Capital markets still not fully pricing in climate risks, even as COP26 kicks off
Yet investors want more transparency, setting high green targets for their investments
Michelle Quah
Singapore
THE year's biggest climate summit, COP26, is in full swing; yet, the ability of capital markets to understand and process climate-related information continues to lag the growing demands that investors have of such data.
Research out last week (Oct 28) showed that capital markets are failing to price in climate risks, due to policy confusion and a lack of clarity on their financial impact, despite a significant growth in investments in this area; while separate reports, out at the same time, pointed to investors demanding more transparency and setting even more ambitious climate targets for their investments.
This comes amid the launch in Glasgow on Sunday (Oct 31) of COP26 - the 26th Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC). Excepting last year, when COP26 was postponed due to the Covid-19 pandemic, parties have met annually to assess the progress in dealing with climate change.
With many are of the opinion that the climate crisis has intensified, this year's summit is going to be closely watched for how countries intend to manage the crisis and for the part that climate financing will play in such efforts.
Of concern, however, is how little understanding there remains on these issues. A global study released last week, Can capital markets help save the planet?, by KPMG International, CREATE-Research and the CAIA Association, said: "the average person doesn't know what COP26 is".
"There is skittishness in the market that indicates that investors are unsure. Markets constantly seem to be reframing their views," it said. "Also, thus far, there is inconsistency between those already hit by climate change - via rising sea levels, hurricanes, wildfires, droughts - and those who are not. Until the effects are felt more widely, change will be slow."
The report, based on interviews with almost 100 leaders from large investment houses and pension plans with US$34.5 trillion of assets, found that only 14 per cent believe that equities are adequately pricing in climate risks.
Just over one-tenth (11 per cent) believe that markets are pricing in climate risks in alternative investments, while 8 per cent think markets are pricing in climate risks in bonds.
Almost three-quarters (70 per cent) of the interviewees attributed this to weak policy signals from governments and regulators worldwide.
"Capital markets can't easily detect risks and opportunities, until they are clear on how governmental actions will create hard incentives as well as sanctions," said one interviewee.
The upside is that many believe COP26 will provide a significant positive boost. Over a quarter (25 per cent) said the summit has a "high likelihood" of driving concerted international efforts in incentivising capital markets to price climate risks, while 56 per cent believed in a "medium likelihood" of this happening.
Forty-two per cent said they expect capital markets to start doing so in the next three years, while another 30 per cent said they thought it was likely - with equities being the asset class expected to advance the most.
The report concluded, however, that capital markets alone cannot resolve the market failure and market inefficiency associated with climate change. "Rechannelling trillions of dollars of capital towards the technologies needed to power a low-carbon economy requires huge concerted action as well as incentives... Investors can only do that if they foresee potential benefits. What they need most is policy certainty," it said.
Meanwhile, two other reports, also out last week, drew attention to the role of capital markets in climate change mitigation by highlighting the growing demands from investors for greater climate-related disclosures by corporates.
MSCI said that investors want greater transparency into the alignment of listed companies with global climate goals; and that it has made the Implied Temperature Rise of over 2,900 companies (constituents of its flagship global equity MSCI ACWI index) publicly available on its website, so that investors can access such data.
Implied Temperature Rise is designed to show the temperature alignment of companies, portfolios and funds with global climate targets, by assessing their commitments to net-zero emissions.
"We are confident this new data adds much-needed clarity to the discussion on the role of capital markets in combating climate change," said Remy Briand, global head of ESG and climate, at MSCI.
Separately, NN Investment Partners said it had analysed more than 10,000 responsible investing publications, and found that the world's 500 largest asset managers are increasingly focused on evaluating their portfolios from a climate risk perspective - with almost a quarter (24 per cent) having set net-zero targets for their investments and that they are working on more detailed goals and more ambitious targets, going forward.
It added that these asset managers have high hopes that COP26 will yield coordinated, meaningful and actionable agreements on climate policy.
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