“Encouraging development”: Asset managers weigh progress of COP26 climate summit


As COP26 enters its second week, global asset managers are cautiously optimistic about the climate conference’s outcomes on key climate change priorities.

World leaders, financial institutions, and the media have come together in Glasgow for two weeks to focus on the global fight against climate change.

Cutting country-level carbon emissions is a key focus of the summit, with the aim of keeping global warming “well below" 2 degrees over pre-industrial levels. 

“All countries need to realise that the old, carbon-burning model of development is a death sentence for their economies and for our planet,” said Antonio Guterres, Secretary-General of the UN, ahead of the summit’s opening. 

A series of climate-related coalitions have already been formed at COP26, including schemes focusing on ending deforestation, reducing dependency on coal power, and increasing investment into clean technology.

The third-largest national emitter of carbon dioxide, India, also committed to reaching net zero emissions by 2070 in a speech by Prime Minister Narendra Modi at the summit. The country had been one of the last remaining major economies to hold out on making a net-zero commitment. 

The world’s largest asset manager, BlackRock, sees “encouraging development from the ongoing UN climate summit” but notes that risks remain to meeting the goals of the 2015 Paris Agreement.

“In particular, a successful transition in emerging markets (EMs) is key for achieving the global climate goals – and for portfolio outcomes over coming years,” said BlackRock Investment Institute in a recent research note.

All the climate pledges announced at COP26, if reached successfully and on time, would be enough to limit the rise in global temperatures to 1.8 degrees by 2100, according to the International Energy Agency (IEA). 

“This is an improvement from a 2.1 degrees increase in the agency’s analysis just last month. But it is still far off the goal of net-zero emissions by 2050 to limit warming to 1.5 degrees, and many pledges remain to be implemented,” explains BlackRock’s analysts. 

However, there is some scepticism over whether country net-zero pledges will be met. 

Mark Dowding, chief investment officer of BlueBay Asset Management notes that global emissions have risen “notably” since last year’s coronavirus lockdown dip, and that the need to tackle the factors driving climate change has never seemed more imperative. 

“However, one wonders whether commitments will be sufficiently binding and it is always frustrating to observe an abundance of talk over action,” says Dowding.

BlackRock observes that, counting only carbon policies that are already implemented, the world is on-track for a 2.6 degrees rise in global temperatures.

For emerging markets outside of China, which account for more than a third of global emissions, reaching net zero will be “particularly challenging”, notes the asset manager.

BlackRock estimates that EM economies excluding China will need at least USD1 trillion per year in order for the world to achieve net-zero emissions by 2050, which is more than six times current levels of investment. 

So far, private investors have not invested large amounts of capital into emerging markets’ carbon transition, due to the high-risk nature of these investments.

“The only way to mobilise private capital at the scale and pace needed, in our view, is for governments that have the capacity to provide support to absorb some of the potential losses on EM investments,” writes BlackRock’s analysts. Potential tools could include green investment banks, according to the asset manager.

If investment stays low, EM assets could be at risk, as BlackRock sees climate change and the transition to a low-carbon future as a “key driver of long-term asset returns”. 

“EMs are typically more vulnerable to climate-related physical damages, and their growth outlook and asset returns in turn could suffer more. Such a scenario would likely increase our strategic preference for DM equities,” writes BlackRock. 

“Tactically we are neutral EM ex-China equities due to less policy support and a greater risk of scarring in these economies,” says BlackRock. The asset manager notes that China has a greater capacity to finance its own journey to net zero.

HSBC Asset Management’s head of research and responsible investment, Stuart Kirk, notes a “promising start” to COP26, pointing to the push to finance sustainable infrastructure projects worldwide including those focused on renewable energy.

“However you measure it, trillions of dollars are needed to fill the infrastructure funding gap around the world,” says Kirk, who adds that the shortfall is “particularly critical in emerging markets, which don’t yet have the necessary financial and operating expertise.” 

Kirk believes that a “first step” has been taken at COP26 towards solving the infrastructure gap. “Part of the answer might have been given at COP26 this week, with the launch of the FAST-Infra initiative, a global public-private partnership aiming to ensure investment is swiftly channelled towards sustainable projects,” says Kirk. 

This initiative is developing a sustainable infrastructure label, which is the “first step towards a deep and liquid asset class,” and should build confidence in the environmental credentials and resilience of new projects. 

The UK’s development finance institution, CDC, has also announced plans to invest GBP3 billion in emerging markets over the next five years to scale up renewable power, infrastructure, and agriculture capabilities.

“Investors who thought that sustainable infrastructure was an oxymoron now have trillions of reasons to change their minds.”

Other investors cite the fast-growing investment in green assets, such as green bonds, as promising signs for a low-carbon future. 

Bank of America has found “encouraging data” on funding for the green transition. According to its global ESG team, USD1 in every USD10 of global bond inflows year-to-date went towards ESG. Investor appetite for ESG assets in Western Europe was strongest.

Michelle Scrimgeour, CEO of Legal & General Investment Management, said in her opening address at the COP26 conference that it “makes sense to support companies to invest in a way that is future-proofed”. Legal & General is the largest asset management firm in the UK, with almost GBP1.3 trillion in assets under management.

“The good news is that by 2030, up to four-fifths of decarbonisation technology investments could be better value than conventional, emissions-intensive alternatives,” said Scrimgeour. 

Scrimgeour concluded: “COP26 can be the catalyst for agile, bigger, and more effective net-zero actions. So, when we leave Glasgow, our greatest task is to move from pledging to doing – to put into practice what we have all promised. Inaction is not an option.”

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Madeleine Taylor
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