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Expert Opinions

Mixed COP26 outcome leaves investors in the driving seat

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While the outcomes of the COP26 conference in Glasgow have disappointed some, Lyxor’s Head of ETF Strategy, ESG and Innovation François Millet, and Head of ESG ETF Product Antonio Celeste, believe there are reasons to be optimistic. In this conversation, they discuss the high expectations for countries’ updated Nationally Defined Contributions, to be submitted next year, the significant side deals made at the Glasgow conference, and why the sometimes frustrating inertia of negotiations have not held back the financial industry, which is constantly pushing ahead, giving investors powerful tools to make an immediate difference.  

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Mixed COP26 outcome leaves investors in the driving seat

Where do you see grounds for optimism in the outcomes of the COP26?

Antonio Celeste: The COP26 has contributed to increasing the global awareness of the need to fight climate change. This is turn should create ever more demand for green investments, which is extremely encouraging. 

The commitments made at the end of the Glasgow summit could have gone much further, for instance on the financing from rich countries to help poorer ones adapt to climate change.

But that will not prevent finance and investment from stepping in, via green bonds for instance whose proceeds can be destined at combating climate change in developing countries. It goes to show that while there is a lot of inertia in these complex international negotiations involving multiple stakeholders, there is very little inertia in the world of investment: investors can act now, through innovative investment products.

What’s also encouraging is that countries have agreed to phase out fossil fuel subsidies, currently at $5.9 trillion annually, and to reduce (but not phase out) coal. It’s also positive that they have committed to “revisit and strengthen” their 2030 emissions reduction targets by the end of 2022, which must be aligned with the Paris Agreement’s 1.5°C goal. 

François Millet: For me the main positive to come out of the COP26 is that the 1.5 degree target is still, technically, within reach, taking into account the additional commitments made ahead of and during the Glasgow summit.

But, if we are going to come close to achieving this 1.5 degree target, the next round of negotiations will have to be strengthened significantly. There will be high expectations for the updated Nationally Defined Contributions (NDCs) or so to speak “net zero roadmaps” that participants will have to provide next year, to converge with the 1.5 degree goal.

Southern countries are waiting on rich countries in the “Global North” to make much more of an effort, amid a growing debate which emerged at the COP26 that countries having made the biggest historic contributions to atmospheric CO2 levels carry more responsibility and should support a fair share of the financing effort.

Another reason for cautious optimism is that we have seen a strong political momentum coalesce around the carbon market. It has grown significantly since its onset in 2005 to account for 45% of global carbon emissions today and is expected to cover 80% of all emissions in the near future. There have been some interesting developments with the increased willingness demonstrated in Glasgow to interconnect all existing carbon markets and strive to define a global price, even though we are still very far from a globally standardized carbon market. But the carbon market is definitely emerging as a cornerstone of policies to reduce carbon emissions.

Will the COP26 conference lead to any changes for investors? 

Francois Millet: Several crucial side deals were made during the conference. Some 100 countries signed an agreement to reduce methane emissions by 30% by 2030. This is important as methane is 86 times more potent than CO2 at trapping the earth’s heat.

Antonio Celeste: This is very positive in the long term as methane emissions will disappear much faster than CO2 emissions, but in the short term (next 20 years) the impact is very high, and the battle for net zero is now a short term battle, as we have just few years to curb emissions. 

François Millet: There was also a deal on halting deforestation by 2030, again signed by 100 countries. This is key as there is a growing realization that the benefit of ending deforestation is far greater than that of planting new trees. This could lead to the definition of new exclusion policies applicable to investment products and in any case, will certainly encourage investors to look for financial solutions aimed at protecting biodiversity.

While these are encouraging developments, COP26 will not change much overall for investors who are already ahead of the game as already mentioned by Antonio: the phasing down of coal has been a reality in portfolios over the past few years and the thresholds for exclusion are becoming stricter and stricter. In the same way, ESG investment vehicles already exclude many damaging human activities.

Does this mean that the fight again climate change doesn’t need COPs or politicians?  

Antonio Celeste: No, we absolutely need politicians. For example, when it comes to reducing subsidies for fossil fuels, this can only come at a policy level. The same goes for promoting green transportation, which relies hugely on subsidies. 

More than 100 countries, regional governments, cities, investors and carmakers signed a zero-emissions deal at the COP26  under which they will work towards all sales of new cars and vans being zero emission globally by 2040, and by no later than 2035 in leading markets.

François Millet: We certainly need the policymakers to support the actions of investors. Notably, the financial industry needs tough regulation of data to prevent greenwashing, as well as regulation that will determine new ways of reporting revenues and capital expenditure that is earmarked as green. This would be particularly welcome as some current voluntary reporting frameworks become compulsory. 

The actions of policymakers are also essential in determining what we call transition risks, which are risks to the valuation of assets linked to new norms and regulations, and higher carbon pricing, which in turn shape our own risk assessment as asset managers.