COP26 seen as vital to lay groundwork for future

For many institutional investors, the much-anticipated United Nations climate change conference now underway in Glasgow is a study in contrasts: a greater sense of urgency, tempered by the reality of what it will take and who is ready to lead.

The global conference known as COP26, ending Nov. 12 and hosted by the U.K., "has been labeled the world's 'best last chance' to tackle climate change," said Daniel Booth, CIO of Border to Coast Pensions Partnership, Leeds, England, whose U.K. local government pension schemes have £55 billion ($75.6 billion) in assets.

"Given the central role private investment plays in financing the green energy transition, many investors will be hoping for substantial commitments by the international community on renewables deployment, industrial decarbonization and energy transmission, as well as support for the prospect of a fair return," Mr. Booth said.

As institutional investors play an increasingly central role in the transition, "COP26 could be an important turning point in directing private capital towards solutions," said Kate Brett, head of sustainable investment for U.K. and Europe at Mercer in London.

Some positive things to look for from COP26 include mandatory net-zero targets for asset owners and managers, consistent national transition road maps and the prospect of harmonized regulation across markets, Ms. Brett said.

The pace of pension funds and asset managers committing to net-zero emissions targets by 2050 has picked up in the weeks heading into COP26.

On Oct. 20, half of the members of the U.N.-convened Net-Zero Asset Owner Alliance, which includes the $487 billion California Public Employees' Retirement System, Sacramento, upped the timeline for faster results, pledging to cut emissions in their portfolios by 25% or more by 2025.

All 60 members of the alliance, with a collective $10 trillion in assets, had already pledged to reach net-zero by 2050, as did a similar asset owner group representing $2.4 trillion and ones for asset managers and consultants.

Institutional owners of all sizes are increasingly joining the chorus, from the $3 billion McKnight Foundation, Minneapolis, to the £12.9 billion ($17.7 billion) London CIV, a pool of London local authority pension funds in the U.K.

Officials with the £82.2 billion Universities Superannuation Scheme, London, have muted expectations. "COP26 is important but does not change our strategy," said a spokesman for USS. It plans to add to more than £1 billion already committed to renewable investments and ramp up engagement with companies, policymakers and external managers toward a goal of net-zero greenhouse gas emissions no later than 2050.

A cold dose of reality came the week before the start of COP26, with the United Nations Environment Programme's latest emissions gap report that even with nations' new and updated climate commitments, the chances of meeting the Paris Agreement goal of limiting global warming to below 2 degrees Celsius are slipping, and the world is on track for a global temperature rise of at least 2.7 degrees Celsius this century. The pledges could trim emissions by 7.5% by 2030, but not by the 55% needed to stay on track for the 1.5 degree Celsius goal by 2050.

The international treaty adopted by 196 parties in Paris in December 2015 that went into effect Nov. 12, 2016, calls on countries to limit greenhouse gas emissions to achieve a climate-neutral world by 2050. The agreement works on a five-year cycle of increasingly ambitious climate actions by countries, many of whom will be defending their records and commitments in Glasgow.

Now considered a watershed moment for climate change, reaching the Paris accord was not easy, said Michael McNicholas, London-based managing director of asset management for OMERS Infrastructure within the C$105 billion ($85 billion) Ontario Municipal Employees' Retirement System, Toronto.

"It was painful and difficult. There were a lot of issues around it landing, but it did land," he said.

The Glasgow conference "is not going to be plain sailing because the challenges are enormous. I do think we will get sufficient signals around global commitment. That gives a reinforcing signal to investors. I would hope there would be greater sense of urgency. The debate has moved from whether it is real or not to how fast do we need to move," said Mr. McNicholas.

In Europe, where most governments have made commitments, "we are already there in terms of the direction of travel" toward net-zero goals, he said. "The pressure is on governments to make it real."

Country commitments will be important, because OMERS Infrastructure looks at investments on a country-by-country basis. "The more commitments, the stronger and faster the pace these move, the greater your confidence," he said. He would also like to see COP26 inspire standardization of reporting ESG data. "If we could get to a standardization for exactly how we measure, we can set a consistent baseline to measure the progress. And that is really important for investing," said Mr. McNicholas. OMERS has committed to reducing the carbon intensity of its portfolio by 20% by 2025.

Mr. Booth from Border to Coast Pensions Partnership agrees. "There is a clear need for a common language for investors to help define climate-related investment strategies, making it easier to assess and compare progress with stronger global data and measurable outcomes," he said.

Navindu Katugampola, global head of sustainability for Morgan Stanley Investment Management in London, with $1.5 trillion under management, is "watching for a few things" to come out of COP26. He notes that while many countries have signed the Paris Agreement, few high-emitting countries have enshrined that into targets known as nationally determined contributions.

"The first thing we are looking for is governments to be more ambitious. A lot of countries made commitments, but it is about formalizing it now," he said.

Over the last five years, commitments to mobilize $100 billion each year to help developing countries combat climate change "have been well short of that mark. We are looking for a renewed sense of purpose from the developed countries," said Mr. Katugampola, who hopes that pledges from the U.S. will be a catalyst to other countries.

While carbon markets received a lot of attention five years ago, he expects a lot of scrutiny of the biggest effort so far, the European Union emissions trading scheme that caps carbon dioxide emissions from companies and creates a market for carbon allowances, among other steps. Particularly with volatile energy prices lately, tougher carbon policy "is going to be challenging," he said.

He does expect to see more private-sector pledges, and after COP26, a recognition that individual sectors may suffer headwinds or benefit from tailwinds. "Who are the winners and losers going to be? It will be really interesting to see … at a more granular level how businesses start to adapt," Mr. Katugampola said.

"It is very easy to throw out pledges. That increasingly isn't passing muster. Over the next few years, the demands from asset managers like us are going to increase. The road map becomes increasingly more important than the overall objective," Mr. Katugampola said.

Mr. Booth of Border to Coast would like more attention paid to realistic short-term goals rather than long-term climate aspirations. "It would be useful to see a granular road map outlined for the next five to 10 years, as well as 2050 targets," he said.

Gordon L. Clark, professorial fellow at Oxford University's Smith School of Enterprise and the Environment, thinks that within the financial services industry, "there is a huge appetite for the companies that will make a difference. But 2050 is no longer a reasonable target for controlling emissions. I would like to see an accord that recognizes that 2050 has to be brought forward to 2035. I think that would be a very helpful development," he said.

Whatever concrete steps come out of Glasgow after all the speeches are made, Mr. McNicholas of OMERS is optimistic about COP26. "I am pretty sure it will be a move in the right direction. It just reinforces what we already know, which is that we need to make significant investments in climate solutions."