During the second week of the United Nations Climate Change Conference (COP26), delegations have delved into more detailed talks as they seek to make progress before the conference’s close on November 12. Kelly Hagg, Global Head of Product Strategy and ESG, covers highlights from the week’s events so far and expectations for what key developments could mean for the asset management industry.

Bold Predictions About Coal

Coal continues to be a key topic at COP26, with President Joe Biden’s climate envoy, John Kerry, attempting to bring the U.S. back to the international stage in climate talks. Kerry has been touting the Biden administration’s goal of decarbonizing the power sector by 2035 and eliminating coal plants in the U.S. by 2030. This is a bold claim considering the U.S. (along with China) refused to join the Global Coal Pledge that was announced at COP26 on Thursday. The agreement includes more than 40 countries that have agreed to stop permitting and building new coal power plants and to fully transition away from the fuel by the 2030s. The U.S. and China have both committed to stop building coal-fired plants abroad, but not in their own countries.

Coal continues to dominate the Global Power supply. The U.S. gets nearly 25% of its electricity from the fuel¹, and many of the nation’s largest power companies don’t plan to phase out their emissions from fossil fuels until 2050. According to a recently released Carbon Brief analysis, emissions from coal would need to drop about twice as fast as pollution from oil and gas to meet the international goal of limiting future global warming to 1.5° Celsius.

With coal demand ramping up and prices surging, this is a daunting challenge that is further complicated by the fact that, while production has been constrained as the biggest mining companies retreat from coal under pressure from investors, the higher prices are likely to attract private and smaller players who don’t face the same constraints. So while it is COP26’s president and host Alok Sharma’s ambition to “consign coal to history,” it is clear that the world remains deeply dependent on the energy source. Furthermore, since Biden’s Bipartisan Infrastructure Bill was passed in the U.S., all eyes have now turned to whether the clean energy and social welfare bill known as Build Back Better will pass, with one of the potential hurdles being resistance from states such as West Virginia, where the use and legacy of coal can run deeper than party affiliations.

The potential implications for the asset management industry are nuanced. As governments and companies make net-zero commitments, cohesive government policy to reach those targets is still lacking. On the finance side, while divestment from some of the largest carbon-emitting corporations is easier to communicate and may appease protestors, helping companies manage a decline in emissions and showing investors how a realistic transition policy can create long-term value is far more complex, particularly without government guidance. Continued engagement with carbon emitting companies (especially in terms of their carbon offset policies) coupled with keen observation of government action on this topic will be vital for asset managers in the years ahead.

Potential Deal on Global Carbon-Trading Rules

After six years of failed efforts, John Kerry indicates that this might be the year that negotiations at the UN Climate Change Conference finally produce a deal on carbon-trading rules. Reaching an agreement on the rules for trading carbon credits and offsets would mark a turning point for climate diplomacy and bring transparency and accounting rigor to the world of offsets, thereby helping countries and companies cut emissions.

Carbon offsets – the valuable credits produced by planting trees, preserving natural carbon sinks or otherwise removing greenhouse gas from the atmosphere – are a convenience that allows buyers to continue polluting while essentially paying someone else to adopt climate-friendly behaviors. And demand is booming: According to clean-energy researchers at BloombergNEF, more credits changed hands in the first eight months of this year than in all of 2020.

The sprawling and so-far loosely organized market has come to encompass a wide range of activities, from funding renewable energy to stopping leaks at landfills, and has been bound up in ad hoc deals with emitters. But no global oversight or common standards exist, and an abundance of low-quality offsets appears to have little impact on climate change.

An organized trade in carbon offsets would allow countries to share the burden of lowering emissions. If one country has exceeded its emissions goals, it can sell the excess to another. An example of this is a bilateral pact by Switzerland and Peru in which carbon credits are swapped for green development funding. The second option would be to create a regulated carbon market governed by the UN to facilitate trades between countries that don’t have bilateral deals. A third option might come from private-sector buyers. In fact, hundreds of corporate polluters and sustainability experts are already attempting to iron out the rules for such private trades.

The issue itself and the debate is incredibly complex, with protestors calling for an end to carbon offsets completely as they don’t address the root of the issue and allow polluters to keep polluting. From our perspective, we anticipate carbon offset rules regarding the corporate sector to potentially be released this year or in 2022. As the expectation of more transparency into carbon offset projects heightens, this presents the asset management industry with another area in which to engage with large carbon-emitting corporations.

Dire Predictions of Economic Devastation and Reliance of Poor Countries on Private Investment

As net-zero pledges are made at COP26, numerous studies are being released showing the devastating consequences that would occur if these pledges are not met.

A recent Climate Action Tracker study showed that the latest plans to curb emissions by 2030 under the Paris Agreement framework still don’t go far enough. If the 197 governments meeting in Glasgow manage to deliver on everything they’ve announced, including long-term and short-term pledges, warming could be limited to 1.8°C – a large improvement over the 2.1°C forecast by the International Energy Agency for warming prior to the ongoing climate talks in Glasgow. But if they are not met, the results would be devastating: A 4°C rise, for example, would mean that nearly half the world’s population could be living in areas where the impacts from rising temperatures are potentially fatal.

Tropical countries – specifically small island nations – would be among the first affected if these climate pledges are not met. Furthermore, as these poorer climate-vulnerable countries make infrastructure plans to safeguard against climate change, they are finding it difficult to secure funding through the United Nations’ Green Climate Fund, a pool of money collected from wealthy countries for the specific purpose of funding climate resilient projects. But these nations have repeatedly failed to deliver those promised funds; as a result, poorer nations are turning to private funding instead, which can leave them at the mercy of the markets.

As climate change accelerates, investing in protective measures such as flood barriers and early warning systems is clearly an urgent imperative. But foreign investors will likely be reluctant to invest in these measures, which typically generate less attractive returns compared to investments in energy infrastructure. And as the most vulnerable countries see their prospects for economic growth deteriorate due to warming temperatures, they become even less attractive to investors.

The dependence of climate-vulnerable nations on the markets makes it clear that the financial industry will need to step up and provide support, particularly when governments and the UN fail to provide a reliable financing path. However, the intensity of the protests at this year’s conference and the growing backlash against greenwashing place a great deal of pressure on the industry to get it right. That is why we believe it’s imperative for financial organizations to ensure their sustainability commitments are genuine and attainable as the industry works toward solutions to help address the global climate crisis.

 

¹ “U.S. ‘Won’t Have Coal’ by 2030, John Kerry Predicts in Glasgow.” Bloomberg. November 9, 2021.
² “World Can Only Avoid Climate Catastrophe If New Climate Promises Are Kept.” Bloomberg. November 9, 2021.

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