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With COP26 around the corner and current climate analysis so dire, it is vital that asset managers take climate targets into consideration with their investments. Ketan Patel looks at what he expects to see from COP26 and how it would affect asset managers.

What can asset managers expect from COP26?

Ketan Patel Ketan Patel Fund Manager
Opinion

What can asset managers expect from COP26?

Ketan Patel

Ketan Patel
Fund Manager

The 2021 UN Climate Change Conference, also known as COP26, which is going to be held in Glasgow in November, will be of great interest to global asset managers. The UK will be leading the conference as president and asset managers who are leading on ESG (Environmental, Social & Governance) will be looking for greater consensus on policy and regulatory action. The conference also allows us to revisit the commitments made in Paris in 2015 and to assess the progress made to date. In addition, it provides an opportunity to examine the road map over the next five to ten years. The recent UN report by the Intergovernmental Panel on Climate Change, a first major review of the science of climate since 2013, concluded with a “code red (warning) for humanity”, highlighting that a key temperature limit will be broken with next 20 years.1 This is the 26th conference with all stakeholders looking for a meaningful outcome given a climate emergency, which shows little signs of respite. In short, we are running out of time and there are now calls for more aggressive action.

Emissions: aggressive targets

We need to see emissions targets that are more aggressive across all industries and not just the usual high profile suspects – energy, transport and agriculture. For example, cement, the active ingredient in concrete, accounts for 7% of global carbon emissions, more than aviation and deforestation combined.2 The fashion industry accounts for 20% of the wastewater globally and 93bn cubic metres of water which could serve 5mn people annually. In addition, it is responsible for 8% of carbon emissions worldwide, more than international flights and shipping combined.3 A more ambitious framework needs to be established with a carrot and stick approach if we are going to meet the 1.5-degree target agreed in Paris.

Net zero vs science based targets

Net-zero carbon, which has come to dominate the climate debate, is focused on achieving neutrality by a certain date, typically 2050. This targets carbon neutrality via carbon offsetting, usually via environmental credits to get to a net-zero target. This has led to the criticism that there is no structural change for the emitter. Science based targets (SBTs) align with climate science and are very much rooted in the Paris Agreement – limiting global warming to 1.5 degrees. The number of companies that have signed up to SBTs via the Science Based Targets Initiative has moved up sharply to nearly 1700. We are looking to encourage companies to adopt a SBTs approach, as this will make a larger impact on lowering emissions, which remain the key driver of temperature change.

Role of asset managers

The science is constantly evolving, as is the role asset managers can play in helping tackle the climate emergency. Asset managers are well positioned as allocators of investment capital across a wide range of sectors and assets. They can play a key role by adopting an investment framework that encourages and rewards businesses that are climate aware leading to meaningful progress in tackling the climate emergency. Investors need to challenge their asset managers on reporting if the portfolios in which they are invested into meet the 1.5-degree target. EdenTree has been running a carbon footprint on their equity portfolios for 6 years now and both the Responsible & Sustainable UK Equity and Responsible & Sustainable UK Equity opportunities Funds are already at the 1.5-degree target on carbon. The challenge for other asset managers is not to be bystanders, but active participants by ensuring their portfolios are also playing their part in helping to reach current and future targets set at COP26.

Sources

1. 'A code red for humanity': Landmark climate report says global warming limit to be hit within 20 years - https://news.sky.com/story/climate-change-global-warming-limit-of-1-5c-to-be-hit-in-next-20-years-landmark-un-report-warns-12376737

2. Cement industry must be regulated to eliminate its carbon emissions, says environmental expert - https://news.sky.com/story/cement-industry-must-be-regulated-to-eliminate-its-carbon-emissions-says-environmental-expert-12370548

3. Thunberg calls out climate impact of fashion brands in Vogue interview - https://www.bbc.co.uk/news/world-europe-58145465