Main take-aways

• Reflecting on COP26

COP stands for “Conference of the Parties”. It’s a negotiation under the management of the United Nations to agree on ways for global governments to tackle the climate crisis. The 26th edition of the event marked the fifth anniversary of COP21, also known as the Paris Climate Agreement, where leaders came together to agree on measures to limit global warming to 2 degrees, and preferably closer to 1.5 degrees, above pre-industrial levels.

At COP26 Nationally Determined Contributions (NDCs) were submitted by governments with plans and actions to reduce their greenhouse gas emissions. The result is a barometer to measure actual progress. In general, there have been substantial achievements, with more than 80% of governments committing to the concept of ‘net zero’. Investors are also committing to net zero, and progress has been made on deforestation, methane and the phasing out coal. However, according to the Paris Climate Agreement, the world is not yet doing enough to achieve its sub 2-degree target by the end of the century.

• ESG and the role of asset management

Whilst ESG is a dominant theme, it still needs to be translated into a discussion that represents tangible value to capital markets. To achieve that, it’s important to have a dynamic approach in place with the use of data and technology to provide better insights for scalability.

One of the roles of the asset management industry is to get investors more interested and educated about ESG investing. Bearing in mind that different players have different priorities, asset managers need to work with asset owners to ensure their priorities are reflected in their portfolios. In addition, shareholders can actively encourage companies to excel in ESG issues by effectively engaging with companies and using voting proxies to drive better corporate behaviour. Long term success will be determined by incentives that motivate firms to move incrementally in the right direction. Investor education and alignment are required to understand short-term impacts and long-term benefits, incorporation into more portfolios, and comparability of disclosures across different funds.

Transparent investment objectives are essential to enhance communication, awareness and understanding for the end investor. Portfolio transparency including financial metrics for the portfolio in parallel with ESG metrics will be crucial for informed decision making. Possible future developments include a natural resources balance sheet of how much natural resources a company is using to generate its revenue. When we get all the datasets aligned to do that, companies will be differentiated based on how well they do on their natural resources balance sheet.

• The role of regulators

ESG takes many forms including integration, having ESG as part of the core investment process, moving to exclusions or impact portfolios. Transparency is essential.

External parties are concerned with the overall investment footprint. ESG reviews should form part of the core integration process, with fund managers reviewing portfolios from a holistic perspective, including rating, carbon metrics and human global compact compliance. The focus should be on optimising portfolios rather than on Marketing, which in turn will drive product development to achieve a lower carbon footprint and optimise returns.

The UK is the first net zero aligned financial centre having introduced disclosure requirements for all asset managers, companies, and banks on their transition plans to net zero. It’s expected that this idea will be adopted by other markets. The entire capital market system is integrating ESG and considering these issues from a responsible capital market allocation.

The International Financial Reporting Standards (IFRS) has published the Sustainability Standards Accounting which will set global minimum standards around what companies need to disclose. Asset managers should familiarise themselves with the Task Force on Climate-Related Financial Disclosures (TCFD) framework and plan to disclose against it. The Net Zero Asset Managers Initiative which asset managers can commit to, provides support for those asset managers targeting net zero greenhouse gas emissions by 2050.

COP26 has created a framework for accountability and transparency amongst governments globally. However, to successfully achieve the goals set out in the Paris Climate Agreement, the asset management industry will play a critical role in providing the finance and behavioural change needed to drive a greener economy.