Reactions to the COP26 conference and the resulting Glasgow Climate Pact have predictably ranged from claims of greenwashing to celebrating progress in the fight against climate change. Ultimately, any judgment on COP26 may be premature, as the best measure of the conference’s success over time is the extent to which the commitments made are put into practice. While we wait for the concrete actions to materialize, the past two weeks have underlined the importance of several themes that will receive increasing attention and should be considered by sustainable investors.
Fossil fuels and coal energy
The latest wording of the Climate Pact refers to “accelerating efforts to phase out unabated coal-based energy and phase out inefficient fossil fuel subsidies.”i Critics have called this language too weak,ii but the language underlines the headwinds facing high-emissions intensity energy sources and the growing opportunities for companies that can provide carbon reduction solutions. Sustainalytics Sustainable Products Research allows investors to identify companies focused on climate solutions, such as Aker Carbon Capture AS, which provides carbon capture technologies, utilization and storage solutions.
Investors can also expect growth in carbon markets as a means to meet emissions reduction targets, after nearly 200 countries reached an agreement to implement Article 6 of the Paris Agreement.iii This agreement brings precision to the carbon market by clarifying the mechanisms of emissions trading between countries and eliminating double counting.
As countries strive to transition energy sources away from fossil fuels, it will be necessary to consider the role that nuclear energy should play. As evidenced by the decision to exclude proponents of nuclear energy from the ‘Green Zone’ of the conference at COP 26,iv The polarization caused by regional differences in public sentiment toward nuclear energy remains strong. However, it seems clear that nuclear energy will play an important role in decarbonizing energy networks in many regions, offering potential opportunities for investors.
Biodiversity and deforestation
There is increasing recognition that climate change and biodiversity are inherently linked, as evidenced by the Glasgow Climate Pact. Investors should consider both the risks associated with biodiversity loss and the opportunities to leverage nature-based solutions to achieve climate change adaptation and mitigation goals.
Investors can view biodiversity through different lenses. For example the Biodiversity programs indicator in Sustainalytics ESG Risk Ratings assesses the extent to which companies in relevant sectors have systematically identified areas for biodiversity protection and implemented biodiversity plans and targets.
To better understand and reduce the biodiversity risks associated with current investments, we are seeing investors turning to Sustainalytics Thematic Engagement Services. In particular the engagement theme of Climate change – Sustainable forests and finance focuses on working with producers and traders of forest risk commodities and with banks that finance these operations.
Growing expectations for Net Zero
The past six months have seen a wave of net-zero commitments by major financial institutions and the rise of industry efforts such as the Net Zero Asset Managers Initiative.v
While this is generally seen as a step in the right direction, the story surrounding COP 26 has shown that long-term commitments can invite additional scrutiny from stakeholders if viewed as superficial. This reputational risk can be mitigated by setting strong 2030 targets for emissions reductions and applying these targets to a wide range of assets. Not only should the 2050 destination be the focus, but the path to net zero emissions is critical to limiting cumulative greenhouse gas emissions.
Please contact us to learn more about how Sustainalytics supports investors in climate action.