The 12-day summit, which also goes by the name the 2021 United Nations Climate Change Conference, will see world leaders and climate activists descend on Glasgow, Scotland.
Most nations have committed to the Paris Agreement of 2015 and set goals for achieving net zero emissions. The summit is therefore likely to focus heavily on the practical steps nations need to take to achieve this. This is key for investors, as it can tell us the direction that businesses will need to push in, as well as the sorts of new regulations they might face.
Detail from Washington?
Schroders lead portfolio manager, Simon Webber, stated in early October that the United States needed to “firm up” its position on climate change, saying:
“In the coming weeks we need to see actual commitments and legislation that can pass Congress to give credibility to the US plans to decarbonise. That will be a key catalyst for climate change investing.”
This is a key area for investors to pay attention to. It’s important to be aware that the transition to net zero will create opportunities as well as challenges. Some of these opportunities and challenges are likely to emerge as world leaders decide their pathway to net zero.
Proposals currently being discussed in Washington reportedly include further grants and loans to aid the agriculture and industrial sectors in switching to clean energy. Reports also suggest that homeowners may be offered incentives to switch to alternative energy sources.
These developments would be great news for companies like solar providers Enphase Energy (NASDAQ: ENPH) and First Solar (NASDAQ: FSLR). Other renewable energy providers like Ocean Power Technologies (NYSE: OPTT) could also benefit.
Some renewables like these have enjoyed boosts after climate conferences in the past. For example, renewable energy firms like Spain’s Siemens Gamesa Renewable Energy (BME: SGRE) saw their shares climb after the signing of the Paris Agreement in 2015.
More companies could benefit from additional detail. Let’s say President Biden formulates a plan which stipulates that gasoline-powered vehicles must be phased out of use and incentivizes the purchase of alternatives. Such a policy would be great news for electric vehicle manufacturers like Tesla (NASDAQ: TSLA). However, it would be a disaster for car manufacturers who have been slow to embrace alternative fuels.
As such, it would be wise to listen to what the delegation from Washington have to say at COP26. It is also worth noting the influence of the US. With China’s Xi Jinping not attending the summit, the United States will be the superpower in the room.
Carbon disclosures
One hot topic when it comes to environmental issues is corporate carbon disclosures. Most publicly traded companies around the world do not share information about their carbon emissions. However, there is increasing pressure for new regulations which would force them to reveal this information.
For example, the first week of October saw calls for COP26 to yield blanket requirements in a new research paper from economists Patrick Bolton, Stefan Reichelstein, Marcin Kacperczyk, Christian Leuz, Gaizka Ormazabal and Dirk Schoenmaker. The economists’ paper stated:
“Given the urgency of the climate crisis, carbon emissions information about is becoming increasingly important. A requirement for both publicly listed and private companies to report their carbon emissions will be an elementary but essential first step in gauging the progress that individual corporations are making towards the net zero goal.”
In the US, Biden’s plans for mandatory disclosure have been backed by big names like Apple, Uber, Blackstone and BlackRock. But COP26 could see attempts for corporate carbon disclosure to become mandatory around the world.
Institutional investors are driving some of the pressure for this change. While many countries have committed to carbon neutrality, the last couple of years has seen a raft of businesses following suit.
Organisations like the United Nations’ Net Zero Asset Owners Alliance have sprung up. This has high profile members including the likes of Allianz, AXA and Legal & General. For these asset owners, increased corporate carbon emissions disclosure can help them achieve their net zero goals. It will make their job in reaching net zero easier by increasing competition and increasing visibility.
However, that does not mean large companies and asset owners are not keen to lead the charge into carbon neutrality alone.
Speaking at Singapore’s Ecosperity conference in September, BlackRock chief executive, Larry Fink, said:
“If governments are only asking public companies to move forward, and which are mostly large companies, then we’re going to be asking the large companies to be the climate police. And I don’t think that’s our role.”
Even so, it seems like only a matter of time before these large companies will be forced to disclose their carbon footprint. On the one hand, this means companies you have invested in may face fines if they fail to properly disclose their emissions. However, environmentally conscious retail investors will have an easier time in being selective.
Emerging markets
Another key aspect of COP26 to look out for is the summit’s impact on emerging markets. Ahead of the summit, a group of 24 nations argued against forcing all nations to achieve net zero carbon emissions within the next decade.
The group, which includes China, India, Egypt, Pakistan, Saudi Arabia and Indonesia, said pushing this agenda “runs counter to the Paris Agreement and is anti-equity and against climate justice”. It argued that developed nations should shoulder more of the burden. Their point here was that developed nations have already undergone industrialization and have historically been larger polluters.
Developed nations have promised $100bn every year in climate finance to support developing countries. However, it appears that this support might need to increase if developing nations are to accelerate their net zero plans.
But why does this matter for investors? The short answer is that developments for these emerging markets could have a huge impact on how companies can viably operate within them. For example, if emerging economies agree to accelerating their decarbonisation plans, opportunities will be created within the green energy space. Some other sectors, like energy and transport, may face greater challenges.
Ahead of the summit, there have been calls for the G20 to take the lead on this issue. According to The Guardian, Grenada’s climate and environment minister, Simon Stiell, commented: “The G20 are responsible for 80% of global emissions. If they really want to address that, then between them they can. It is really that simple. They have the knowhow to manage it, they have the resources, and they have the responsibility.”
However, this is made more challenging by the fact that some nations, like China, Saudi Arabia, India and Indonesia, are G20 members but still consider themselves developing economies.