Please note: this blog was published in November 2021 and its content is based on what was correct at the time of writing. As a result, some of the facts and opinions may no longer be current or relevant.
As the Chief investment officer at Wealthify, a large part of my job is to decide what we include in our Original and Ethical Plans. This doesn’t just mean understanding their performance but also making ethical decisions to exclude certain industries or practices. With our Ethical Plans, for example, weapons, tobacco, gambling, and adult entertainment are automatically excluded.
I chair both our original and ethical fund selection committees and our Ethical Committee, which ensures our fund managers are doing what they’ve promised and examines their level of engagement with the companies we hold in your plans. In addition to this, I also sit on the Investment Committee for one of the largest education charities in Scotland, which is supported by Wealthify through our annual volunteering day allowance.
There are millions of factors that we need to consider when making investment decisions, and the outcomes and actions following COP26 will shape the investment landscape and the world for the decade ahead.
What is COP26?
The United Nations Climate Change Conference is commonly referred to as COP, which stands for ‘Conference of Parties’. These conferences are where the countries that signed the UN’s Framework Convention on Climate Change come together to discuss measures being used to try and keep the world’s temperatures below 2 degrees Celsius.
The ‘26’ part of COP26 refers to the number of times that COP has been held, with the one in question being the 26th time. This has been one of the most anticipated meetings as it’s the first time that countries have needed to set out more ambitious goals for ending their contribution to climate change under the Paris Agreement, which was COP21 back in Q4-2015.
What did we want to get from COP26?
There were high expectations going into COP26, and if we were looking positively at it then yes, we did get an agreement, and yes, it progresses from the initial Paris Agreement. However, there’s an overwhelming feeling that what has been agreed and what was achieved is simply not enough.
To say we got more than we feared but less than we hoped for is probably the best spin one can put on this.
The bad news
Something that many people were looking for was a firm commitment to how much nations would be looking to cut their emissions by over the next decade, but also how that transition is going to be achieved, and ultimately, paid for. Unfortunately, this has been left somewhat unresolved, with a lot of unanswered questions remaining.
We also saw some countries, such as India and China, not signing up for tighter restrictions on coal. The implications on this are yet to be realised, but with more and more businesses looking to make their supply chains more carbon-neutral to satisfy their consumers, this decision could ultimately impact their economies or drive them to comply.
The good news
The positive news is that there are 33 new countries, including Brazil and India who have agreed to net-zero targets, with most aiming to achieve this by 2050 although India has set their targets for 2070. We’ve also seen more than 40 countries agree to phase out coal-fired power in the 2030s for major economies, which represents a significant shift away from carbon-intensive fossil fuel. The impact of this has spread even further, with the G20 also stopping any funding on overseas coal projects.
There was also good general progress on methane, but the 3 largest emitters – Russia, India, and China – did not commit to cutting emissions by 30% compared to 2020 levels by 2030. We also had a significant commitment from Brazil to end deforestation, however, the enforcement of this is crucial.
The US, EU, and the UK have all refused to provide any funding mechanism for compensation to balance out the loss of demand caused by climate change, as this could lead to further demands in the future.
More frequent progress reviews
A lot of this is really positive news, but perhaps the most important pledge that was made during COP26 was the agreement that the countries will come together at the end of next year to review their progress. This is a very positive move, as the initial pledges were only reviewed after five years. This has raised hopes for even greater progress at COP27, which is taking place next year in Egypt.
What does the impact of these changes look like globally?
Over the last few years, we’ve seen a rush towards investing in ‘green’ issues which has meant that investment firms around the world are looking at more ways to offer Ethical Investments. There’s a very strong case for this, however, the availability and uniformity of the data relating to these investments needs further work.
For example, we’re actively working with our fund managers to be able to work out the carbon footprint of our investments. With clear, available data not only would this information allow us to better report the impact of our ethical investments, but it also allows consumers to track the positive impact of their investments.
We’ve already seen some improvements across the board in this, but even more is needed, particularly across emerging markets.
Can we already see the benefits of ethical investing?
Definitely, although it’s worth pointing out that Environmental, Social, and Governance (ESG) investing has been around for years. Using these pillars to help guide investment decisions and encourage businesses to engage with them has preceded any Conference of Parties, including the original Paris Agreement.
The potential benefits are significant to both businesses and investors, and by taking an ethical approach, there is some insulation from market impacts driven by supply chains issues or climate change.
For example, companies that are now using internal pricing for carbon emissions or have a strong focus on improving their resource efficiency are benefiting from being more competitive compared to those firms that are currently unable to be as nimble. This also allows businesses to get ahead of the regulatory curve, given that both the UK and EU will be introducing a “Carbon Border Adjustment Mechanism” trade tariff that will be imposed to ensure countries with higher production costs due to carbon pricing are able to compete against cheap imports from countries which are not planning to fully apply carbon pricing.
This has also been highlighted in areas where there have been supply difficulties, such as the recent energy crisis in Europe. Those businesses that have gone the extra step to improve their efficiency, install renewable generation, and/or reduce their reliance on fossil fuels have not seen their costs rise as much as those who have not.
The business case for ESG investment
There is often a strong business case for employing an ESG approach to your business model– the idea that by making this move you could appeal to more customers and potentially generate better returns. But what happens when this changes? Even with current targets, time is ticking for businesses that are not adapting to this approach.
At the moment, we’re still at the very beginning, with targets that aren’t as ambitious as they probably could or need to be – i.e. looking for a 45% reduction against 2010 levels by 2030.
We need a balance between reward and punishment. Just as we know that there are huge demands for renewable infrastructure, we also need to offer greater energy independence to allow companies to take advantage of this. But the other side of that same coin is ensuring that the enforcement and punishments for using carbon-intensive processes to generate power or failing to meet climate change targets are severe enough to encourage and drive change rather than simply being absorbed as a business cost.
The Organisation for Economic Co-operation and Development (OECD) have stated that they are keen to focus on Carbon Pricing to further encourage the shift towards low and zero-carbon options. However, this requires global harmonisation, otherwise, it runs the risk of being meaningless as some countries adhere, but others ignore. This is important as the G20 accounts for around 80% of all Green House Gas emissions globally.[1]
What could investors do that might have an impact?
From an investing perspective, you may wish to ensure that your investments are aligned with your beliefs. If this is the case, then there are many options available to you. These options change depending on your circumstances, for example, you might feel very passionate about a certain area that doesn’t allow a lot of room for compromise, or you may just want your investments to generally do good. What your beliefs look like and how you align yourself to them is likely to be different for everyone.
The next important thing you might want to do is have long-term goals that rely on short-term changes being made. For example, if your long-term goal is to help reduce the impact of climate change, then seeing more ambitious targets being set during COP26 is just one short-term change that adds towards your goal.
One area where this is often overlooked is pensions, despite it typically being a persons’ largest asset[2] and therefore offers huge potential to support meaningful positive impact. By working closely with our fund managers, we hope to be able to accurately show our customers the carbon impact of their pensions in the near future. It is our aim that by having this information readily available and clearly displayed, customers will be able to better understand the impact of their investments and track against their long-term targets.
Wealthify does not offer advice or personal recommendations, if you’re unsure about investing please seek financial advice. With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
- https://www.oecd.org/ctp/tax-policy/carbon-pricing-in-times-of-covid-19-what-has-changed-in-g20-economies.htm
- https://www.fca.org.uk/publication/research/research-note-accumulation-of-wealth-in-britain.pdf
