Glasgow is hosting this year’s annual climate conference - or COP. Joe Biden and Boris Johnson are both attending. So is David Attenborough, and Prince Charles. They’ll share the stage with over 100 world leaders, prominent environmental activists, and around 20,000 delegates to discuss climate change and agree how to achieve net zero - balancing the amount of greenhouse gasses going into the atmosphere by taking out the same amount - by 2050.
This year’s COP, which stands for ‘conference of parties’, is the 26th such event, which is why it’s called COP26. Like a lot of other things, it’s been delayed by the coronavirus pandemic, but is now finally going ahead. The first COP was held in Berlin in 1995, but it was COP21 in 2015 in Paris where, for the first time ever, world leaders agreed to collectively cut carbon emissions. This is known as the Paris Agreement.
This time around, cutting carbon emissions will still be very much on the agenda, but the conference will push for countries to do even more. As well as achieving net zero by 2050 and keeping world temperature rises below 1.5°C of pre-industrial levels, COP26 will also urge countries to actively commit to invest in renewable energy rather than coal, and switch to electric cars sooner rather than later. Other initiatives on the table will include restoring and protecting vital ecosystems (areas where plants, animals, and people live together), as well as helping other countries directly affected by climate change.
Developed countries will be asked to make $100bn (approx. £725bn) of climate finance available every year. Basically, that means money from governments and private companies should go towards helping the transition to net zero. Or, as former Bank of England governor Mark Carney puts it, making every financial decision with the ‘climate in mind.’
And what Mr Carney says at COP26 will be worth listening to as he’s now the Prime Minister’s Finance Adviser for COP26 and the UN Special Envoy on Climate Action and Finance. He’s previously talked about how blending Government and private company funding together can be the key to ‘a greener, more resilient economy and a fair transition for society’ through 're-engineering our economies for net zero.' There’s no doubt this will be a major theme of the conference that will be discussed by all the major players.
The UK is already making some headway. It is now one of the biggest investors in offshore energy. And combustion-engine powered cars will no longer be produced here after 2030. The UK Government has also pledged to spend at least £3bn of international climate finance on nature and nature-based solutions in the next five years, as well as making climate-related financial disclosures mandatory by 2025.
So why does this matter to you as a pension investor?
It matters because pensions are invested in companies, and companies are impacted by the move to net zero. How well they adapt for the climate transition may well determine how they perform in future, which could affect how good an investment they are. Becoming net zero by 2050 is high on the Government’s agenda and it’s already been put into UK law. This means companies will have to be open and clear about their environmental impact, and regulations will come in around how information is displayed and reported. Those that fail to comply face regulatory risk and could well be shunned by investors and excluded from pension schemes. Your pension may also start to invest more in companies directly involved in positively affecting climate change through technology, food production, transport, or energy, for example.
The shape of things to come
COP26 will help shape the global investment market over the next few years. Banks and regulators will also need to make sure our financial systems can withstand the impacts of climate change and support the transition to net zero. Whatever is agreed at COP26 will play a big part in all of this. Exactly what will come out of it is difficult to predict, but hopefully this has helped you understand what the main themes and aims are. We’ll be watching with interest - will you?
At Scottish Widows we’ve set ourselves an ambitious goal of reducing the carbon footprint of all our investments to net zero by 2050 with important milestones between now and then. For more information read our Approach to Climate Change.