The Russian invasion of Ukraine, adaptation, new technologies and the role of GFANZ will be the hot topics of discussion at this year’s COP27 in Egypt, according to Charlie Thomas, CIO at EdenTree.
Here, he answers ESG Clarity’s questions ahead of the November conference.
Russia’s invasion of Ukraine has brought the issue of energy security to the fore but instead of pushing the global economy to renewables new fossil fuel projects have been set up. This is disappointing – is it likely to continue?
Of course, no one wants to see the reopening of coal-fired plants or investment in new fossil fuel projects. But many of the immediate fixes are likely to be temporary – peaking after a year or two. Investing in things like liquified natural gas (LNG) storage and buying in gas from US and Australia are not financially sustainable over the long term, nor are steps like rationing gas in an effort to cut demand in Europe.
The key question is what happens to energy in the next three to five years, and Europe’s REPowerEU plan provides a signal on that front. It sees a greater role for renewables in the region’s energy security and a drive for greater energy efficiency. Current fossil fuel prices and the cost of shipping LNG around the world in themselves boost the case for alternative energy. In our view, renewables are the ultimate tool for achieving energy independence and security.
And as troubling as the situation in Europe is, the global outlook is more optimistic. There is the Inflation Reduction Act in the US that will spur investment of about $369bn in climate projects and clean energy, helping the US cut greenhouse gas (GHG) emissions by 40% from a 2005 baseline, compared to the 30% trajectory prior to the bill.
In July, China unveiled an ambitious 14th five-year plan for renewable energy, backed by a fiscal stabilisation package, which is likely to see the country overachieve on its targets as it has done over the last three five-year plans.
And the new government in Australia has already made climate inroads, enshrining into law an ambitious target to cut GHG emissions by a minimum of 43% by 2030 and a net-zero goal of 2050 – far exceeding the previous 26-28% 2030 target.
Adaptation was key in the last IPCC report – how do you think this will be addressed at COP27?
Bringing adaptation to the fore at COP27 in Egypt makes good sense. It is an inconvenient truth of the anthropogenic climate change has been caused by richer countries and has left developing countries most vulnerable to its effects. The fact the Intergovernmental Panel on Climate Change (IPCC) recently drew the connection between climate vulnerability and colonialism for the first time is likely to open the floor for lively – and necessary – debate. Climate change is an existential threat to too many people from too many nations and the deficit when it comes to global efforts to mitigate climate change has only made adaptation risk far higher.
Costs of adaptation and new technologies are sky high. Where will see this investment come through (if at all)?
The Stern Review in 2006 warned that the cost of delayed action would be far greater than if immediate action was taken to start mitigating climate change. We are seeing that warning play out with a significant shortfall in investment to both mitigate and adapt to climate change.
The UN estimates developing countries will need $140bn to $300bn in 2030 to meet adaptation costs. This is far greater than the 2009 Copenhagen pledge to provide $100bn a year to poorer nations to fund climate adaptation and mitigation from 2020 – the OECD estimates that only $83.3bn of this was met that year, much of which with strings attached.
We have adaptation schemes like The Clean Development Mechanism that was part of the Kyoto Agreement and its successor, Article 6 from the Paris Agreement.
As problematic as these can be in terms of carbon accounting – they are effectively forms of carbon offsetting – they have potential to hasten development and build resilience in areas where it is most needed, but have generally been underutilised.
Relatively new initiatives like the Coalition for Climate Resilient Investment (CCRI), which has more than 120 members representing $20trn in assets, are a positive step, but we really need to see more bite from initiative such as this. Saying you are aligned to a particular cause is one thing – providing additional finance is quite another.
What else are you expecting to be addressed in Financial Day at this year’s COP?
We expect to see fierce debate about the annual $100bn pledge, which is a symbolic battleground between richer countries and developing nations, least developed countries and small island developing states that rightly want to see an actual commitment to this pledge. The issue of loss and damage compensation is also likely to feature more highly.
The Glasgow Financial Alliance for Net-Zero (GFANZ) formed at COP26 represented a capital pool of some $130trn involving 450 firms across 45 countries committed to a transition to net zero. But it was criticised for the fact it offered no new or “additional” money but merely represented an alignment to that goal. We hope to see greater pressure put on this group to drive the transition and consider the issue of climate resilience and adaptation. In recent weeks the group has called on its signatories to stop investing in new coal projects. This is a step in the right direction, but we would like to see more.
But some of the most interesting initiatives have been coming at the corporate sector where businesses have sought to source clean energy and actively improving the climate resilience of supply chains. The EnergyTag initiative is a great example. Google and Microsoft have joined about 100 global companies to hasten the transition to 24/7 clean energy through a system that monitors and matches carbon-free energy sources on an hourly basis which effectively means their datacentres can be carbon free around the clock. The knock-on effect of this initiative is a big pickup in demand for zero carbon energy which encourages greater supply.
Corporations have long been at the heart of the transition, in part due to growing pressure from discerning public. Consumers have long been voting for more sustainable products, cutting across differences in their voting habits.
What have been your most recent investments on the Green Future Fund and why?
In recent months we’ve been adding to positions in renewable energy infrastructure companies Greencoat Renewables plc and Harmony Energy Income Trust. These renewable energy businesses have defensive characteristics and have seen their share prices rise along with rising energy prices. They are backed by great structural drivers and own renewable assets that are at the forefront of the energy transition. It’s an area with extraordinary growth potential that we’re particularly excited about at EdenTree.
Alternative energy is only one of the fund’s themes and some of our investments in areas such as environmental engineering, water infrastructure and regenerative agriculture are providing important solutions which are ultimately helping to improve climate resilience.
