Cop28: All eyes on finance and climate action

From the usual suspects to lesser-discussed challenges and untapped opportunities, fund managers await Cop28 to unfold, writes Piyasi Mitra

As the countdown to Cop28 commences, with the event scheduled from November 30 to December 12, its implications reverberate across the financial landscape, keenly anticipated by fund managers. Cop28, an acronym for the 28th session of the Conference of the Parties, marks a pivotal juncture in the United Nations Climate Change Conference series.

These conferences, tracing their origins back to the inaugural meeting in Berlin in 1995, primarily convene in Bonn, rotating hosts among UN regions. This year, the conference in Dubai transcends beyond a mere forum for dialogue, poised to be a crucible where global climate policies are forged, reshaping investment horizons. The decisions emanating from this conference are anticipated to recalibrate regulatory frameworks, either unlocking new prospects or ushering in unforeseen challenges for fund portfolios.

Lisa Wilson MD, XTCC, who will be presenting at the conference, calls it the “Cop of action”. Should it fail to sustain the 1.5-degree pathway, the repercussions for the financial system and implications for European investors would be “profound”, cautions Wilson. Thankfully, today’s asset managers are considering transition risk and physical risk data in their investment processes, observes Hortense Bioy, global director of sustainability research at Morningstar. The assessment of climate change impact on companies helps portfolio managers identify assets well-positioned for the shift to a low-carbon economy, explains Bioy. Additionally, they are actively engaging with companies to encourage them to improve their climate-related disclosures and reduce carbon footprints.

Morningstar data shows global growth in climate-related funds from just 200 five years ago to 1,400 this year, registering a 14-fold growth in assets to over $500 billion. Bioy highlights that, in parallel, there’s a growing trend among asset managers to develop and launch investment products focused on climate themes. These products include low-carbon funds, green bonds, and others that concentrate on climate solutions and renewable energy.

Data proves why it is time investors smell the coffee. Physical risks caused by climate change could result in more than 50% loss of portfolio value in infrastructure investments before 2050, according to research by EDHEC Infrastructure & Private Assets Research Institute. “Moreover, the average investor will also lose twice as much to extreme weather, mostly in OECD (Organisation for Economic Co-operation and Development) countries, compared to a low carbon scenario,” shares Frédéric Blanc-Brude, director of the EDHEC Infrastructure Institute.

“…the average investor will also lose twice as much to extreme weather, mostly in OECD countries, compared to a low carbon scenario.”

Additionally, the cost of physical risks within the “current policies” scenario represents, on average, 4.4% of the total NAV of the assets in EDHEC’s reference database by 2050. The average maximum loss is -27%, and the effect of extreme climate events is negative across all sectors, highlights the research. Blanc-Brude adds: “Many infrastructure investors hold few individual assets, potentially resulting in high concentration in physical risks. When investors find themselves exposed to the riskiest assets in the same portfolio, maximum losses can mount to -27% in the orderly transition scenario and to -54% in the ‘hothouse’ scenario”.

Nature and health = climate

Nature and climate must co-exist in the same conversation because “we cannot succeed with one without protecting the other,” says Victoria Leggett, head of impact investing at asset manager UBP. This comes amid the last 12 months witnessing progress in the form of the task force on nature-related financial disclosures, the global biodiversity framework and other supporting initiatives, giving policymakers more reasons to fold into their climate agendas at Cop28.

Cop28 could also take a leaf out of Cop15’s book, which targeted “30% protection of lands, oceans, coastal areas and inland waters by 2030”, states Leggett. Disruptive technologies supporting sustainability goals, especially in the food and agricultural sector, hold significant opportunities, she points out, rooting for a focus on technologies like reforestation, rewilding and soil regeneration for restoring degraded ecosystems at Cop28.

Furthermore, Leggett underscores the need for evidence demonstrating that food systems can evolve without compromising nutritional needs. Demonstration is also needed to establish how a transition to less waste and regenerative agriculture can diminish reliance on chemical inputs, improve carbon sequestration, restore soil health and biodiversity and serve as carbon sinks – all while feeding a growing population. Health’s integration into the global climate change agenda is another topic under the Cop28 spotlight. Climate-related health risks may harm sectors like agriculture and tourism, while investments in health-promoting and climate-resilient sectors – such as sustainable agriculture, public health and healthcare technology – offer attractive opportunities.

Voluntary carbon credits

Wilson emphasises the Voluntary Carbon Credit (VCC) market’s essential role in achieving emissions reductions for financial market stability. She highlights its potential: “Organisations such as Bain, Shell and the UN expect the VCC market to expand, with some projecting a 15x growth by 2030.” She advocates for the market’s growth and maturity, stressing the need for transparency, clear reporting and integrity to influence global climate emissions positively and enhance financial market stability. This strategy aims to actively involve institutional investors, supporting the growth of carbon mitigation and sustainable energy initiatives.

Fossil fuel frontier

According to the International Energy Agency, the total global renewable capacity needs to triple by 2030 to reach 11,000 GW – also referred to as the goal of tripling renewables. While solar power deployment is almost in line with a net zero scenario, wind power deployment has had more difficulty amid inflation and rising interest rates, underscores Alix Chosson, lead ESG analyst, environmental investments and research at sustainable investment manager Candriam. “Government transparency regarding accelerated commitments to renewable energy would benefit the industry and the transition. Also, swift deployment in developing countries is crucial for addressing financing and responsibilities issues,” adds Chosson.

“Government transparency regarding accelerated commitments to renewable energy would benefit the industry and the transition.”

Recently, the European Parliament urged for a global deal at the Cop28 climate summit to phase out fossil fuels, adding pressure on countries to address CO2-emitting oil and gas. The meeting should agree to “a tangible phase-out of fossil fuels as soon as possible, to keep 1.5°C within reach, including by halting all new investments in fossil fuel extraction,” the EU Parliament said in a resolution.

Chosson predicts that the fossil fuel sector will take centre stage at Cop28, and the focus could be more on decarbonising the sector (operational emissions, scope 1&2) rather than on indirect emissions induced by the sector, particularly during the combustion of fossil fuels (scope 3).

According to the Greenhouse Gas Protocol, scope 1 covers direct emissions that a company generates while performing its business activities, whereas scope 2 covers indirect emissions from purchased energy and scope 3 covers indirect emissions in the value chain. “Prioritising credible alternatives such as renewable energies and electric mobility is essential, as opposed to focusing on highly technological visions centred around capture and compensation solutions,” adds Chosson.

The Intergovernmental Panel on Climate Change emphasises the necessity for “drastic changes” to meet climate goals. Cop28 must become a beacon for this transition, showcasing a future free from fossil dependence. Failing this, the window for action on the +1.5°C target may close before 2030.

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