Schroders: Expectations of investment experts for COP26

October 28, 2021

What are the expectations in the run-up to the COP26 climate conference from Schroders' experts - sustainability specialists and fund managers who invest in climate change trends. They answer key questions and highlight nuances for investors to consider.

What is the significance of COP26 and the emergence of the concept of 'just transition'?

Andy Howard, Global Head of Sustainable Investment:

'COP26 could prove a make-or-break moment for global climate diplomacy. Pressure has been intensifying and we could see a real step change in climate policy at this year’s meeting.'

'The principle of a ‘just transition’ – ensuring the transition to a low carbon global economy does not unduly disadvantage weaker economies or parts of societies – has also gathered pace. As a global challenge, climate change requires coordinated action. Through that lens, the just transition is both a goal and a requirement: global agreement across policymakers representing every part of the global economy will not be possible unless all consider the plan fair.'

'Failure to reach such an agreement has been the major headwind to faster action at past global conferences. As a result, we expect the need for global coordination and support to less developed economies to be a major component of negotiations in the run up to, and throughout, COP26.'

What are the objectives of COP26 and what should investors be looking out for?

Kate Rogers, Head of Sustainability, Wealth:

'A successful Conference would see both meaningful commitments and international collaboration. A powerful way to incentivise businesses to decarbonise would be an agreed carbon price. This would charge emitters based on the amount released into the atmosphere, aiming to put the cost back to the source.'

'Many countries already have some form of carbon pricing, but in order to be effective we would need universal adoption. Could COP26 be that opportunity? Although a major positive in the fight against climate change, the implications for investment markets could be significant. Our Carbon Value at Risk model applies a carbon price of $100 per metric tonne (the level suggested by the UN Global Compact in 2016) and finds 14% of the MSCI World’s earnings at risk.'

How will the dynamics between China and the US affect the negotiations?

Simon Webber, Lead Portfolio Manager with 15 years of investment experience in climate change trends:

'Climate is one issue where the US and China seem to want to cooperate. The question is whether the relationship is good enough to have a supportive set of announcements on climate change at COP26.'

'We need to see real detail on China’s policy position, given that last year they committed to reaching net zero by 2060. But the US position also needs to be firmed up and supported by detailed policies to implement change. 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.'

'As well as the long term benefits of preventing dangerous climate change, public concern has risen considerably in both countries, creating a stronger political incentive for both countries to work together on climate action. One of the drivers of China’s recent regulatory changes is that people are unhappy with pollution and inequality. China has got much tougher on a number of polluting industries recently and there are clear signs that environmental pollution and standards are being prioritised in a way that they weren’t three or five years ago.'

'There is an alignment of interest between China and the Biden administration on this. It’s just whether or not the trade issues get in the way of it.'

What has the highest priority?

Saida Eggerstedt, Head of Sustainable Credit, and a specialist in carbon-neutral investing:

'I would like much more actionable commitments by all governments towards carbon neutrality. It is absolutely welcome that many countries have set themselves targets by reaching net zero. But to meet the science-based pathway of limiting global temperature rise they need to act in the shorter to medium term. Disclosure and governance on how countries will reach carbon neutrality, and to include the private sector to commit, are key. Aside from that, I would also like to see allocation of financial resources and technical help to developing countries and endangered areas, immediately and urgently.'

What will be the impact on markets?

Jonathan Fletcher, Emerging Markets Fund Manager and Head of EM Sustainability Research:

'I’m really optimistic with regards to COP26, and the opportunity this brings to address the world’s climate challenges. As an investor in emerging markets, I’m all too aware of the impact of climate change. Of the top ten cities most vulnerable to climate change, nine are in emerging market countries. Air quality is a concern across many emerging countries. Of the top 50 cities ranked by highest air pollution, 45 are in EM. The need for coordinated action, and financial support to help these countries, is absolutely fundamental.'