The 2021 United Nations Climate Change Conference (COP26) thus far has seen significant focus on deforestation concerns, the reduction of methane emissions, and decarbonization linked to steel production and coal usage. Kelly Hagg, Global Head of Product Strategy and ESG Distribution, provides a high-level view of these areas and their potential investment implications.
Deforestation: The Other Side of Reducing Carbon Emissions
One of the key highlights from the COP26 climate talks thus far has been the pledge on behalf of more than 100 global leaders to end deforestation by 2030. The group is attacking climate change not only from a “reduce carbon” perspective but also with the goal of ensuring the pieces of the ecosystem that absorb carbon – like our forests – are able to thrive.
- The commitment included Brazil, Indonesia, and the Democratic Republic of Congo, which collectively account for 85% of the world’s forests.
- US$19 billion in public and private funding will be invested to protect and restore forests.
- Under the agreement, 12 countries including Britain have pledged to provide £75 billion (US$12 billion) of public funding between 2021 and 2025 to help developing countries, including efforts to restore degraded land and tackle wildfires.
- More than 30 financial institutions with over US$8.7 trillion in assets under management said they would make "best efforts" to eliminate deforestation related to cattle, palm oil, soy and pulp production by 2025.
Based on these commitments, we expect to see a number of asset managers reevaluate their investment policies and ability to invest in controversial areas related to deforestation in 2022. As with all things related to the carbon transition, tracking progress with meaningful data will be key in assessing success rates and areas of risk and opportunity.
Reducing Methane Leaks: One of the Worst Offenders in Climate Warming
European Commission President Ursula von der Leyen announced in Glasgow that around 100 nations and parties have signed on to a global pledge to cut methane emissions by 30% of 2020 levels by 2030. Methane, which is the main component of natural gas, is an extremely potent greenhouse gas with 80 times more warming power than carbon dioxide.
In line with this commitment, President Biden announced new U.S. regulations from the Environmental Protection Agency (EPA) that would push oil and gas companies to step up their monitoring, detection, and repair of methane leaks. Another piece of the proposal includes US$775 million in funding to incentivize oil and gas companies to stay below a stated threshold of emissions, and to levy a fee on those that emit methane above that mark.
From an investment perspective, those companies that don’t abide with the new regulations could face fees, while those that adapt quickly may present more attractive opportunities. Again, data will be key in analyzing progress, particularly for investment professionals and investors seeking to make allocation decisions critical to advancing the capital market’s part of the climate change equation.
Decarbonization: Steel and Coal Commitments
Britain, the U.S., India, China, and the EU were among 40 nations who pledged to increase production of so-called near zero-emissions steel around the world by 2030 at the COP26 climate summit. As one of the most difficult industries to “take green,” the steel industry continues to be one of the world’s top carbon dioxide producers. Alternatives to the coal needed to produce steel aren’t yet widely available. Steelmakers need to take urgent action on producing less carbon in order to meet the Paris Agreement on climate change, and now they have even more incentive.
On Wednesday, the issue of coal usage, the single biggest contributor to climate change, was addressed. This saw more than 40 countries committing to shifting away from coal. These included major users Poland, Vietnam and Chile but importantly did not include some of the world's biggest coal-dependent countries, including Australia, India, China and the U.S.
Those that did sign committed to ending all investment in new coal power generation domestically and internationally, and agreeing to phase out coal power in the 2030s for major economies, and the 2040s for developing nations. Corporates also signed up to the pledge, with several major banks agreeing to stop financing the coal industry.
This development was presented as a step forward, but the countries not pledging support is meaningful. The recognition of the phased approach needed for developed versus developing economies is important. Janus Henderson’s Global Head of ESG Investments, Paul LaCoursiere, chairs a panel in Glasgow on Monday addressing this important topic. The debate, “Is decarbonization an opportunity for emerging markets?” will include insight from leading figures in academic research, national energy policy, bond issuance and corporate energy.
Emerging Market: Countries that are transitioning away from being a low income, less developed economy to one that is more integrated with the global economy and is making progress in areas such as depth and access to bond and equity markets and development of modern financial and regulatory institutions.
