COP26 in Scotland will be a pivotal moment for sustainable investing and ESG
About the Author Joshua Brunert is a senior ESG partner at Apex Group.
Environmental, social equity and good governance strategies are of concern to fund managers and their investors. World leaders have a chance to capitalize on this momentum when they meet at the 26th United Nations Conference of the Parties on Climate Change, known as COP26, in Scotland next month. If they make real progress in putting in place international financial frameworks that reflect ESG concerns, they will energize the growing parallel efforts of private capital to achieve the same goals.
Far-sighted investors are pushing for more stringent carbon mitigation targets, details of how to achieve them and, of course, how they will be funded. Governments and the private capital sector, especially in the developed world, are going to have to play a role in answering these questions if they are to buy buy-in from the leaders of emerging economies who are critical to tackling climate change and other ESG issues.
Sustainable investing is still in its infancy. The progress of COP26 could push it to a whole new level. After all, the changes needed to avoid the worst effects of climate change require billions of dollars in investment. The private sector is expected to provide 70% of this funding. But for investors to open their portfolios, they need orderly markets, manageable risk, and the allure of higher returns.
Many governments have pledged to bring economic activities that account for nearly 70% of global GDP to net zero by mid-century. Many companies have also subscribed to these commitments. They recognize that reducing greenhouse gas emissions today decreases the growing risks associated with climate change.
ESG spending has become the biggest finance revolution in recent memory. Investors who are more socially and environmentally conscious are aware of the financial risks posed by inequality, climate change, corruption and other issues. The pandemic has only highlighted these concerns and their macroeconomic ramifications, as in supply chains, for example.
Investors have also noticed that ESG holdings have performed well relative to their traditional counterparts over the past decade, including during the pandemic. A Morningstar study found that sustainable equity funds in 2020 outperformed traditional equity funds. S&P Global Ratings recently said that sustainable bond issuance could collectively exceed $ 1 trillion in 2021, nearly double the amount in 2020.
Private market leaders who already focus on ESG reporting and obligations, like BlackRock’s Larry Fink, are setting the standards for these changes and creating a competitive environment where those who have not implemented ESG models will realize. that they must implement them quickly. . This dynamic is essential to advance the objectives of COP26.
If world leaders can craft a clear framework, investments in countries, including emerging economies, with a stronger climate and related ESG plans are likely to increase over the next few years. This, in turn, will increase competition in peer countries to implement similar plans in order to remain attractive. The necessary policy changes that will help guide the market towards better risk-adjusted returns in sustainable solutions will become almost inevitable. The only question now is, when will we see them?
Despite the accelerating pace of progress, experts believe change is coming too slowly. Politicians in many developed countries have been reluctant to undertake green transitions for fear of losing key voters. Many emerging markets are still too dependent on coal and other fossil fuels. Their leaders have historically seen little benefit in costly reforms that could hinder development. Leaders are expected to tackle this conundrum at COP26.
Finance, for its part, wants to go faster. Investors and fund managers are eager to engage in emerging markets and do their part in tackling climate change and pursuing ESG concerns. But they are reluctant to enter developing markets without ESG plans in place and where perceived risks, such as regulation or currency, could hurt their goals.
“Our ability to properly allocate the trillions of dollars needed to support the net zero transition is constrained by the ambition gap between current government commitments … and the emission reductions needed to limit temperature rise world average at 1.5 degrees Celsius, “a June press release read. signed by over 450 investors with over $ 41 trillion in assets. The signatories urged governments to commit to “incentivize private investment in zero emission solutions”.
It feels like we’re on the start line now, crouched down and ready to go. The starting point will hopefully come in the form of a commitment at COP26 to help developing countries – and bolster the efforts of those that are more developed – to meet the climate change goals that are vital to the world. survival of all. World leaders don’t really have a choice. Emissions from emerging economies like India are expected to grow at a much faster rate than those from the developed world.
Investors want to be part of the solution to the biggest challenge of their time and earn great returns. They just need the signal to start running.
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