By Andrew Wetzlel, CFA®, Managing Director of Sustainable Investing
Climate action pronouncements have been hitting the headlines in somewhat of a frenzy over the last few months as companies and governments indicate commitments ahead of the 26th UN Climate Change Conference of the Parties (COP26), an important climate meeting in Glasgow, Scotland, in November. Two big questions remain: in aggregate, are current action plans enough to meet longer-term targets, and what if anything does this all mean for investors?
The stage was set on June 7th, when the Network for Greening the Financial System (NGFS), a global group of central bankers, announced an updated set of climate scenarios. These scenarios laid bare the cost of inaction or uncoordinated efforts, resulting respectively, in worsening physical and transition risks across our planet and economies. Then, in early August, the UN Intergovernmental Panel on Climate Change (IPCC) issued its sixth assessment report, addressing the current state of the global scientific community’s understanding of the climate system, climate change and the physical risks we all face. The message from these two reports is loud and clear: significant and coordinated action is needed through 2030 if there is any hope of averting the worst effects of climate change.
The NGFS and IPCC reports put pressure on those attending Climate Week in NYC, a gathering of international business, government and civil society leaders, that takes place alongside the UN General Assembly in September. During Climate Week, Breakthrough Energy Ventures announced investment commitments nearing $1 billion that will finance high-impact projects and technologies required to meet net-zero targets. Chinese President Xi Jinping announced that China would stop funding and building coal plants internationally. President Biden reiterated pledges to double climate change support for developing countries to $11 billion and meet broader Paris Accord goals.
What remains clear ahead of the UN COP26 Summit in November is that current pledges are not enough to meet 2015 Paris Accord targets. An analysis by Bernstein Research and the International Energy Association shows that current climate commitments in pandemic recovery plans would increase total public and private spending on clean energy to around $350 billion per year by 2023, just more than a third of what is required to limit global warming to well below 2 degrees Celsius. The analysis highlights the scale of what still needs to be done and along with recent extreme weather-related tragedies, puts the spotlight on world leaders attending COP26 in just a few weeks.
As we look forward one thing is clear: government and corporate support is only likely to build from here, though there is clearly no guarantee that actions will be of sufficient scale and well-coordinated. From an investment perspective, government incentive programs and private sector capital spending geared toward clean energy, energy efficiency, zero-carbon transportation, and other areas, are likely to expand significantly, driving more capital for investment and growing revenue opportunities for companies aligned with a lower-carbon future. Where there is opportunity there is also risk – risk that capital is allocated inefficiently to firms unable to execute, and risk that incumbent industries and firms are disrupted. Building climate-related risks and opportunities may well shape financing and investment markets for decades.
Research into the global transition toward a net-zero world is central to our sustainable investing platform and a key component of our broader ESG-integrated risk management approach. As the chart below from Bernstein Research illustrates, a drive to meet climate targets will create opportunities across sectors for companies and investors paying attention, and risk for those who are not. We will be watching COP26 commitments closely and evaluating potential impacts across markets.
