ESG Feature – COP26 Off to work we go
The International Energy Agency has calculated that if all the pledges made at COP26 are achieved then global temperature rises would be limited to 1.8-degrees by 2100. “Those are just the pledges; the implementation is what’s needed,” says Mar- garet Childe, head of ESG research and integration, Canada at Manulife Investment Management.
“There is no indication that we will see the necessary actions coming out of these commitments,” she adds. “In fact, post the negotiations in Kyoto, Copenhagen and Paris, we saw a steady increase in greenhouse gas emissions. “We are not currently on track for an annual greenhouse gas emissions reduction of 7%, which is what’s needed between now and 2030,” Childe says. “1.5-degrees is achievable, but the magnitude of the action necessary is significant.” It looks like cutting greenhouse gas emissions in half by 2030 and achieving net zero 20 years later is going to be tough. So, those pledging to achieve carbon neutrality in less than three decades have a lot of work to do and will need the support of those managing vast pots of private capital.
Indeed, government commitments made at COP26 probably put us on track for a 2.4-degrees climate target, which only falls to 1.8-degrees once all pledges and proposed reductions are considered. “So, even in the most positive scenario of all the consequences of COP, we are not fully on track for 1.5-degrees,” Mulligan says. “We need to do more and accelerate it.” The financial community understands its role here. “Positive progress is being made, but there is a recognition that more needs to be done,” Ogden says. “We would not be having this conversation if the problem had been sorted in one conference.” It is clear that pension schemes and those they appoint as stew- ards of their capital have a key role to play. “Asset owners expect their managers to play a positive role in the transition, rather than sit on the fence or hinder it,” McAllister says. “The mes- sage from COP is that asset managers need to do more.”
Down or out?
One of the biggest headlines from COP26 involved coal-pow- ered energy. Following much discussion between various gov- ernments, the agreement was to ‘phase down’ rather than ‘phase out’ the use of coal. Mulligan is disappointed by the policy. “All the science says we have to phase out coal as soon as we can,” he adds. “But there is also the question of how to support this in a fair and practi- cal way – to enable heavy users of coal to address the challenge of moving to cleaner energy without sacrificing too much.” Such language is common when it comes to carbon-reduction plans. “Language plays a key role in this transition,” McAllister says. “It is amazing that two words that are relatively close in meaning can cause such tension.”
30 | portfolio institutional | February 2022 | issue 110
He uses the example of oil companies renaming ‘product emis- sions’ as ‘customer emissions’. “There is a lot of this going on. “For me, ‘phase down’ is appropriate,” he adds. “If you are phasing down on one side, there needs to be a ‘phase up’ on the opposite side of substitution technologies, which are not yet scalable or affordable,” he adds.
LGIM has called on governments to phase out coal-based energy, so they are disappointed by the agreement to ‘phase down’. “Having clarity that people can get behind is always preferable,” says Caroline Ramscar, head of sustainability solu- tions at LGIM. “It is difficult to change behaviours, whereas clarity from the
top would provide stronger signals to
investors.” This was not the only agreement struck at COP. Other commit- ments include 20 countries pledging to stop funding fossil fuels overseas as well as the signing of a hard agreement to reduce deforestation by the end of the decade. But this agree- ment is a sign of why expectations of the events has been low. “The end of the decade is quite late,” Mulligan says. “Ending deforestation sooner would have a more positive climate impact and send a stronger signal. This is a key theme that emerged at COP26: the need to pull our horizons – and deci- sions and actions – nearer.
“The agenda at COP26 was shaped by net zero 2050, but large institutional investor groups were vocal in wanting nearer- term action,” he adds. “The problem is that 2050 is beyond the scope of many investment strategies. Bringing it closer means acting sooner.” Such action means investors using their influence as asset owners to create the change needed. “COP26 has made the direction of travel more official,” Childe says. “We are heading towards a low-carbon economy, but we have significant legacy investments to deal with. This is why investors need to engage with the fossil fuel industry to make that transition,” she adds.
Pricing it
One positive from COP26 was that the rules for creating a car- bon pricing market were approved, which could see costs rise for those with high carbon footprints. “The carbon trading arena is at least a little clearer after COP26,” Mulligan says. Such a market has been difficult to create, a task made tougher given recent events. “It is politically challenging to get carbon pricing off the ground, and it has been made harder because of Covid, rising inflation and societal discontent at government intervention in people’s lives,” McAllister says. “From an economics perspective, the simplest way to fix a mar- ket failure like pricing pollution is to tax it and let the market reallocate capital,” he adds. “It is that simple, which is why it is crucial that this framework gets off the ground.” An additional benefit of a carbon market would be that more
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48
