NEI Investments' climate change experts discuss what they hope to see achieved at the landmark conference and how advisors can play a vital role in achieving a net-zero world
COP26 in Glasgow is under way and the build-up has not been short on publicity. Nearly five years on from the Paris Agreement, however, the pressure is on to deliver more than big talk and aspirations.
There is a lot at stake for the 2021 United Nations Climate Change Conference, which will run between 31 October and 12 November, as world leaders build on the agreement to cap climate change at 2 degrees, with a stretch goal of 1.5 degrees. But John Bai, CIO at NEI Investments, told WP the problem with Paris was that while the conference was full of admirable goals, there was little action and, even now, a collective lack of commitment. Glasgow, therefore, offers countries the chance to up the ante and put in place real steps towards a net-zero world.
“It’s not enough just to be aspirational,” he said. “What does 2050 look like? We need actionable plans, we need milestones, and we need to get more serious because we cannot take another day of inaction. It’s that urgent.”
The lead-up to COP26 featured three critical reports. The Intergovernmental Panel on Climate Change paper revealed how the world is currently not on track to meet the Paris goals, while the IEA Net Zero by 2050 report for the first time quantified the investment needed to make this happen at $5 trillion annually from 2030 until 2050. The verdict being that this clearly requires a joint venture between public and private industry. The third key report came from the Climate Action Tracker, which said only one country, Gambia, is currently aligned with Paris, and that the efforts of G7 countries, in particular Canada, is insufficient.
For Bai’s colleague at NEI, Jamie Bonham, Director of Corporate Engagement, the best-case scenario is that, after the Glasgow conference chairs have all been folded back up, COP26 cements global collaboration and a commitment to reaching net zero. Without this, he added, we have no chance.
“Countries can’t go it alone – that’s inefficient,” he said, adding that western countries must adapt to their pledge of $100 billion annually in climate finance to help developing countries.
“Another outcome that has to come out of [Glasgow] is that all the countries who are signed up have to agree to continually ramp up their targets. The targets we have right now are inadequate. There’s an expectation that every five years we up the ante and say, “This is not enough.” Eventually, we’ll be able to make [the requirements] more and more stringent to the point where we’re actually on target to meet the Paris agreement.”
Poorer countries have, however, been resisting climate targets because richer countries have not supported them for the problems they themselves caused, and many have simply not lived up to their financing commitments with their poorer counterparts.
Canada’s role is vital given its poor environmental performance to date. Bai highlighted two critical data points he doubts the average Canadian appreciates. Firstly, that temperatures are rising in Canada three times the annual rate and, secondly, that it’s the only G7 country that has had a meaningful rise in its carbon footprint since 1990.
Bai warned that if Canada continues down the path of relying on fossil fuels as the primary driver of its economy, the country risks becoming uncompetitive in the global marketplace, with a workforce untrained for jobs in a low-carbon world.
He said: “There is a tremendous opportunity for our companies in Canada to be leaders in this new energy infrastructure—and that’s a significant value creator because, as a country, you want to make sure that you’re investing in the skill sets and industries that are growing. It’s very clear from the countries that have signed on to the Paris Accord, this is the direction we’re going in. There’s no question in my mind that if we take bold and decisive action, we can become leaders, which will provide the backdrop of much stronger economic growth, meaningful job creation, and a more sustainable and resilient economy.”
For the investment management community, both Bai and Bonham urged advisors to keep in mind their primary objective of being good fiduciaries of clients’ money. Within this, however, they should want to be part of the solution of a sustainable economy rather than part of the problem. By directing capital towards this aim, and away from bad actors, NEI also helps them achieve risk-adjusted returns in line with their objectives. Just like the collaboration it is hoped will be in evidence at COP26, advisors must work with others to have an impact.
Advisors are in prime position to mobilize capital, on their clients’ behalf, by recommending investments that are aligned to net zero. That could be individual company securities, mutual funds, or exchange-traded funds. This way, fund managers can use clients’ pooled capital to wield greater influence than a single investor would be able to do on their own. A Deloitte study titled 2021 Climate Check revealed 80% of CEOs are in agreement that they should be acting on climate. Asked what would push them into action, the survey revealed that the number one answer was investor or shareholder demands, with 38% of CEOs saying this was the most important factor.
Interestingly, only 15% said a boycott of their business would spark change. Bai said: “If investors put their money where it can not only lower the cost of capital for companies but also have an active voice, we can start effecting change on this very, very important topic.”
That type of partnership between clients, advisors, asset managers and companies forms a powerful force for change. COP26 participants would do well to pick up this baton of collaboration to ensure the world moves in line with the Paris Agreement targets.
