As the dust settles from COP26 in Glasgow, there is little consensus around whether this heavily hyped event can be considered a success or a failure. On the one hand, the goal of 1.5˚ has just about been kept alive, on the other climate activists expressed disappointment at the event’s seemingly meagre accomplishments, Greta Thunberg stated “They even succeeded in watering down the blah, blah, blah which is quite an achievement.”¹

As ever, the truth lies somewhere in between, with everyone getting just a little of what they wanted.

One of the clear positive outcomes from COP26 was that governments worldwide are really starting to act on climate change and coordinate their efforts. Around 137 countries are now committing to net zero, with China, Japan and South Korea adding their names to this list.

Under the Biden administration, the US has strengthened its ambitions, pledging to cut emissions by 52% by 2030 and during the COP event itself, India came to the table with its commitment to reach net zero by 2070.

Admittedly some of these commitments have a long way to go and ambitions vary widely, but collectively they demonstrate the progress that has been made. That said, it is also natural to feel a sense of disappointment. Current national pledges – known as nationally determined contributions (NDCs) – still fall well short of the 1.5˚ target of the Paris Agreement, meaning nations are being asked to bring improved commitments to next year’s COP in Egypt.

Another positive takeaway, which came very late in COP 26, was the announcement of closer climate cooperation between the US and China. This is a significant step, given these nations are the world’s top two carbon emitters and collectively account for over 40% of annual emissions². It is particularly important from an investment perspective as recently frosty relations between these nations has created uncertainty and added further pressure on supply chains. For example, the US currently has barriers restricting the importing of Chinese solar products. Environmental investors will be watching closely for signs of improved collaboration.

Significantly, COP26 was the first such event to prioritise nature as a way of achieving decarbonisation and detoxification and this could be a real game changer.

Firstly, more than 100 countries pledged to reverse deforestation by 2030, with signatories including Canada, Brazil, Russia, China, Indonesia, the Democratic Republic of the Congo, the US and the UK, representing around 85% of the world’s forests. While we have previously seen that pledges and action can be two completely different things, and therefore require close monitoring, this agreement has firmly put deforestation onto the climate agenda.

The second significant achievement was a global initiative to curb methane emissions, championed by the US and Europe. The agreement commits signatories to reduce their overall emissions by 30% by 2030 and emphasises these cuts should be achieved by tackling methane leaks from fossil fuel infrastructure. Even though China and Russia are significant absentees from this initiative, it is still a meaningful step forward given methane is even more damaging to climate than carbon.

Finally, there was also a significant focus on concerns around the ocean and marine ecosystems, and the role they can offer as carbon sinks. Article 21 of the final Glasgow agreement explicitly emphasised the importance of protecting, conserving and restoring marine ecosystems and the impact this could have on reducing greenhouse gases.

This increased recognition of natural capital and the role it can play in decarbonising and detoxifying the planet should also help direct investment focus into areas that are often overlooked, such as agricultural technologies seeking to improve soil quality and crowd out the use of fertiliser and pesticides; or companies seeking to improve ocean health by developing biodegradable plastics.

The last minute re-wording of the commitment to phase-down the use of coal from a stronger pledge to completely phase-out coal caused the most controversy and was widely greeted with dismay. However, it is still the first time that efforts to limit fossil fuel usage have been explicitly mentioned in these official agreements and must still be seen as a positive step forward. Of course more is needed, but commitments to reduce subsidies for coal and fossil fuels should be welcomed, as should China’s commitment not to expand its coal production outside of China and to try and reduce its coal production that doesn’t have CO2 abatement.

Separately, the concept of a voluntary market for carbon credit was given a boost in Glasgow. Harking back to Article 6 of the Paris Agreement, there has been a lot of criticism about carbon credits due to a lack of unified standards or governance. However, COP 26 delivered an agreed set of rules for international emissions trading and established a UN-controlled marketplace, bringing in some much needed rigour. The topic is still likely to evolve further amid discussions over trading carbon credits in different countries and the prospect of carbon border adjustments and should be monitored closely.

While Glasgow fell short of delivering the desired outcome of a clear path to 1.5˚, progress was made. The event was highly visible and ensured a much wider array of people paid attention, adding momentum to the positive change and environmental conservation agenda.

From an investment perspective, some tangible investment themes were supported by the outcomes of COP26. The energy transition remains central to countries’ aims to meet net zero targets and there remains a clear requirement for investors to support those companies providing clean energy solutions. However, the notion of natural capital was given a much broader platform, which should promote vital environmental solutions around oceans and water systems, land, food and forestry, as well as sustainable cities and buildings.

At BNP Paribas Asset Management, we believe it is important to investigate environmental opportunities from across the spectrum. Our Environmental Strategies Group not only invests into safe, large-scale infrastructure assets, such as offshore wind and large solar installations, but also seeks out those solutions that are still at an early stage in terms of their technology and scale.
In their view, allocating risk capital towards young, promising technologies could really move the needle, help these businesses scale quickly so they become commercial and make a meaningful impact. And that’s how we, alongside our clients, can truly be part of the solution.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed do not in any way constitute investment advice.

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