Major investors at COP27: it’s time for the City to step up

The excitement over last year’s COP26 conference was palpable. Political and business titans gathered in Glasgow for the global summit after a 12-month hiatus due to Covid.

As this year’s COP takes place in Egypt amid the ongoing war in Ukraine, soaring inflation and an energy crisis, there are fears that last year’s focus on climate has diminished – particularly as European countries reduce their dependence on Russian energy supplies by increasing their use of fossil fuels.

As the devastating floods in Pakistan and Europe experience one of the hottest spells on record, major investors say the focus on climate change – and the journey to net zero – must remain top of the charts. agenda for this year’s event.

“The world has changed since COP26,” said Jenn-Hui Tan, global head of responsible stewardship and sustainable investing at Fidelity International. “Amid a significantly changed geopolitical, economic and market backdrop, climate has been pushed back from the government’s agenda this year, and the risk of locking in higher issuance in the short to medium term has increased.”

COP27, adds Tan, is an opportunity “to reaffirm to policymakers around the world that moving faster towards a net zero future is the best way to ensure energy security today and tomorrow”, and to tackle the climate crisis “in a fair way that supports energy needs”.

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“While critical gaps still exist in national climate commitments, it is more important to see practical measures unveiled that help deliver on existing commitments and for key themes to be addressed, including facilitating the energy transition and adaptation that responds to the needs of the most vulnerable, particularly in terms of food and water security,” he said.

Although this year’s COP did not receive the same fanfare as the Glasgow event, investors will be watching closely whether countries can meet some of the agreed commitments in 2021.

“Every COP matters,” said Andy Howard, global head of sustainable investing at Schroders. “We are approaching this in a different environment, but also in a context of respecting the objectives and commitments defined in Paris in 2015.”

“What we have seen over the past seven years are increased levels of ambition in terms of government commitments to drive long-term change in their economies. Long-term ambition requires concrete political action that will have a significant impact. We will have to see more action on this front.

COP26 was hailed for brokering key agreements during the two-week event, including the formation of the Glasgow Financial Alliance for Net-Zero – an alliance of 450 companies in 45 countries led by the former governor of the Bank of England, Mark Carney, who has promised 130 billion dollars to finance the transition to net zero.

Some 23 countries have agreed to phase out coal power, 122 countries have pledged to reduce methane emissions, and 25 countries and public financial institutions have said they will stop funding coal.

Steve Waygood, chief responsible investment officer at Aviva Investors, said the long list of commitments unveiled in Glasgow last year “looked like a great moment and a great success”.

However, he said there was little evidence of progress on the matter. Countries have pledged to review and strengthen their 2030 climate goals – known as Nationally Determined Contributions, or NDCs – but only a small number have done so.

According to Waygood, COP27 will be about holding countries to account on those pledges, rather than negotiating new commitments.

“The Egyptian presidency calls for this year’s event to be the implementation COP,” he said.

Howard de Schroders added, “The majority of conferences that have been held each year have been ones that consolidate rather than move things forward. Glasgow, like Paris, was about getting things done.

“It is also becoming clear that COPs are a useful barometer for global governments. But it’s the things that happen outside the international political arena, as well as in business, that are becoming increasingly important.

This year’s COP is also expected to focus more on the $100 billion annual pledge made by wealthier nations at COP15 in Copenhagen to help poorer nations adapt to climate change. The issue of loss and damage caused by climate change – and the compensation promised by rich countries to poorer ones – is also likely to feature prominently.

The climate crisis has deepened since the Paris Agreement of 2015, which resulted in a commitment to limit global warming to well below 2°C, ideally 1.5°C, compared to pre-industrial levels .

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“The harsh reality is that Paris is a dream written on a piece of paper. This is not a reality for the market,” said Waygood. “We have a better chance of not delivering it than delivering it. Market integrity could be destroyed due to the physical risks associated with climate change. This is the hard and cold reality.

Waygood added that despite the best efforts of the United Nations Framework Convention on Climate Change – the body that coordinates the COP – it may not be powerful enough to mobilize markets on the scale required to make significant changes.

“They didn’t know when they signed Paris how bad 1.5C looked,” Waygood said.

He said there needed to be an overhaul of the international financial architecture to address the physical risks of climate change and promote trade.

“The system rewards fossil fuel companies for digging up the ground and burning. This is the biggest market failure and requires government action to address it,” Waygood said.

Asset managers who lend money to governments need to improve to be good stewards, he added.

“Between us, financial institutions have the latent potential to help the UNFCCC by engaging with member countries…Unless and until you harness finance – and within that research profit – without the material cost of carbon, there will be no transition.

“At the moment, part of the international financial architecture is preventing financial institutions from promoting these just transitions. We need nothing less than an overhaul of the whole thing.

To contact the author of this story with comments or news, email David Ricketts

About Brandon A. Hood

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