The UN climate change conference (COP 26) is a watershed moment for ESG investors, providing an opportunity to illustrate why and how aligning portfolios can play a key part in addressing the climate emergency. There is a palpable sense that the conference
has fallen short of its ambitious agenda. We have no commitment to phase out all fossil fuels, including coal, no global price on Carbon, no strengthening of NDCs (Nationally Determined Contributions) to support the 1.5 degrees target and no framework
on how to finance transition for all developing countries. While talks in Glasgow highlighted the dichotomy between the timing of climate diplomacy and the pace of climate change, it also yielded some potential catalysts for climate action, including
renewed cooperation between China and the US and unprecedented engagement from financial institutions. The role played by private capital in combating climate change has come to the forefront, more so during the pandemic, which has accelerated many
long-term trends around ESG.
Difference between 1.5C and 2.0C of global warming
The 2015 Paris Agreement was hailed as a great success with the commitment to limit the global temperature rise to well below 2 degrees Celsius above pre-industrial levels and to aim for 1.5 degrees. The difference between the two measurements would have
a dramatic impact on climate via heat, rain and drought and this in turn would make extreme events more regular. For example, “warming at 1.5 degree would destroy 70% of coral reefs, but at 2% more than 99% would be lost1.” The need to
get to 1.5 degrees remains the key challenge for governments around the world, many of which have differing agendas and priorities when it comes to economic development.
SBTs vs Net Zero
The debate around SBTs (Science Based Targets) and net zero targets (NZT) has come to the forefront, but both initiatives are not mutually exclusive, but complementary. The former are stricter and shorter in period (5-15 years), whilst NZT’s are
set on 15+-year basis. SBTs came via a partnership of organisations including the UN Global Compact, Carbon Disclosure Project and World Resources Institute, which developed a methodology providing companies with a clearly defined framework to reduce
emissions in line with the Paris Agreement; more than 2000 companies have already signed up. The net zero targets conversely are focused on firstly reducing the carbon emissions of a business and for unavoidable emissions, using offsets in order to
reach net zero. Whilst net zero garners much of the political headlines, SBTs will play a greater role in lowering total emissions and this is where businesses can play a pivotal role in climate change. In the Responsible & Sustainable UK Equity
Fund, over 60% of the companies in the portfolio have committed to a range of measurable and reportable targets.
The recent study by CDP shows the challenge facing the investment management industry in helping to fight the climate emergency2. The analysis of a third of the global fund management industry representing $27 trillion of AUM revealed that only 102 funds
out of 16,500 were aligned with the Paris agreement’s target of 1.5 degrees. This number falls further to just 65 funds when considering scope 3 emissions. At EdenTree Investment Management, we have been measuring and publishing the carbon footprints
of our funds for 6 years, resulting in a strong track record in lowering carbon emissions across our equity range. For example, the Responsible & Sustainable UK Equity Fund has lowered its emissions by 40% since 2016 and is now 70% lower than
its benchmark, the FTSE All-share. Based on current targets the Fund is expected to align with the Sustainable Development Scenario by 2050, representing a potential temperature increase of 1.5C by 2050 compared to 4.5C for the benchmark. What COP
26 illustrated was the need to get all forms of capital aligned to tackling the climate emergency and there will be greater scrutiny on data collection and reporting on targets at COP 27 in Sharm El Sheikh next year.
At EdenTree Investment Management, we have been measuring and publishing the carbon footprints of our funds for 6 years, resulting in a strong track record in lowering carbon emissions across our equity range. For example, the Responsible & Sustainable
UK Equity Fund has lowered its emissions by 40% since 2016 and is now 70% lower than its benchmark, the FTSE All-share.
Click here to read the EdenTree Montreal Pledge 2021
COP 27: Sharm El Sheikh
The UN climate process has been in situ for nearly 30 years and over that time, little or no progress has been made on carbon emissions, in fact, they have continued to rise. Many commentators have questioned why there was so much hype around COP 26 when
the previous conferences had failed. Perhaps the question should be why did we expect COP 26 to succeed, given the poor track record of the preceding 25 conferences. The pressure on global leaders remains incessant, but their ability to bring about
real change requires radical action, which leads to a malaise. One clear example here is the US, which has signed up to two climate agreements (Paris and Kyoto), only to back out later. The dependence on coal as a fuel for India and China was an obstacle
in Glasgow and there is little prospect of change in that regard for the next UN conference in Sharm El Sheikh. What is clear is that the politics of COP remains a quagmire and one from which global leaders show little or no sign of escaping. The
role of private capital, especially the investment management industry, will become more pivotal going forward more so with continued failure of politicians who seem content with kicking the can down the road.
- Explainer: What's the difference between 1.5°C and 2°C of global warming? | Reuters
- Under 1% of $27 trillion global fund assets are Paris-aligned | CDP
The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past
performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.