This year's United Nations climate summit featured visits by world leaders, proposals by business leaders, and negotiations by nearly 200 nations about the future of global action on climate change.
The proposition of a ‘just transition’ was a highlight in discussions at the recent COP 27 held in Egypt. Richer governments and nations for the first time agreed to set up a fund to provide payouts to developing countries that suffer "loss and damage" from climate-driven storms, floods, droughts and wildfires.
The discussions also showed the financial world has so far failed to provide enough money to help emerging economies effectively cut their carbon emissions.
There is a plan to reform leading public lenders such as the World Bank so that they can take more measured risks and lend more money. That could, in turn, encourage private investors to join the mission.
Of note was the landmark deal between countries such as the United States and Japan, and private investors to help Indonesia shift away from coal-fired power generation at a faster rate.
AsianInvestor invited experts from the asset management industry to highlight how the outcomes of COP27 will shape investment in Asia, and which sectors present the most ESG-friendly investment opportunities.
The following responses have been edited for brevity and clarity.
Jerry Goh, investment manager of Asian equities
Data presented in COP27 showed the continued urgency for the world to act together, given more severe extreme weather events for instance. While there was some progress on tackling the climate issues such as the discussion and initial establishment of a loss and damage fund, progress seemed to be stagnating on a majority of other issues, in particular, on progress monitoring. There remains uncertainty and no direct way to monitor, track, and measure the outcomes of previously committed deals and pledges, such as emissions reduction or investments budgets towards climate.
Given the backdrop, and abrdn’s approach towards climate investing, we understand the urgency of climate change, and will continue to invest prudently in companies that demonstrate climate resilience, and offer solutions to the climate problems that the world is facing today. We will continue to engage companies in terms of being mindful of climate risks and opportunities and encourage our portfolio companies to mitigate and transit their business models.
I believe ESG investing will continue to pivot towards pockets of debate at the country, regulatory and corporate levels, which I believe could be a good way to influence and track on climate progress, though this might mean a slower march towards the 1.5 degrees scenario. These dialogues would likely be intensified at the grassroots level.
Xinting Jia, ESG investment strategist, APAC
State Street Global Advisors
COP27 will continue to shape ESG investing with a focus on decarbonization and a ‘Just Transition’. For decarbonization, the emphasis will continue to be mitigation and adaptation. In terms of mitigation, countries need to work in unity to limit global warming to well below 2 degrees, which will require bold actions from all parties. COP27 reiterates the importance for countries to fulfil their promises to deliver the objectives of the Paris Agreement.
For adaptation, countries have to make ‘crucially needed progress’ and demonstrate resolve towards enhancing resilience and assisting the most vulnerable communities. The finance sector will play an important role to support actions taken to achieve the mitigation and adaption goals. For a ‘Just Transition’, more work from market participants is needed to focus on collaboration which will require active participation from all stakeholders, especially from African countries that are impacted increasingly by climate change.
For investors looking for an active and fundamental approach to climate transition investing, rather than specific sectors, we suggest focusing on assessing companies in their respective industries on three key areas: climate transition readiness, financial and physical climate risks and climate-enabling opportunities, including green products, services and solutions. These insights form the foundation of our climate investing efforts.
Dr. Sun Mingchun, chief economist
The various initiatives at COP27 to accelerate the shift away from fossil fuels, especially those to help poorer countries scale back their use of fossil fuels, will likely boost investments in the renewable energy sector significantly in the coming decade. As the scales of production capacities increase, the efficiency and viability of renewable energy technologies will be further enhanced, providing ESG investors with even more economic incentives to invest in technologies related to solar, wind, green hydrogen, energy storage and transformation, and emission reduction, amongst others.
In addition, the consensus from COP27 that the world is behind the curve in terms of reining in carbon emissions and meeting the targets set in the Paris Agreement also has implications for ESG investors. It suggests that we will not only need to catch up in the future in terms of cutting emissions more aggressively, but also need to rely more heavily on carbon capture and storage technologies to reduce the vast stock of greenhouse gases (GHGs) already emitted, in order not to fail the 1.5°C target. To ESG investors and market participants, these areas of technological developments also offer significant investment opportunities.
Jane Ho, head of stewardship Asia Pacific
BNP Paribas Asset Management
The biggest breakthrough at COP 27 was the establishment of a "loss and damage" fund to support developing nations that are most vulnerable to natural disasters linked to climate change.
Whilst there are remaining questions over the details, we expect an increase in foreign direct investment in energy infrastructure and climate resilience projects. Investors will need to be more creative about how we finance these, exploring options for blended finance, since many previous projects were deemed “unbankable”.
Crucially, the fund is recognition that we need to re double our focus on a just transition. Investors will need to step up engagement on this important issue with companies, as well as other stakeholders, and work together on the right framework and approach for different impacted communities.
This is also integral to the $20 billion agreement that Indonesia signed, first announced at the G20 summit in Bali, which took place alongside Cop 27. The Just Energy Transition Partnership (JETP) aims to help developing nations transition away from fossil fuels in a fair way, leaving no one behind.
Fabiana Fedeli, CIO equities, multi asset & sustainability
A key focus of this year’s COP is on establishing a framework for compensating less developed countries for climate-related ‘loss and damage’ due to the historic build-up of emissions, with agreement needed on a mechanism or facility through which funding can be implemented. The Sharm El Sheikh Guidebook for Just Financing, unveiled at COP27, offers a framework aimed at accelerating flows of climate finance, in particular towards developing economies. Focus now needs to be on rebuilding momentum and providing scalable solutions to address the collective shortfalls.
While we may not see additional near-term commitments on emissions reductions coming out of COP27, due to the current energy crisis, we are likely to see more ambitious longer-term projects. For example, the recent agreement between the EU, US, UK, Japan, Canada, Norway and Singapore to develop an international market for fossil energy that minimises flaring, methane and CO₂ emissions across the value chain.
Active asset managers, for their part, have been evolving their capabilities to meet the growing needs of investors. Certainly, financial institutions have a role to play, but coordinated and cooperative action across sectors, including governmental and non-governmental actors, is also required to translate commitments into action.
Lucian Peppelenbos, climate and biodiversity strategist
The COP27 climate summit did not yield much in terms of concrete solutions. The 1.5 °C target barely survived the negotiations, and no agreement was reached on the phasing-down of unabated fossil fuels. That said, we do see strong signals that the energy transition in the market is gaining pace. Despite the massive return to coal-fired power in Europe, the International Energy Agency (IEA) is forecasting a mere 1% increase in emissions from energy this year.
This is due to the accelerated deployment of renewables, electric vehicles and efficiency measures, partially driven by the energy crisis. As climate policy expands - which has been the case this year in key markets such as US, EU and Japan - exponential change could be unleashed, as market forces and human ingenuity seek to create value from the transition to net zero.
On the back of the COP27 conference, the UN released criteria for safeguarding the integrity of net zero pledges by businesses and financial institutions. For example, net zero commitments must include short-term targets that cover emissions along the full value chain and targets related to the phasing-down of coal, gas and oil. We welcome this report and believe it is an area that will require more work for market participants.