COP27 recap: implementation changes slow but inevitable for fund operators
With COP27 complete, fund operators should take stock of the global involvement required to achieve net zero, and shifting focus toward emerging markets.
Maya Sibul POSTED ON 11/22/2022 3:46:59 PM
With unprecedented coverage and attendance, the 27th United Nations Climate Change Conference (COP27) took place over the past two weeks focusing on the decades-long conversation on how to address the most severe impacts of climate change.
The two week-long conference, this year in Sharm El Sheikh, Egypt, focused on communities, ecosystems, and economies in vulnerable countries and emerging markets, making important progress.
A 12-page agreement was signed on Sunday, 20 November by almost 200 countries detailing plans to create a climate damages fund to compensate countries most vulnerable to and damaged by climate change.
Major goals achieved in this document included the establishment of a transitional committee — comprised of representatives from 24 countries — to plan logistics and funding. The results of this committee will present their plans at COP28 in the UAE in 2023. The compensation fund is set to begin distributing capital shortly after.
Fund operators should take note of this concrete action, and in general the shifting focus toward the wellbeing of emerging markets.
Stalled plans on the net zero front
While a controversial compensation agreement was reached after much wrangling, the conference also saw continued stalling on the carbon emissions front, with significant implications for fund operators.
The 1.5C temperature target set out in the Paris Agreement — to which countries recommitted at COP26 last year in Glasgow — remains in a precarious position. There was little to no consensus on concrete plans to mitigate further temperature changes and keep this target well in sight — a failure not just of regulators and policymakers, but also of asset managers and the investment community more broadly.
All of which could affect fund managers ESG and investment targets as well as their in-house operation touched by climate change.
“Record-breaking temperatures followed by catastrophic floods and extreme weather events globally should have galvanised the governments and corporations attending COP27.”
Daniela Barone Soares, CEO of the impact-focused investment management platform, Snowball, said that “record-breaking temperatures in the UK and Europe over the summer followed by catastrophic floods in Pakistan and extreme weather events globally should in theory have galvanised the governments and corporations attending COP27.”
At the conference’s start, COP27 was characterised as an ‘implementation COP’, mainly because there has been little tangible progress since COP26, and many in the fund industry saw COP27 as a necessary platform through which to generate material action.
With markets tending to take a short-term view on the topic – inflation, political upheaval, the war in Ukraine, and the cost-of-living crisis often seem to be more immediate issues – climate change has been pushed off or swept under the rug; it receives less actionable change despite the constant chatter.
“[Asset managers] must seek and publish independent verifications of their impact claims, return to first principles and look at their governance structure."
Barone Soares said that in order to make material progress, there are a few immediate actions that asset managers can take. “First, they must seek and publish independent verifications of their impact claims. Second, they must return to first principles and look at their governance structure – an intention to create a positive impact on society and the planet should be legally protected in articles of association.”
The importance of the investment community
Even as policymakers dragged their feet, it is now obvious that going forward the fund and asset management community has an opportunity to bake sustainability into governance procedures and reporting processes.
"We need solutions that the private sector can implement, and promoting renewable energy and carbon zero energy is critical. Energy efficiency in buildings could pay for itself."
Professor Jim Skea, Chair of Sustainable Energy at Imperial College London, was blunt on the matter and the clear risk if asset owners and managers do not. “We need financing and political will to move forward. We need solutions that the private sector can implement, and promoting renewable energy and carbon zero energy is absolutely critical. Energy efficiency in buildings could essentially pay for itself,” he said at The Geneva Association’s 2022 Climate Change & Environment Conference earlier this month.
Maria Nazarova-Doyle, Head of Pensions Investments at Scottish Widows, echoed her disappointment in some COP27 outcomes, saying that there is little time left to make meaningful, robust changes that will help reduce global warming to the 1.5C goal. “World governments have committed to a range of policies that need to be implemented – and fast,” she said. Nazarova-Doyle also emphasised the significance of emerging markets, now and going forward.
Toward engagement, not divestment
When it comes to the shifting focus toward emerging markets, Nazmeera Moola, Chief Sustainability Officer at global investment manager Ninety One, said that for companies in carbon-intensive economies – such as South Africa – the transition to net zero will be neither linear nor simplistic. Transition plans need to be “ambitious, credible, and implementable,” she added.
Like other managers, Moola's firm has developed an in-house Transition Plan Assessment Framework, which assesses the viability of transition plans from heavy emitters that could go faster than COP goals and deliver change where the wider bureaucracy fails. The proposals are based on three key principles: level of ambition, credibility of plan, and implementation of plan. Because these elements are often considered subjective, Ninety One has outlined clear bullet point definitions for each principle, they said.
"We need to approach decarbonisation from a real-world perspective. Divesting from high emitters to cleanse the portfolio does nothing for contributing to real-world decarbonisation.”
For fund operators, this means that remaining invested in high carbon emitters – specifically in emerging markets – might be necessary, at least for the short-term. Moola was wary about divestment for this reason. “We do not support portfolio purity,” she said. “We need to approach decarbonisation from a real-world world-perspective.” It is less about a company’s or country’s current carbon position, she added, and more about their willingness and ability to change in the near future. “Divesting from high emitters to cleanse the portfolio does nothing for contributing to real-world decarbonisation.”
Globally, most companies do not yet have clear plans on how they will achieve the net zero goal by 2050. Moola, along with Nazarova-Doyle and Barone Soares, explained that it is the role of the investment community to encourage, measure, and engage the high emitters in their transitions. Emerging markets require committed attention and actionable guidance from insurers and investors. Corporates can take the lead in the transition to a low-carbon future.
COP27 showed many in the industry that if they want to move the dial on climate, they may be better off doing it themselves and hoping everyone else catches up.
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