As the 26th UN Climate Change conference (COP26) concluded in Glasgow, it was clear that this ambitious conference had produced developments that were not only high in number but also in complexity.
Although providing a comprehensive list of all developments is beyond the scope of this short commentary, we outline some select highlights that we believe are particularly relevant for the financial services industry.
One of the most significant outputs of COP26 — even if not at first as eye catching as some other carbon reduction pledges and headlines — is the establishment of the new International Sustainability Standards Board (ISSB). Overseen by the International Financial Reporting Standards (IFRS) body, the ISSB will develop a baseline of global standards for sustainability-related corporate reporting. With a multi-locational presence across several key markets — including a board seated in Frankfurt and supporting offices in Montreal, amongst others — the ISSB will adopt a climatefirst approach to standard-setting and will leverage existing global frameworks, notably the Value Reporting Foundation (formerly SASB) and TCFD. As a leading advocate for standardisation in line with SASB, this is highly welcomed by State Street Global Advisors. This will build upon draft documents that have already been produced, but it may be some years before we have fully-fledged global standards. The target for initial release is forecast to be the first half of 2022.
This development is significant, as for the first time consensus has been reached between investor-focused sustainability disclosure organizations to support the ISSB. We now have a realistic path to achieve a single global ESG reporting standard; something the market has long desired.
Under the Glasgow Financial Alliance for Net-Zero, asset owners and managers (including State Street Global Advisors) representing more than USD 130 trillion in capital have pledged to put the global economy on a path to reducing greenhouse gas emissions across their portfolios.
Even if many of those pledges have not resulted in concrete plans just yet, COP26 moved the focus from making promises to delivering promises. Although certain business activities will be under increased scrutiny (see, for example, our comment on coal below) the Net Zero Asset Management Initiative goes beyond simple divestment. It requires delivering credible decarbonization plans, policy development (across many different sectors and coordinated across regions) and rigorous stewardship practices.
Since in several sectors technology to operate without emitting carbon does not currently exist, active engagement with public companies will be more important than ever, meaning that COP26 has certainly ensured that the financial focus on carbon-heavy assets will only increase.
There is growing recognition that climate risk is not only about emissions but also about protecting biodiversity and the associated environmental and financial risks stemming from biodiversity loss.
A key deal struck at the summit outset between more than 130 countries — including the US, the UK, China, Canada, Brazil, Russia, Indonesia — backs a plan to end deforestation and land degradation by 2030. This is important not only because reforestation helps with decarbonization, but also because the deal puts a spotlight on the use of natural resources in commercial activities. This will have implications for companies in related fields as they look to find viable alternatives, in a similar manner as fossil fuel phase outs have driven changes in other sectors.
In the spirit of “what gets measured/reported gets managed”, the Taskforce on Nature-related Financial Disclosure (TNFD) is now up and running. (State Street is a member of the TNFD forum.) Experience from the Task Force on Climate-related Financial Disclosure (TCFD) may help accelerate the development of disclosure standards related to natural capital.
Meanwhile other coalitions such as the Sustainable Markets Initiative (SMI) — where State Street leads the asset owner and manager task force — are actively encouraging investments in natural capital.
With COP26, what has been advocated by many environmentalists for a long time has finally resulted in specific commitments: 23 countries pledged to end the use of coal and to stop financing coal plants outside their borders.
One particularly interesting coal-related development was the announcement of a deal between France, Germany, the US, UK, and EU: they committed to partner and help fund South Africa’s transition away from coal. Currently 70% of South Africa’s power generation is from coal and, with over 200,000 workers, it is a critical sector for employment. So, even though the size of the deal is not enormous in absolute terms (the countries have pledged $8.5 billion) it could be a model that catches the eye of other governments for application elsewhere
105 countries joined the Global Methane Pledge, a US/EU-led commitment to cut global methane emissions by at least 30% from 2020 levels, by 2030. Methane is a by-product of a number offossil fuel related activities, but it is notably a by-product of natural gas, a fossil fuel that is viewed as a needed bridge energy source.
This pledge will increase the pressure on natural gas companies and will result in additional capital expenditures. Moreover, where natural gas would have been seen as the next best alternative to, for example, coal, the new rigour around methane could trigger a leapfrog to renewables in some situations.
After six years in the making, measures for a new global carbon market were put into place by the UN climate summit. Although world leaders fell short of agreeing an international carbon tax, meaning carbon prices will be maintained locally, the agreement on scaling up global carbon markets should help address the problem of double-counting and to ultimately price carbon as a negative externality.
Double-counting has been a thorny issue in the world of carbon markets since their inception, and in particular since organisations started making claims about their emissions being voluntarily offset with carbon credits.
The summit made clear that, although the onus is on governments to establish the rules of the game, private markets, which of course includes asset owners, banks and asset managers, will have to be part of the solution and as a result the concept of “blended finance” will move up the agenda.
Private markets offer many potential benefits because of the short lines of communication between owner/investor and manager and the ability to make changes to a business with fewer concerns about short-term results. This could make de-carbonizing decisions easier (and attractive in light of potential sale of businesses into the public markets).
However, in order to achieve a real breakthrough in the private market space a more universal commitment to data disclosure will be required, along similar lines to listed companies – a commitment that might arise as a result of pressure from regulators.
Central banks may be helpful in this, given their lens on banks’ lending and climate exposures. The previously mentioned ISSB could also prove helpful in that regard. With State Streets involvement in the Sustainable Markets Initiative (SMI) we hope to play our part in fostering development into the right direction.
Led by the UK, more than 40 nations including the EU, China, India and the US, will impose standards, incentives and rules to create markets for new technologies that will support the climate transition.
Supporters of the Glasgow Breakthrough agenda include nations that collectively represent more than 70% of the world economy. The plan aims to scale development of clean power, zeroemission vehicles, near-zero-emission steel, low-carbon hydrogen and sustainable agriculture by 2030. Mechanisms include pooling research and development, coordinating investment and spurring support from private investors.
This will also have implications on how companies will look at receiving capital market financing. Green/climate bonds have had one record year after another and this trend will continue as, amongst other things, the Glasgow Breakthrough can be seen as an accelerator to shift more focus on new green tech that needs financing, in the process creating tremendous opportunities.
India, the world’s third-largest carbon emitter, has made its first net-zero pledge in targeting netzero by 2070. Although this is not in line with most other countries’ pledges to achieve net-zero by 2050 it is still a notable development. Additionally, India has pledged to meet 50% of their energy requirement from renewables by 2030, up from 40%. However, they fell short of sharing a clear plan on the exact emission reduction strategy and India also did not participate in the formal phasing-out commitment on thermal coal.
An important consideration is the incentive for the geopolitical superpowers (especially the US and China but also Europe) to stay on top of the race to become a climate leader. This is especially important as most countries are net energy importers under the current fossil fuel regime. This is underscored by the unexpected announcement by China and the US who have agreed to boost climate co-operation over the next decade.
All in all, similar to other disruptive shifts (such as digitalization), the transformation to a low-carbon economy will come with enormous opportunities. Investors should be on the lookout since one can interpret of what’s ahead as a massive economic depreciation exercise for carbon heavy assets and a substantial appreciation exercise for carbon-neutral assets. (For more on this, see Spiralling Disruption: The Feedback Loops of the Energy Transition).
For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create costeffective solutions. As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s fourth-largest asset manager* with US $3.86 trillion† under our care.
* Pensions & Investments Research Center, as of 31 December, 2020.
† This figure is presented as of 30 September 2021 and includes approximately $59.84 billion of assets with respect to SPDR products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.
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Exp. Date: 30/11/2022