In one sense, Climate Week 2022 in New York (September 19-24) was a return to a pre-pandemic normal. The feeling of agreement among private sector actors on the urgency to act on climate change equally to protect our business interests and to protect the viability of humanity was palpable.
In contrast, this year’s COP27 was a more somber reality check compared to the optimism that surrounded last year’s summit in Glasgow, Scotland. This is an unfortunate result of rising global geopolitical tension, supply chain regionalization/fragmentation, and calls for energy security, nationalization and independence. However, the incredible momentum being witnessed in the private sector restores hope that solutions to the existential problem of climate change remain within reach.
Two prominent themes during Climate Week and COP27 that we’ll be monitoring going forward are:
- Implementing decarbonization: Moving from targets to tools and systems
The private sector and investment community have moved far beyond carbon footprinting and target-setting. Instead, emphasis is now on how companies and investors execute against those targets. Climate Week attendees were focused on generating the tools and definitions needed in the finance sector to make decarbonization and reduction of “financed emissions” a reality–such as introduction of a global carbon price, development of standardized climate scenarios and adoption of climate-adjusted indexes.
Climate Week participants frequently noted that data availability and quality across all of Scopes 1, 2 and 3 upon which these tools depend remain far from satisfactory. However, the consensus was that while data quality remains a concern, the urgency of the call to act now in the investor community trumps the wait for perfect inputs. Investors also are paying much more attention to the gap between pledges and emissions; or the gap between talk and action.
This coincides closely with the primary ask of COP gatherings: that countries both redouble efforts to tackle emissions and demonstrate progress against targets. While each group has its own respective constraints and ability to influence meaningful capital deployment, nation states and investors can work most effectively when pulling in the same direction.
- Climate justice: Making the invisible visible to the finance sector
One of the key topics of discussion at Climate Week, and a critical at COP27, is how developed and developing nations can move forward on climate transition in partnership. Given that developed regions of the world have been responsible for the vast amount of historical emissions since global industrialization, negotiations between nations at COP27 are only tenable if founded on principles of fairness and justice. What’s painfully clear is the promise made about such partnership and support at the Paris conference in 2015 has not been fulfilled.
At COP27, the non-governmental organization (NGO) sector highlighted the many dimensions of intersectionality of climate justice and economic and social security for various marginalized and vulnerable groups. We’re watching whether countries double down on emissions reduction commitments, whether attention starts to seriously shift toward the idea of countries having to “adapt” to climate change, and if global climate financing flows between developed and developing nations are agreed on. Whilst the conference fell short on several aspects, it did deliver an important milestone on the notion of establishing a ‘loss and damage’ fund – a key ask from the most vulnerable nations for over 3 decades. As with many decisions at a COP forum, the details are still to be thrashed out and much rests with decision taken at COP28 in the UAE; but progress on this topic was tangible at Sharm El-Sheikh.
As the social justice and equity implications of climate change gain more attention, we expect investors will be actively seeking more information on how companies are proactively working to mitigate the potentially adverse impacts of transitioning business models and capital investments on vulnerable populations.
What can investors do?
We’ve long expressed our opinion on the risks that come with inadequate pricing of systemic negative externalities, and climate change is arguably the greatest of all externalities. We predict that private sector action on the climate transition will gain pace no matter the outcomes of Climate Week and COP27. The International Energy Agency estimates that global clean energy spending (renewables, energy efficiency, EVs and energy storage) is set to grow 8% in 2022, to a record level of around $1.4trn. Couple this with the fact that investors, by the end of Q3 2022, continued to place net new funds in ESG investment strategies—compared to net outflows for broader-market funds—indicating that the direction of capital allocation remains clear. Here are three things that we believe investors can do to keep up the momentum:
- Focus on deep research that links climate metrics and factors to material impacts for company balance sheets, underlying costs or growth projections.
- Actively engage with companies on climate disclosures and the capital allocation strategies necessary for transition planning.
- Introduce, where appropriate, a thematic climate focus in some investment funds to enable investors to allocate more intentionally to decarbonizing the real economy as part of a holistic investment strategy.
