The twenty-seventh meeting of the Conference of Parties (COP) under the UN framework convention on climate change drew to a close in the early hours of Sunday 20 November.
Following last year’s conference in Glasgow, this year’s was held in the slightly more exotic location of Sharm el-Sheikh, Egypt.
Much hope followed Glasgow, and this year’s COP was supposed to be about building on that momentum. However, heading into the final moments, there was a real fear over lack of progression, with negotiations dragging on 40 hours past the initial deadline. There were some steps forward, but in general, a growing realisation that we’re losing the battle with climate change.
Let’s take a look at what happened, and how the investment landscape could be impacted.
Narrative
Things certainly haven’t gone swimmingly since Glasgow. A war-induced energy crisis continues to highlight our overreliance on fossil fuels. Increasing extreme weather events make the impacts of climate change even more apparent.
The ensuing narrative has undoubtedly been around the rapidly accelerating need for developed nations to do more in support of their developing counterparts, both in making the transition and in addressing the damage already done.
Pay your fair share
On the second day, French President Macron took a jab at the world’s super-polluters, the US and China. In his speech he urged them to ‘step up’ saying “You have to pay your fair share”. The remarks were in reference to the imbalance between developed and developing countries in the cause and effect of climate change.
Widespread calls for a ‘loss and damage’ fund, funded by wealthy emitters, went to the wire, with major economies dragging their heels. The EU were the first to blink in the early hours of Friday, with a proposal which included levies on high-emission industries. On Sunday, we woke up to the news that a loss and damage fund was agreed and despite the minutiae not yet being clear, it’s a huge step forward in addressing the imbalance.
In relation to transition financing, Joe Biden (you could argue, hypocritically) asked world leaders to do more and said they can no longer plead ignorance. He also announced a deal to back new solar and wind projects in Egypt. There were also significant packages agreed to aid Indonesia, South Africa, and Vietnam in making the transition to cleaner energy.
The bleak reality is however, that it isn’t enough. A joint British and Egyptian study presented at the conference suggested that £1.75 trillion will be needed annually to help developing countries make the transition and to deal with the already locked-in effects of climate change.
If countries are serious about fighting climate change through transitory funding, and aiding adaption through loss and damage, a monumental amount of investment is required. This simply won’t be possible without a redirection of investment by the financial industry.
Through transition funding, we can expect to see accelerated investment in green energy and infrastructure. An expansion of the green bond market, to fund these projects, should also see an increase in ‘green’ fixed income products.
Loss and damage funding could see an increase in funding for adaption technologies. Effectively funding mitigation of climate-related risks, it would be reasonable to expect a reduced cost of capital in these markets and also to expect an increase in market valuations for emerging and frontier markets, particularly in adaptive technologies.
Brazil is back
Brazilian president-elect, Luiz Inacio Lula da Silva, commonly known as Lula, was one of the stars of the show. In a sharp turn on policy, the politician sought to reverse some of the damage – reputational and literal – caused by exiting president, Jair Bolsonaro.
Due to deforestation-linked fires the Amazon rainforest now emits more CO2 than it absorbs, Lula pledged that his country would do “Whatever it takes to have zero deforestation”.
He also signed the Rainforest Protection Pact with Indonesia and the DR of Congo, agreeing to negotiate a funding mechanism for conservation.
While it’s not clear if Lula intends to reforest illegally destroyed land or only stop new deforestation, either way the current degradation of the Amazon feeds many industries’ supply chains.
From an investment perspective, this means higher costs for companies profiting from cheap materials. Expect to see negatively impacted valuations in industries such as agriculture, hospitality, cosmetics, and retail. Conversely 25% of modern pharma comes from plants in the Amazon. Reforestation and an increase in biodiversity could see the reverse effect for the pharmaceutical industry.
Coca Cola COP
Amusingly or horrifyingly, depending on your sense of humour, COP itself was on the wrong end of greenwashing claims due to their sponsorship deal with drinks giant Coca Cola, the world’s biggest plastic polluter.
Greenwashing is a massive issue for the credibility of environmentally conscious investment products. A number of experts called out the private and public sectors over accusations of greenwashing and vague net zero commitments.
In response, a new set of guidelines were published at the conference by the International Organisation for Standardisation (ISO). The guidelines provide a common definition of ‘net zero’ and high-level principles for achieving climate neutrality. These guidelines will build on existing and planned regulation, making it easier to compare ‘net zero aligned’ products.
Incrementalism is over
US house speaker, Nancy Pelosi told the conference “We have left incrementalism in the dust, this is about transformation”. It’s easy to dismiss the veracity of the words themselves, especially considering the fact only 29 of 194 countries came to COP prepared with tightened transition plans to limit global temperatures. What can’t be questioned is the need for transformation, and fast.
We’ve all seen the haste in which climate-related disclosures are being introduced, across investment and corporate industries. As we reach more tipping points, experience further extreme weather events, and public opinion continues to evolve, expect to see further ratcheting up of climate-related regulation.
Although the visible pressure will be on the public sector, governments will need to lean on the private sector to meet pledges. This means more policy, more regulation, and more disclosures.
In(vestment) summary
Despite slow progress and fears of no outcome, the agreement of a loss and damage fund will unquestionably go down as the COP’s milestone moment.
My four reflections, from an investment standpoint are:
- Significant funding is being committed to safeguard against the worst impacts of climate change and fund the energy transition, possibly resulting in a reduced cost of capital and increased value in emerging (excl China) and frontier markets.
- Financing these projects could see an increase in green bond issuance (and subsequently an expansion of the green fixed income market) and the value of beneficiary energy and infrastructural companies.
- Further, proposals have been made to fund a portion of loss and damage through taxation on fossil fuels, flying, and shipping, so expect these industries to be adversely impacted, should this become a reality.
- Industries whose supply chain benefits from the degradation of the world’s rainforests may see increased costs. These include the agriculture, hospitality, cosmetics, and retail markets.
- To meet 1.5C - 2.0C targets, governments and regulators will need to introduce more policy, more regulation, and more climate-related disclosures. These will need to be supplemented by more stringent frameworks and definitions.
Whether countries follow through on their pledges and the agreements made is another matter, but although worrying, it’s somewhat reassuring that there’s a realisation of our predicament and that we absolutely must do more.
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