ESG Focus | Nov 30 2021
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COP26 Hands Transition To Big Capital
COP26 may have appeared a fizzer to many observers but the outcomes point to another reality – big capital has got this one – and it’s a whopper.
-Investors to carry the transition until the next COP
-Outcomes focus on market regulation
-China appears set to take the lead
-Morgan Stanley predicts focus to shift to non-climate ESG thematics in 2022
By Sarah Mills
After what appeared to be much ado about nothing, many COP26 observers emerged perplexed: global warming was to be confined to 1.8 degrees Celsius according to the International Energy Agency, not the 1.5C previously mooted; other forecasts put the figure averaging 2.4C; and Europe showed signs of backtracking on gas.
But in a financialised world, it is big capital calling the shots and COP26’s indications of limited global central regulation suggests big capital is confident it can carry the transition from here.
Underscoring this proposition, one of the most material statements of the period emerged not from the COP26 but from the investment community.
The Glasgow Financial Alliance for Net Zero, which represents 450 banks, insurers and other asset managers, and is led by former Bank of England chief Mark Carney and billionaire financier Mike Bloomberg, announced US$130trn in new commitments.
The most material global COP26 outcomes also focused squarely on markets, the implication being that sovereign nations will be more than willing to compete on the regulatory front in the race to transition.
The three most material outcomes from the October/November period for global markets include:
-The unleashing of the world’s carbon markets
-The agreement to establish an international reporting standards board
-The introduction of methane into global climate commitments
The upshot is that these commitments will take a year or two to bed down, and some analysts expect the climate investment theme will be put on hold in FY22 and that big capital will shift its focus to other environmental and social imperatives such as circularity, biodiversity and social themes (more on that later).
Financialisation wins the day
Meanwhile, there are US$130trn big ones in play.
For governments to stay in the transition race they will need to issue debt, and most of the world’s debt is to be directed to sustainable finance.
The notable lack of rich-world support for developing countries at COP26 (save for mitigating physical climate risks) also points to the expectation that investors will drive development in emerging markets.
All this suggests growing momentum towards global financialisation and climate colonisation.
So to assume that weak climate commitments at COP26 reflects an easing of global resolve on climate would be a mistake. Remember, the name of the game is “Who Cares Wins”.
As Bloomberg Green writes: “Public shaming hasn’t seemed to move the needle. But money might”.
Might is an understatement. In the context of the transition, money is might and might is right. And the funds will flow. Forecasts vary wildly but the numbers are massive.
The Energy Transitions Commissions forecasts more than US$1trn in investment is needed to reach net-zero emissions by mid century.
The Organisation for Economic Co-operation and Development says US$6.9trn will be required annually this decade to meet Paris Agreement forecasts.
By 2025, Morgan Stanley estimates sustainability/ESG assets under management will triple to US$6.5trn, representing a compound annual growth rate of 29% between 2020 and 2025.
The expectation is this will be driven by “Beyond Europe, Beyond Environment and Beyond Screening” themes.
2022 may be a year of adjustment for investment management industry
But as usual, timing is critical, and analysts took the mood of COP26 to suggest the transition pace is generally on track and that the focus will be on bedding down the disclosure nets and carbon-market infrastructure over the next year.
Brandywine Global’s Around the Curve in its 2022 ESG Outlook says the legacy of Glasgow depends on whether support for climate change mitigation and adaptation reaches critical mass in 2022.
“COP26 and its resulting agreements should drive 2022 trends within the investment management industry,” posits Around the Curve’s blog.
“We expect net positive improvements across three themes: data, collaboration, and finance … they should benefit from strengthening momentum within the asset management industry next year and beyond.
“Investors do not necessarily need more data providers; we just need standardisation and consensus among them.
“That level of consistency will require extensive co-ordination across the public and private sectors, particularly from entities that collect and report data, whether they are non-governmental organisations, government agencies or corporations.”
So Around the Curve spies opportunities for relevant, timely data to assess risks.