Market Views: COP28 key takeaways for Asian investors

The recently concluded COP28 reached a historic global climate agreement on transitioning away from fossil fuels. What does it mean for Asia's institutional investors?
Market Views: COP28 key takeaways for Asian investors

Dubai played host to this year's United Nations Climate Change Conference, popularly known as COP28, which drew to a close on Wednesday after two weeks of intense deliberations.

The conference concluded on a promising note with an agreement by 198 governments to embark on “transitioning away” from all fossil fuels.

Although the UAE Consensus does not explicitly mention “phasing out” fossil fuels, it is still a historic milestone as it marks the first-ever collaboration among governments across the world to propelling cleaner alternatives to achieve global net-zero emissions by 2050, which goes beyond previous efforts that only focused on coal or individualised state efforts.

It also provides context for each country to consider the 1.5 degrees Celsius warming limit in line with their respective national circumstances and capabilities.

Asia has begun its sustainable transition, with policies and regulations underway. ESG-labelled bond issuance represented a quarter of all Asian US dollar issuance last year and is expected to continue, according to data from Robeco.

In the wake of COP28's landmark decision, this week we canvassed the views of fund managers and ESG experts in Asia on the most notable outcomes from the climate summit, and the agreement's implications for asset owners and managers in the region.

The following responses have been edited for clarity and brevity.

Thu Ha Chow, head of fixed income Asia

Thu Ha Chow

Despite the controversies, COP28 delivered a strong message, with a call to “transition away from fossil fuels”. Yet it is sobering to remember that pledges do not equate to results.

For Asia, the broader scope and effort to mobilise capital during COP28 is good given the vast capital required and the enormous economy-wide adjustment.

Asia is challenged as it remains vulnerable to climate-related risks while still heavily reliant on fossil fuels and experiencing growing emissions. However, it offers new opportunities to make a higher impact by accelerating the region’s energy mix while reducing its carbon footprint.

The fact that Singapore, Hong Kong, Shanghai, and Tokyo are keen to foster transition financing in the region will be pivotal to global decarbonisation.

Specifically, wins relevant to Asia at the COP28 include the loss and damage fund with pledges of $750 million to help lower-income countries cope with the loss and damage caused by climate change.

Meanwhile, the double-up in renewable and double down on energy efficiency is positive for a region with growing energy demand.

Also, the pledges by 152 countries to include farming and agriculture emissions in their national plans are crucial for Asia's economy considering its rich natural capital and reliance on agriculture.

Moreover, there is a $2.5 billion pledge to protect nature and biodiversity through the establishment of the Global Biodiversity Framework Fund, potentially leading to $10 trillion worth of new business and some 400 million new jobs.

Lastly, pledges to increase financing to cities as part of climate action are also critical given the growing number of Asians living in cities that are vulnerable to rising sea levels and storms.  

Natalia Rajewska, global head of sustainable investment
Nikko Asset Management

Natalia Rajewska

Admittedly, the industry expectations from COP28 were low and whilst a lot is still uncertain about the world’s ability to meet the Paris Agreement - progress has been made.

Whilst COP remains a predominantly policymaker-focused political gathering, this year we have an opportunity as an asset manager to draw actionable industry insights back to the investment floor – especially around renewables, energy transition and new investment opportunities.

Although investors might have been cautious in the past about follow-through from energetic COP announcements, the pace of traction on new deals might be more pertinent. This also has to do with the time horizon of some of the announcements, which allows better alignment with a typical investment horizon.

Whilst the final wording might have fallen short, the new measures at COP28 bring confidence and substance to goals to triple renewables capacity and double energy efficiency by 2030. In practice, the ripest opportunities in renewables may continue to be in emerging markets.

At the same time the COP28 agreements were a compromise, they give a strong signal to the market that we are as a society transitioning away from fossil fuels in energy systems.

We expect this will further galvanise efforts to not just define, but also execute and importantly finance energy transition, although many challenges are yet to be solved. The devil is always in the details – how we are practically going to get there, especially for the emerging nations, given the substantial capital and infrastructure requirements needed to make the pivot.

Marc Franklin, senior portfolio manager, asset allocation, Asia
Manulife Investment Management

Marc Franklin

We would expect fossil fuel exploration and production investment and incentivisation to continue to be constrained in Europe and North America, whereas in Asia and the Middle East to be less compromised, highlighting divergences in the level of political imperative and investor pressure.

Accordingly, the energy sector in equities markets such as Europe is likely to see an ongoing headwind from investor exclusion.

However, one sector we believe has the potential to be a significant beneficiary of COP28 is nuclear energy or uranium. Some 20 countries, including the US, pledged to triple nuclear energy by 2050. This support will be a strong tailwind for nuclear power generation companies as well as producers and refiners of uranium, a critical input for nuclear energy.

Nuclear is a low-carbon technology. It doesn’t release carbon dioxide and there are no methane leaks in the fuel sourcing. It also provides base power which can help to solve challenges with the intermittency of wind and solar.

However, there is a trade-off between the low-carbon benefits and introducing risks around radioactive waste, weapons, and health risks from accidents. Moreover, nuclear tends to be a relatively expensive source of power generation. So, whilst it can be a good option for developed countries, it can prove too expensive for developing nations.

Tomomi Shimada, lead APAC sustainable investing strategist
JP Morgan Asset Management

Tomomi Shimada

The key takeaway was that the final COP deal called for a transition away from fossil fuels, after much intense debate. The deal’s suggestion that the role of fossil fuels in the global economy should eventually be eliminated offers increased certainty to companies and investors about the future global energy mix.

The agreement on a pledge to triple global renewable energy capacity and double the rate of energy efficiency improvements by 2030 further supports this.

From a regulation perspective, the agreement to advance the adoption of the International Sustainability Standards Board’s (ISSB) sustainability and climate-related reporting should help to increase the availability of decision-useful non-financial data for investors. 

On the other hand, although there was some progress around improving transparency, no clear agreement on operationalising a global carbon market had been reached under the official negotiations and key decisions have been pushed out to 2028 or later.

Greater integrity in the voluntary carbon market could give investors greater confidence to use carbon credits in their portfolios to offset emissions and contribute to real-world carbon removal.

Thomas Höhne-Sparborth, head of sustainability research
Lombard Odier

Thomas Höhne-Sparborth

Much of the focus in reflections on COP28 will, understandably, be on the first-ever agreement to transition away from fossil fuels. That, indeed, must be seen as a significant symbolic achievement and shift in tone, while at the same time immediately raising the question of implementation and how that objective will become reflected in national action plans.

For investors, we believe the COP28 outcomes reiterate and reinforce the unstoppable nature of the economic transformation – the speed and scale of which is still underestimated by markets.

The move to a renewable, electrified energy system based on non-depleting assets, lower operating expenses, higher energy productivity, and smarter energy grids will not just transform the environmental footprint of the system, but will lead to profound shifts in value chains, profit pools and investable opportunities.

We believe the disruption will extend well beyond energy systems. COP28 increased emphasis not only on energy, but also on food systems – with 130 countries having committed to integration action plans on food systems (a $15 trillion system and responsible for one-third of global emissions) into national action plans, likely to drive interest into new agricultural technologies (such as precision agriculture), nature-based solutions, and changing diets.

Interest in nature has also been apparent throughout COP28, with nature acting as a major piece of the carbon puzzle and, today, an asset that is largely unpriced yet likely not to remain so.

For investors, the opportunities are hence plentiful. A reversal of millennia of economic development built around extractive models, towards a net zero and regenerative economic model, amounts to arguably the most extensive and fastest industrial and infrastructural revolution in our joint economic history – and it will change everything.

Irene Chu, ESG advisory partner
KPMG China

Irene Chu

There are two main areas of focus for the financial industry: energy transition will accelerate, and financing activities will need to be realigned to help economies and businesses reach net zero in line with the Paris Agreement; unlocking private finance for climate resilience in emerging markets.

On both energy transition and climate resilience, there’s a clear funding gap. The financial industry is expected to play a key role in driving and supporting a just energy transition and net zero ambitions of different industries.

To do so means asset owners and managers need to have a clear decarbonisation strategy, roadmap as well as Paris-aligned targets by embedding sustainability, climate and nature risks in their investment process and decisions. 

In order to have a just and equitable transition, instead of moving away from fossil fuel industries, there are opportunities for asset owners and managers to engage with the industries in scaling finance for clean and renewable energy adoption.

Challenges would be the readiness of the financial industry to understand climate and nature risks and price them appropriately.

There are quite a few initiatives and alliances launched during COP on capacity building for the finance industry. There’s also a consensus around the need to have common sustainable finance and transition finance frameworks and taxonomy as well as more established infrastructure to facilitate blended finance to scale investments in transition finance.

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