ESG in the wake of COP26

In the run up to COP26 the optimistic focus was very much on limiting global warming to 1.5°C.  The climate scientists had set the scene by defining our status on Climate Change as a “Code Red for Humanity” in the most recent Intergovernmental Panel on Climate Change (IPCC) report. By contrast, Greta Thunberg predicted it would just be more “blah, blah, blah” with politicians not really following through on their commitments and lacking real action. 

On reflection COP26 and its resulting “Glasgow Climate Pact” wound up somewhere in the middle as the Financial Times editorial aptly put it:  

“COP26 has achieved more than expected but less than hoped.”

In an optimistic scenario where all the climate pledges announced to date were actually met in full and on time, then the International Energy Agency (IEA) estimates that global warming could be kept to 1.8°C. However, the lack of firm plans for 2030 means the actual increase could be 2.4°C. This still represents progress since Paris, where the world was heading for 3 -4°C  of warming. The watering down of the Pact’s wording to “phase down” coal burning and fossil fuel subsidies only where they are “inefficient”, while satisfying some like India, Australia and China, disappointed many. However, given over 90% of world GDP agreed to net zero emissions by 2050 the writing is clearly on the wall that a fossil fuel based economy is on the way out. 

There were plenty of signs of the extent to which the global shift in sentiment about the need to tackle climate change continues to gather pace. Deals to cut methane and halt deforestation by 2030 have laid the groundwork for future COPs to spur more direct action.  While the ambition was less then hoped, the Pact keeps “1.5°C alive” and this time next year, Egypt is due to host COP27, all key actors must ensure they deliver a better outcome.

The meeting has bolstered the Paris agreement in several important ways. First, it has recognised the primacy of its 1.5°C goal, and the scientific consensus that reaching it will require global emissions almost to halve by 2030 and reach net zero emissions by 2050. Already many nations have translated these commitments into national law – including the EU, Ireland, UK and USA. The final text requested countries to “revisit and strengthen” their 2030 targets as necessary to be in line with the Paris goal, by the end of next year. 

When it comes to Environment, Social and Governance (ESG) as a defining factor for investment and lending decisions, COP26 has clearly accelerated its growth trajectory, as climate-conscious investors and lenders increasingly want to know how to match up their investments with their values.  What COP26 has also clearly done is to shine a light on the Asset Manager’s key role in funding the climate transition. 

Ahead of the Glasgow meeting, ESG investments were already seeing significant AUM growth.  The appeal of these funds is particularly strong among millennials who have a strong voice and are increasingly conscious of their role in supporting the climate transition.   Millennials not only account for over a third of the global population but are also undergoing a massive $30 trillion intergenerational wealth transfer, from baby boomers to their children.  

According to a July report from Bloomberg Intelligence, ESG assets globally were already on track to exceed a third of total global assets under management by 2025 and that trajectory seems set to accelerate further in the wake of COP26. A growing acceptance that the ESG investment industry needs play a more significant role in the transition to a low-carbon economy was evident, especially as this demand for ESG investing soars.

With regulation continuing to ramp up, policymakers at COP26 were clearly looking to asset managers and lenders to take a leading role on decarbonisation, both in terms of financing the overhaul of the carbon intensive capital stock and pressuring companies to aim for net zero emissions.  For companies this means not just satisfying regulatory standards held within these ESG portfolios, but a much tougher time from shareholders and lenders as the narrative around climate change has shifted with more intense scrutiny on each individual businesses’ contribution to the climate transition. For example, aligning to third party verified best practice standards like Science Based Targets (SBTi) and climate finance disclosure (TCFD) are becoming the new normal for business.  
At COP26, the Mark Carney and Michael Bloomberg led coalition of international financial companies signed up to tackle climate change with $130tn private capital committed to hitting net zero emissions targets by 2050. This Glasgow Financial Alliance for Net Zero (Gfanz) — which is made up of more than 450 banks, insurers and asset managers across 45 countries — said it could deliver as much as $100tn of financing to help economies transition to net zero over the next three decades.

“We now have the essential plumbing in place to move climate change from the fringes to the forefront of finance so that every financial decision takes climate change into account,” said Carney, the former governor of the Bank of England who has been chair of Gfanz since its launch in April.

COP26 also saw a major milestone towards globally aligned ESG reporting when the International Financial Reporting Standards (IFRS) Foundation Trustees announced the creation of the International Sustainability Standards Board (ISSB). Companies, investors and asset managers have struggled with the myriad of sustainability standards, frameworks and metrics. The ISSB standards will hopefully provide the foundation for consistent and global ESG reporting standards that will enable companies to report on ESG factors affecting their business in a similar transparent manner than financial accounting standards now afford. 

While, the outcomes of COP26 are not enough to meet the required 1.5°C target. As we hurtle towards 2030, our window of opportunity is narrowing. Investors and companies are playing an even greater role in driving and scaling the low carbon economy and grasping the opportunities it provides.