based electricity. While also agreeing on getting rid of the old, there will need to be commitments on the new. Specifically, the UK government is aiming to strike a deal so that only zero-emission vehicles are on sale anywhere in the world by 2040. The UK has committed to end the sale of polluting cars by 2030, and other nations have similar commitments, but this is going to be a tall order for developing nations to commit to. Also, lest we forget, electric vehicles still need minerals, so this isn’t a simple solution. Data While high-level commitments are welcome and necessary, the devil is always in the detail, and this detail is where we need to see other important agreements, particularly for the financial services industry. The provision of accurate climate-related data on a global scale is going to be a fundamental challenge in the coming years. The UK government has committed to making Task Force on Climate-Related Financial Disclosures-aligned disclosures mandatory across the economy by the middle of this decade, but the same requirements do not exist in other countries so the data is patchy, and investors do not have a complete picture. Similar agreements must be made on reporting standards and auditing standards to ensure the accuracy and reliability of climate data globally.
‘Governments are by no means united on the climate and will have different aims and be working to different timelines’
Gemma Woodward Director of responsible investment, Quilter Cheviot
ESG Clarity’s editorial panel set out what they want to see from this year’s climate summit. By Natalie Kenway
At the highest levels of government, feelings around hosting COP26 in Glasgow have surely fluctuated over a tumultuous 18 months. Hopes for a chance to showcase post-Brexit Britain to a watching world were set back by Covid-19, even as demands for more rapid climate action took hold. How quickly the wildfires raging in Australia were forgotten as the pandemic took hold. The conference moved from in-person to virtual, to delayed as the full reality took hold. By 2021, it was clear that – in person or virtual – some form of COP had to go ahead whatever happened. Under the current circumstances, I’ll probably be tuning in remotely. As if business wasn’t considered urgent enough, in August, the latest update from the UN body responsible for assessing the science on climate change issued what UN secretary general António Guterres called a “code red” for the planet. Do the maths Many expectations have been placed on the Glasgow summit in several key areas. Of primary significance is the need to review progress made since the Paris Agreement on long-term decarbonisation plans and efforts. The 2020 deadline agreed for these nationally determined contributions (NDCs) has been pushed back to match the pandemic-affected schedule. This review is vital given the deepening understanding of the science around climate change since 2015, and the rapid pace of action required. In a sense, COP26 is a numbers game – do the NDCs pledged by each country curb emissions enough to keep the world below 2C of warming? Several countries and the EU have already submitted plans, with varying degrees of ambition. Since 2015, China has pledged to become climate neutral by 2060, which at least creates the opportunity for agreement on goals to reduce emissions sufficiently. Who pays for the actions of developing nations is also highly relevant. Climate financing was a tricky enough subject even before a crippling pandemic. Under Paris, developed nations pledged to provide $100bn (£72.7bn) a year by 2020 to fund the energy transition – with good progress stalled by the pandemic. All eyes will be on the UK to demonstrate leadership, energise negotiations and set an example for others to follow. Simply setting dates isn’t a strategy; it’s what happens in between that counts. Much more direct policy action is needed. Good COP, bad COP Will a good COP emerge from Glasgow this November? At the risk of making this sound like a comic-book ending, the world really needs one to come to the rescue, and it might come down to a personality like Costa Rican diplomat Christiana Figueres, head of the UNFCC at COP21 in Paris, emerging from the shadows. We’ve always been believers in the power of responsible capitalism to make a positive difference in the world, but tackling something as big as climate change can’t be done unless political and economic forces are working together.
‘Do the NDCs pledged by each country curb emissions enough to keep the world below 2C of warming?’
Matt Crossman Stewardship director, Rathbones
Targets, coal phase-outs and better data needed at COP26 if we are to reach net-zero goals, says Quilter Cheviot’s director of responsible investment Gemma Woodward
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‘Impact investing is an exciting space where we get to help clients align their financial objectives with social and environmental aspirations’
Campe Goodman and Tara Stilwell, portfolio managers, Wellington Management
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Q: What is impact investing? A: Impact investing provides funding to companies and bond issuers actively addressing the world’s major social or environmental challenges. Impact investors like us intentionally direct capital with the aim of generating positive outcomes for people and the planet while seeking to deliver competitive investment returns. Q: Where do you find opportunities? A: We focus our research on 11 impact themes, centred on life essentials, human empowerment and the environment. Life essentials covers affordable housing, clean water and sanitation, health and sustainable agriculture. Human empowerment seeks to address the digital divide, education and job training and financial inclusion, as well as safety and security. The environmental category encompasses alternative energy, resource efficiency and resource stewardship. Q: How do you define a company as ‘impact’? A: To be considered for our impact approaches, each potential investment must meet a high bar of alignment with our impact themes. The impact case must be material, with the majority of a company’s revenues or business activities advancing one or more of our themes. The impact of the potential investment must also be additional, addressing a specific need that is unlikely to be met by other agents, be it competitors, governments or non-governmental organisations. We believe it is also important to understand a company’s or an issuer’s holistic impact. For example, with green bonds, we scrutinise not just the use the bond’s proceeds will be put to, but also the issuer’s wider business activities. With government bonds, we only invest where the proceeds are being used specifically to address one or more of our impact themes. We also assess any potential investment for unintended negative consequences that would outweigh its positive impact – for instance, the impact of a new recycling facility on local communities or the environmental implications associated with the data storage involved in digital solutions. Finally, the impact case for each investment must be measurable so that we can quantify and report on its progress over time. We believe investors must be able to analyse, track and measure impact outcomes as thoroughly as they do financial outcomes. We also believe this transparency helps encourage much-needed capital to be directed towards impact companies and issuers. Q: How exactly do you measure impact? A: To measure impact, we create custom key performance indicators (KPIs) for each company or issuer in our portfolios. The KPIs will vary depending on the security, sector or impact theme, but they must all be logical, transparent and based on reliable information, such as science-based insights from our climate research team. For example, we may measure the amount of greenhouse gas emissions avoided by recycling waste instead of sending it to landfills or the percentage of a population provided with clean water, internet access or affordable housing. Q: How do you address the UN SDGS? A: When the United Nations (UN) published its Sustainable Development Goals (SDGs) in late 2015, we were pleased to see how well our themes aligned. Today, between our impact equity and bond approaches, our investments address all 17 SDGs, either directly or indirectly. For each company and issuer in our portfolios, we tag the goals we believe they align with, as well as any of the 169 underlying targets outlined by the UN. While we do not manage the portfolios to a targeted level of alignment, our high standards for inclusion result in an investment strategy that naturally supports many of the SDGs. All the companies and issuers we invest in offer what we consider to be much-needed solutions to many of the major challenges identified in the SDGs. Wellington is proud to continue supporting the UN SDGs. Q: Which asset class is most suited to impact investing: equities or bonds? A: Both equities and bonds provide excellent opportunities for impact investing, with large and growing opportunity sets. In fact, we believe the two asset classes provide complementary impact exposures and can be blended within a broader portfolio to create compelling synergies. Some themes are easier to access for fixed income managers, such as affordable housing bonds issued by local housing associations. Other themes, such as financial and digital inclusion, are more accessible for equity managers. Q: What about financial returns? A: We believe impact investing does not entail giving up return potential, and our experience to date actually points to the contrary. Both Global Impact approaches aim to deliver competitive returns for clients alongside positive social and environmental outcomes. All our impact investments must meet specific financial thresholds to be considered for inclusion in our portfolios. In our view, many of the companies we target also benefit from structural tailwinds given their focus on products and services that seek to address some of the world’s most pressing issues. Companies that can provide effective solutions to those problems are likely to see healthy growth in their revenue and market share in the years to come. Q: How do you bring it all together? A: After defining the universe of potential investments that meet our impact criteria, we focus on selecting the best combination of securities to reach our financial objectives, via bottom-up research. Key to successfully building and managing portfolios, in our view, is our multi-disciplinary approach. We regularly integrate the insights and perspectives provided by Wellington’s global teams of research professionals across industries, asset classes and investment styles. This includes close collaboration with our career credit analysts and industry specialists, who provide detailed insights at the security, industry and sector level. We also draw heavily on the expertise of our dedicated ESG research and climate research teams. Q: How do you approach engagement? A: We seek to enhance both the impact and the financial value of our portfolios further through active engagement with company management teams and boards. Engagement helps us identify opportunities for companies to improve, measure and report on their impact activities. It also allows us to report more meaningful data at the issuer and portfolio level. Ultimately, engagement creates an important feedback loop and mechanism to help us deliver and measure impact. Q: What’s so attractive about impact investing? A: Impact investing is an exciting space where we get to help clients align their financial objectives with social and environmental aspirations. We are committed to helping investors appreciate the potential benefits of directing their equity and fixed income allocations towards solutions that help people and the planet while pursuing their investment goals. For more information, please visit wellingtonfunds.com/sustainable-investing
Wellington’s Climate Research Team works with Woodwell Climate Research Center to integrate climate science into the investment process for our impact strategies. We increasingly leverage reports, quantitative models, and investor tools to identify impact assets with exposure to these risks and companies whose products we believe minimise the human and environmental toll of climate-related events. Water scarcity One key climate-related trend that overlaps with impact investing — particularly our clean water and sanitation theme — is water scarcity. We believe chronic water shortages in many regions are a critical issue. Solutions to prevent or alleviate water scarcity will likely attract more investor attention and trigger significant capital spending as governments and public/private partnerships invest in water infrastructure and technology. And because water scarcity is still underappreciated by the market, impact investors have opportunities to uncover attractive investment opportunities. For example, a company we have researched facilitates water reuse and recycling, among other services, and has the potential to build a utility-like business providing outsourced water-management services for institutional customers like hospitals and industrials. In this way, we find the company’s social value and impact potential as attractive as its differentiated business model. Mapping climate risks Wellington’s research collaboration with Woodwell has produced an innovative geospatial mapping tool that overlays physical climate-risk variables, including heat, hurricanes, flooding, drought, water scarcity and sea-level rise, onto global maps that can display the locations of investable assets. This tool has helped us analyse how and where climate change could affect companies and issuers in the impact investing universe. In a drought-prone region in Latin America, for instance, a water sanitation company tracks regional water availability and implements measures intended to guarantee continuous water production. By bringing our team’s physical climate data into the conversation, we were better able to assess the scale of local drought risk and the company’s near- and medium-term risk-mitigation capabilities. We have also used the mapping tool to assess risks to mortgage-backed securities supported by apartment buildings in the affordable housing theme. If a building is located in a coastal area at risk of flooding from hurricanes or sea-level rise, we may choose to avoid the related bonds. How chronic climate risk affects our outlook In the education and job training theme, we have identified a company that matches employers with job seekers. In early 2020, data indicated a sharp drop in job postings and employer-match activity, revealing that the devastating bushfires had had a material negative effect on business. Wellington’s climate research projects that Australia, which experienced devastating wildfires in late 2019 and 2020, will continue to grapple with active wildfire conditions. We have integrated this input into our research mosaic for impact companies we consider in Australia. Finally, our Climate Research Team projects increasing heat and drought conditions for many parts of Asia. Our digital divide theme looks at companies that produce chipsets for the sale of low-cost mobile devices and handsets. The average semiconductor plant consumes between two and four million gallons of water per day. Recent drought conditions in Taiwan exacerbated existing market tightness for semiconductor production, boosting some companies’ pricing power, but chronic exposure to potential drought could be a challenge in the long run. Here again, climate data and research will inform our thinking about a region and industry critical to our impact approach. The Climate Research Team’s research has helped us gain conviction in investments in several impact themes, and it is beginning to inform our analysis in sustainable agriculture and nutrition, health and resource efficiency. The guidance they provide often informs our fundamental company and issuer analysis and enhances valuation assessments. As society adapts to climate change, we believe Wellington and Woodwell’s climate research will become integral to our impact research, helping us identify new investment ideas and make more nuanced industry-level assessments. Learn more about impact investing and explore our 2020 outcomes. “Waste Not, Want Not – Water Use in the Semiconductor Industry,” Sustainalytics, March 2017. While more current data is unavailable from this source, the investment team believes this trend persists today.
‘Climate data and research will inform our thinking about a region and industry critical to our impact approach’
Tara Stilwell, portfolio manager, Wellington Management
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We believe companies and governments in coastal regions will need to spend enormous sums on resiliency measures to protect human life and urban infrastructure
• 40% of the world lives within 100 km of a coast. • 110 million people live below high tide level; by 2100, that number will be 190 million. Sea-level rise (SLR) is the climate risk that perhaps most captures the imagination. Pop culture has long depicted doomsday scenarios of ocean inundation and, increasingly, real-life disasters like 2012’s Hurricane Sandy and chronic flooding in coastal cities from Bangkok to Miami have turned fiction into reality. Thankfully, climate models show most catastrophic impacts of SLR to be far off, relevant for the end of this century and beyond. However, given the extreme risks that even minor changes in SLR pose, we expect spending on adaptation to increase in coming years, creating challenges for coastal cities and leading to a range of investment opportunities. The relationship between SLR and coastal flooding is log-linear, meaning a small increase in the former greatly amplifies the probability of the latter. Woodwell research indicates that a 0.16m (6.3in) increase in global mean sea level can cause a 50-year flood (occurring once every 50 years, with a 2% chance of occurring in a given year) to reach the magnitude of a much more damaging 100-year flood (occurring once every 100 years, with a 1% chance of occurring). In other words, rare coastal flooding events will become more common as sea levels rise. Our research agenda with Woodwell Climate Research Center has expanded to include SLR, and together we have generated a new process for assessing risks that is more accurate than established methods. We include SLR in our Climate Exposure Risk Analysis (CERA) mapping tool, which enables our investors to integrate projected impacts of nine climate variables into securities research. Figure 1 shows that during an extreme flood event, most of Miami beach would be under nearly one meter of water. Figure 1 SLR will likely continue regardless of our efforts to curtail greenhouse gas (GHG) emissions and cap global temperature increase. Climate change contributes to SLR through thermal expansion (warm ocean water is less dense than cold water) and added volume from glacial ice sheet melting. These processes unfold over millennia and are unlikely to revert quickly in response to lower atmospheric GHG concentrations. Regional factors such as water salinity and temperature, population density and subsidence all affect the degree of SLR risk. Natural land subsidence in coastal deltas is typically offset by the buildup of sediment from river flow. In coastal regions with extensive land development, however, dams and other hard infrastructure counteract those natural protections. The sheer weight of coastal megacities, as well as the effects of groundwater loss and fossil fuel extraction, can greatly exacerbate subsidence. Adaptation spending will increase Although SLR creates challenges for coastal governments, including governance difficulties co-ordinating stakeholders and financial headaches from building and maintaining protective infrastructure, for most large coastal cities, the benefits of building resilience to SLR vastly outweigh the costs. We expect spending on SLR adaptation to create substantial tailwinds for a number of industries: • Infrastructure, engineering, and environmental consulting • Hard infrastructure, including seawalls, surge barriers, dikes, trenches, and canals • Dredging, excavation, land reclamation, marine services • Stormwater solutions; drainage and pumping infrastructure • Flood proofing for buildings • Ecosystem-based solutions like beach nourishment, mangroves, and reefs • Agricultural adaptation to decreased soil salinity • Relocation services Stats from Scott A Kulp and Benjamin H Strauss, New elevation data triple estimates of global vulnerability to sea-level rise and coastal flooding, Nature communications, 29 October 2019. According to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change, global mean sea level is expected to rise by 0.1 - 0.4 meters by 2050 compared with 1995 levels under most climate scenarios.
‘We expect spending on adaptation to increase in coming years, creating challenges for coastal cities and leading to a range of investment opportunities’
Jenny Xie, climate physical risk analyst, Wellington Management
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Investors are increasingly looking to decarbonise their portfolios, but moving from intent to implementation is challenging. We explore key issues to consider and outline a balanced approach to start repositioning portfolios towards net zero. The momentum to curb carbon is accelerating We expect the transition towards a net-zero carbon economy to speed up in the face of intensifying climate change and regulatory and societal pressure. Investors need and want to be part of the solution as evidenced by initiatives such as the Net Zero Asset Managers initiative or the growing demand for climate strategies. Aligning decarbonisation goals with existing investment objectives, risk profiles and time horizons can be challenging, however. Here we explore what a balanced approach may look like. Major risk, major opportunity Climate change now constitutes an existential risk. Even if we manage to reverse course, adverse consequences are now unavoidable, leaving many assets exposed to physical risk. The wholesale shift to a net-zero world also comes with transition risk: assets of companies unwilling or unable to adapt may be hit by a brown discount – as markets reprice them downwards for increased climate risk – and could ultimately become stranded. At the same time, the sheer scale of the forthcoming transition brings a host of opportunities experienced investors may be able to exploit to generate above-benchmark returns, while contributing to a faster transition. Key ingredients of a balanced approach Investors can transition their portfolios towards zero carbon in various ways, but we believe there are common strands that feed into a balanced approach. These include: Engagement Although large-scale divesting or restricting exposure to heavy carbon emitters may achieve decarbonisation faster, it can sometimes mean sacrificing returns, while potentially still leaving portfolios exposed to the carbon damage caused by those emitters. We believe active engagement – with divestment as the ultimate option – may translate into similar levels of decarbonisation over time without compromising returns or other economic objectives. Active engagement should also help to accelerate the economy’s overall transition. Forward-looking goals Despite significant progress, data remains a significant challenge. Data sets are incomplete, fast changing and mostly backward-looking. A research-based active approach may allow investors to gain a deeper understanding of companies’ forward-looking goals and relative ability to adapt and mitigate. Key role for science Climate change is a highly complex phenomenon, with broad-ranging ramifications across the entire economic chain. Having access to up-to-date scientific insights can help investors map the long-term impact on asset values across sectors and regions. Diversification A balanced approach will not only seek to reduce both physical and transition risks within the portfolio, but also ensure diversification across the many associated opportunities. This entails combining exposures to established companies and infrastructure with allocations to new entrants and technology. Aligning strategies with risk profile and time horizon Within the broad framework outlined above, investors need to put in place the right building blocks for their specific circumstances, answering questions that include not only, what is my risk profile, primary investment focus (growth, capital preservation, income), but also how fast do I want to decarbonise? We illustrate how that may work in practice with two potential exposures for the equity component of a climate-aware portfolio. Both solutions enable investors to focus on the opportunities associated with the transition to zero carbon, while reducing climate risk. However, they come with distinct characteristics that fit different investor profiles. Longer-term, above-market growth exposure Targeted exposure to growth companies with an explicit focus on combating climate change may offer increased potential for meeting higher growth and decarbonisation targets. This includes renewable energy producers of course, but the universe is much larger and growing fast, as countries around the world start to tackle climate change in earnest. A significant proportion of those companies will be small- to mid-cap size, but not exclusively so. It essentially encompasses any company that generates a large proportion of its revenues from: • Mitigation: addressing the causes and minimising the possible impacts of climate change; • Adaptation: aiming to reduce the negative effects of climate change; or • Innovation: new solutions that help economies and communities both mitigate and adapt to the effects of climate change. Figure 1 illustrates the breadth of areas where we see the application of climate-led solutions, many of which will involve new technology or doing things differently. This can lead to unexpected new opportunities away from areas that may have become overvalued. Take, for instance, the well-trodden path of renewable energy producers, where new forms of decentralised energy production and distribution could create attractive new businesses. We expect the list of businesses to expand continually as the reality of climate change starts to bite and capital and investments increasingly flow towards companies that have a credible plan. FIGURE 1 Climate mitigation, adaptation and innovation It is important, though, to recognise that the road towards low carbon will be bumpy. Some companies’ transition plans may be less effective than assumed, many technologies and approaches still need to be tested and the impact of climate change is evolving rapidly; hence, the value of active research and the need for up-to-date scientific input. But even with those vital inputs, this type of high-growth exposure may be too volatile and produce less income than certain investors are comfortable with. Longer-term, lower-volatility exposure For those types of investors, more value-oriented approaches with a longer decarbonisation trajectory may be more appropriate. This sort of approach tends to focus more on the decarbonisation efforts of incumbent companies, which have well-established income streams. Many of those companies will be essential to the success of the transition to zero carbon — think, for instance, of certain energy utilities and the investment needed in electric grids to make the transition possible. This type of exposure can potentially allow investors to capture opportunities in sectors that may be underappreciated by the market and, again, diversify away from areas that are at risk of becoming overvalued. Figure 2 illustrates this by way of the International Energy Agency’s projections of investment for different forms of energy. It shows that electrical networks are likely to benefit from major investment, even ahead of renewables. FIGURE 2 Investment in the grid expected to surpass renewables Global annual investment (US$bn) The decarbonisation efforts of those types of utilities will be supported by governments, regulators and public opinion, so exposure to those types of assets should help investors decarbonise their portfolios, while still enjoying relatively reliable income streams. Clearly this is a sector view, and active research and climate science input can help identify those utilities that have the most credible plans and are least vulnerable to climate risk. This type of underappreciated development is not limited to the utilities sector, and we expect to see similar scenarios unfolding across virtually every industry and sector. By incorporating these or similar building blocks alongside existing core holdings, investors can take a meaningful step towards decarbonising their portfolios without compromising returns or other objectives. They can take further steps towards zero carbon over time, as the transition accelerates and available climate solutions expand across asset classes. Taking tangible steps Decarbonising the economy is a long-term process, and, likewise, repositioning portfolios will take time, but we believe it is important that investors act now. Our balanced framework offers a road map to guide their zero-carbon journey based on their specific objectives and risk appetite. World Energy Outlook 2020, Sustainable Development Scenario, International Energy Agency, October 2020. Please refer to the investment risks page for information about each of the following risks: • Capital risk • Emerging markets risk • Concentration risk • Smaller capitalisation stock risks • Currency risk • Sustainability risk
‘A research-based active approach may allow investors to gain a deeper understanding of companies’ forward-looking goals and relative ability to adapt and mitigate’
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