The recent United Nations Glasgow Climate Change Conference, also known as COP26, generated plenty of big-picture headlines, including a late agreement among nations to ramp up emissions cuts and reconvene in 2022 to up the ante. There’s certainly a lot more work to do, and little time to waste.
However, also meaningful were the underlying themes emerging from formal announcements and numerous side events at the 12-day gathering in Glasgow, Scotland. They ranged from an acknowledgement that advances are needed in sustainability skills and financial catalysts to the notion that deeper, collective engagement—and even radical collaboration—can speed the race to net zero.
From “Clean Technology” to “Climate Solutions”
One interesting development was a change in tone, with the dialogue shifting away from the idea of developing specific clean technologies. There was little discussion, for example, on battery storage and renewables, though they remain key cogs in the net-zero transition. Instead, conversations seemed to refocus on the notion of climate solutions.
What does this mean in practice? We see growing recognition that decarbonization isn’t just a problem for the energy and utilities sectors alone—it’s a pressing issue for all industries. Decision-makers cited the need for every company to reduce and remove greenhouse gas emissions in order to ensure long-term viability. Discussions spanned aspects such as human capital, culture and nature-based solutions. Engagement from active investors, including AB, is probing how issuers across industries, sectors and regions are readying their businesses and economies for success in a lower-carbon economy.
Policy Momentum Is Growing—but Still Needs a Push
Clearly, public policy aimed at enabling decarbonization is foundational to setting the “rules of the road” for nations and industries. We’ve already seen significant action, particularly in the UK and European Union. Momentum is expected to pick up, with corporations calling for more regulation as industry policy advocates work with regulators in sectors such as shipping and aviation as they plan their paths to net zero.
Investment managers and asset owners must be proactive in shaping these policies. Policy advocacy could translate into supporting needed regulation, weighing in on pending legislation or engaging individually and collectively on sector-specific policy issues. Examples include AB’s work to strengthen the Securities and Exchange Commission’s climate change disclosure rule-making and our collaboration with peers to advocate curbs on flaring. By influencing the policy framework, the investment community can help ensure that regulations are effective, practical and equitable.
Engaging with Brown Issuers Will Enable the Transition
Even among staunch advocates of swift action to achieve net zero, the emphasis is shifting away from divestment. One reason: divestment encourages the sale of emissions-intensive assets to private businesses with less shareholder and ESG oversight. Also, shutting off capital from carbon-intensive markets will disproportionately impact emerging and frontier nations that bear most of the physical climate change risks—possibly creating an “unjust transition.” Withdrawing capital also raises the cost of debt, which can inflate energy and supply-chain costs in the short and medium terms.
Rather than completely diverting capital from emissions-intensive industries, we’re seeing more stakeholders coalesce behind stronger engagement—using the power of capital to influence issuer behavior. Simply put, the transition won’t happen without them. This translates into the need for a performance-oriented framework for dialogues with issuers around their practices and progress on decarbonization and business-transition plans.
Policies for escalating engagement when that progress falls short should be implemented and strengthened. Engagement must encompass not only issuers’ operations but their supply chains, with specific key performance indicators and milestones to assess progress.
Narrowing the Sustainability Skills Gap
The decisions, leadership and technology needed to get the world on a 1.5-degree warming path by 2050 will require a tremendous amount of climate upskilling. The sustainability skills gap is particularly acute for heavier carbon emitters—firms that are having a tough time recruiting talent. As one executive put it at COP26, “steel is not sexy.”
There is a broad-based need to advance skills. For example, corporate executives need to bolster their abilities in order to effectively lead businesses on the transition. Many businesses and issuers, such as municipalities and governments, would benefit from a deeper pool of talented sustainability experts. And investors must continue to delve deeper into climate science—with the help of academics, if required—in order to translate climate knowledge into investment insights.
Carbon Offsets Are Here to Stay
Several discussions were dedicated to carbon markets, the need for more carbon pricing and the role of carbon offsets. Without carbon taxes, carbon offsets play a key role in ensuring that carbon emissions are priced appropriately. COP26 activity focused on tightening global carbon-market governance and closing loopholes by introducing carbon-credit verification systems.
The finalization of Paris Agreement Article 6 on carbon-market prices has had a stark impact—increasing the price of nature-based carbon credits by 45% and that of aviation-industry carbon credits by nearly 20%. Offsets may continue to exist in many forms and markets, but improvements in quality assurance, transparency and verification can encourage continued growth, expediting the adoption of clean fuels, technologies and solutions, as well as ensuring that valuable forestry assets are retained for carbon sequestration.
Blended Finance Is a Must to Fund Climate-Change Adaptation
Many conversations related to the need to ramp up blended finance instruments in funding climate-change adaptation activities. In blended finance, development capital is deployed creatively to attract capital from broader commercial sources—with the goal of funding climate adaptation and mitigation projects and bringing them to commercial scale. Development banks often devise structures and instruments for this purpose.
At COP26, reinsurance companies and investment banks demonstrated opportunities to partner with governments, multilateral banks and supranational organizations to structure financing for such projects. In some cases, asset owners are partnering directly with governments and corporations to fund initiatives in energy, pipeline and transmission infrastructure projects. Given the mountain of capital required to empower the climate transition, broader use of blended finance is a critical catalyst.
“Radical Collaboration” Offers Collective Empowerment
There are many passionate advocates striving to get the world on a 1.5-degree warming course, including individuals, corporations, industries, academics, governments, supranationals and nongovernment organizations. But none of these groups can limit global warming alone: radical collaboration is needed to bring together many actors to solve problems that transcend formal boundaries.
Asset managers, issuers, asset owners and academic experts are important stakeholders, and the thread of radical collaboration connects many of the COP26 themes we’ve shared here, including engagement, sustainability upskilling and blended finance. Collaboration can advance even further, whether it’s connecting firms seeking solutions with those possessing them, collaborating in innovative ways on technology, engaging corporations or tapping academic climate knowledge to sharpen investing insights.
In summary, the themes emerging during COP26 highlight the growing urgency behind net zero, the need for creative approaches to empowering and financing progress and acknowledgement that no single stakeholder group alone can drive success. Progress toward net zero must be forceful, innovative and collective. And we all must do our part.
Sara Rosner is Director, Environmental Research and Engagement—Responsible Investment at AB. Jodie Tapscott is Director of Strategy, Responsible Investing at AB.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.