Why investors should care about UN Climate Change Conference

THE United Nations Climate Change Conference of the Parties (COP26) in Glasgow has been hailed as a turning point in the global fight against climate change amid a new US administration and a long and strenuous exit from the Covid-19 pandemic. The objective is clear: limiting the temperature rise to 1.5°C above pre-industrial averages, reaching net-zero carbon emissions by 2050 and cutting them by half this decade.

Yet six years on from the Paris Agreement, we are not on the right track. In 2021, carbon emissions are set to rise at the second-fastest annual pace on record. This runs counter to the growing narrative from policymakers and the private sector, who claim that climate change is the top priority on the global agenda.

Amid changing global macroeconomic and geopolitical dynamics as well as the opportunities provided by Covid- 19 recovery, we prelude some of the key developments to watch in the upcoming conference, and what these mean for investors.

THE COP26: THE CORONATION OF CLIMATE POLICY

At a public policy level, the upcoming COP26 in Glasgow marks the elevation of climate policy as one of the main drivers of macroeconomics and geopolitics in the 21st century.

The US has returned to the Paris Agreement and President Joe Biden has set an ambitious target of a 50 per cent reduction in greenhouse gas emissions by 2030. Several countries followed suit by setting carbon reduction targets of their own and this will put pressure on China and India to make their moves.

Beijing has already signalled its intent to become carbon neutral by 2060, although a recent TransitionZero report argued that China must close almost 600 coal plants to meet its pledges. Despite significant investments in wind, solar and even nuclear energy, China remains by far the largest polluter, as regional governors in the country have been building new coal powered stations to fuel economic growth.

Since the beginning of climate negotiations, India has argued against sacrificing development to reduce carbon emissions despite contributing less to the problem than developed countries. Nevertheless, Indian policymakers have seemingly understood the strategic importance of renewable energy, with India and France notably founding the International Solar Alliance at the COP21 in Paris.

However, India's leaked draft National Electricity Policy for 2021 exemplified significant contradictions, with investments in renewable energy counterbalanced by an open door to new coal power plants. India's positioning and commitments at the COP26 will be a critical "pass or fail" factor.

OPPORTUNITY TO BUILD BACK BETTER

In a sense, the Covid-19 crisis should be considered as an opportunity. Most countries have announced or are exploring recovery packages, with some featuring a green dimension.

The key question is: how green will these recovery plans be? While much remains to be seen with the US, it is already clear that emerging economies have failed to step up, as China, India and Brazil notably sidestepped environmental issues, despite announcements on solar, wind, battery and forest investments.

To date, almost a third of stimulus announced across the globe will flow into environmentally intensive sectors that have negative impacts on climate change and/or biodiversity. The COP26 represents a key opportunity to change course and refashion these plans.

BEYOND CLIMATE CHANGE: THE SOCIAL DIMENSION

Looking beyond the environmental aspect of climate change, the transition towards more sustainable models and consumption will be successful only if it is made socially acceptable. Recent events have demonstrated this over and over: from inequality caused by the pandemic to potential job losses in certain fossil fuel dependent industries that may not be directly compensated by "green" jobs around the world, including in Asia.

The climate crisis has now been joined by a social crisis: poverty and inequality rates have risen and may rise further as debt levels constrain support for the poor and redistribution policies. At the same time, six years on from the Paris Agreement, it is clear that if we are to deliver on the ambitious climate promises made, words will need to be transformed into actions, potentially making their social impacts more salient than ever.

The Covid-19 crisis has presented an opportunity to "build back better", calling for a "just transition" to a lowcarbon economy - reducing negative social impacts while maximising the positives.

IMPLICATIONS FOR INVESTORS

What does this all mean for investors? Firstly, they need clarity. Many themes will be thrown around at the COP26, from net zero to just transition to biodiversity. Understanding what each theme entails and what it means from an investment standpoint will be key.

Secondly, they need a plan. For each of these themes, investors will need to detail ambitious, credible, and transparent plans to reach their climate objectives. Responsible asset managers should work with their clients on this journey. Those plans need to incorporate four levers: investment processes, engagement policies, disclosures, and target setting.

Thirdly, they need the right tools. It is important that asset managers start launching "just transition" solutions to take into account the social impact of climate change and meet the growing demands of investors. At the same time, we are also witnessing new developments in the climate data space. For instance, some ESG data providers now compute temperature scores, a new metric that assesses a company's trajectory to net zero. Asset managers can integrate this forward-looking metric into their investment processes to keep up with these developments.

Investors are increasingly making bold announcements in terms of reducing carbon footprints. While the commitment is welcomed, these investors and their responsible asset managers need to better understand what goes on behind ambitious "carbon neutral" calls to make more educated and impactful investment decisions. The challenge remains to figure out how to translate ambition into reality, as the world keenly awaits if answers can be found in the upcoming COP26.

The writer is Head of ESG, Amundi