By Alan Hsu, Global Industry Analyst at Wellington Management

The views expressed are those of the author at the date of publication and are subject to change. Other teams may hold different views and make different investment decisions. Forward-looking statements should not be considered as guarantees or predictions of future events. While any third-party data used is considered reliable, its accuracy is not guaranteed.

While the United Nations Climate Conference of the Parties (COP26) ended with mixed results, we believe the outcomes are more positive than the media has portrayed. We think the resulting Glasgow Climate Pact will serve as a framework for accelerating coordinated action to limit global warming and avoid the worst effects of climate change.

More ambitious top-line targets: the Parties agreed to limit global temperature rise to 1.5°C (below the original 2°C goal) and reduce emissions by 2030, rather than 2050.

Going beyond CO2: the focus has expanded to the reduction of methane, a much more powerful warming agent than carbon dioxide.

Phasing out coal: the Parties agreed that unabatedcoal must become a smaller percentage of the global energy mix sooner than previously agreed. For the first time at a COP event, fossil fuels’ contribution to the climate crisis was explicitly acknowledged.

Robust climate finance: from the public sector, governments committed an additional US$100 billion per year for the next two years to fund climate-resilience projects. In the private sector, 220 companies have pledged to align US$57 trillion with net-zero goals by 2050. Recognising their important role in repricing climate risk, it was significant to see more than 450 capital-markets firms form a new affiliate organisation, the Glasgow Financial Alliance for Net Zero (GFANZ), with the stated goal of aligning lending with net-zero emissions ambitions.

Carbon credits: the Parties agreed that carbon offsets can be used to meet climate pledges.

The media has criticised the Parties for failing to provide sufficient details for the implementation of these goals and for watering down some of the original goals set out by the Paris Agreement at COP21 in 2015, and we don’t entirely disagree. Pulling emissions targets forward to 2030 results in implied reductions of just 45% from 2010 levels, and the Parties acknowledged that global emissions would continue to rise until at least 2025. No wonder there is the perception of a worse outcome from a well-intended change.

And, although coal came under greater scrutiny, the language in the Pact was softened at the last minute from the “phasing out” to the “phasing down” of unabated coal. Wording on bridge fuels such as natural gas also became more accommodating. Finally, while endorsing carbon offsets to facilitate global carbon reduction is constructive, offsets are not of uniform quality and can be challenging to commoditise, arguably limiting their efficacy. In addition, not every country has strengthened its carbon-reduction goals, which is ultimately what matters most.

Investment takeaways

Despite the shortcomings of COP26, it is now clear that global decarbonisation is a global, secular, comprehensive trend that will affect nearly every sector in some way. Countries and companies have pledged trillions of dollars to achieve increasingly aggressive decarbonisation objectives. Climate adaptation is finally recognised as a significant investment theme and a form of insurance against the effects of climate change. As a result, discount rates for mitigation and adaptation solutions should adjust to reflect an expanding market in which demand outstrips supply. And, as carbon credits become more widely used to support the low-carbon transition, performance and valuation gaps between climate-advantaged and climate-disadvantaged assets should widen.

I believe the following may be long-lasting outcomes of the Glasgow Climate Pact:

  • Decarbonisation will continue as scalable renewable energy takes share from hydrocarbon-based power, as demand-side efficiency technologies are increasingly adopted and as low-carbon transport options reach critical mass.
  • Carbon markets will keep evolving, resulting in broader stakeholder participation and, ultimately, a more efficient price for CO2.
  • Countries may rethink the role nuclear power can play in reaching the 1.5°C target.
  • We will see bold innovation in carbon capture and other climate adaptation and mitigation solutions over the next 20 years as capital markets align to support groundbreaking advances.

While COP26 did not feature a single breakthrough decarbonisation innovation, companies from a range of industries are actively developing solutions, including in sustainable agriculture; carbon capture and storage; and algae, biomass and carbon tracking. For innovators developing climate technologies, COP26 confirmed that scalable solutions will have enormous global end markets.

Overall, COP26 succeeded in making significant progress on clarifying climate end goals and underscoring the urgency in meeting them. Much work remains. From here, what governments and countries do matters far, far more than what they say.

Only time will tell whether COP26 will catalyse meaningful, necessary action on climate change.

Notes:

1 Unabated is defined by the International Energy Agency as the consumption of fossil fuels, such as coal, in facilities without carbon capture, utilisation and storage.

Disclaimer:

This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities.

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