by Jonathan Bailey, Head of ESG Investing, Sarah Peasey, Director of European ESG Investing, Neuberger Berman
COP26, the 26th United Nations Climate Change Conference of the Parties to the Paris Agreement on climate, kicked off in Glasgow over the weekend.
It has been five years since COP21, at which almost every country in the world signed up for the climate change mitigation, adaptation and finance commitments contained in the Paris Agreement. Where COP21 laid the foundations, COP26 is about world leaders turning commitments into action.
Many would argue that it is the most critical global summit in a generation. Decisions and commitments made there—or not made there—are likely to tip the balance in our fight to achieve net-zero emissions by 2050, limit global warming to 1.5°C and avoid potentially catastrophic changes in our environment.
The Conference is not only critical for the climate, but also for investors. If the required commitments are made, they are likely to affect pricing across financial markets and demand the mobilization of vast amounts of capital into substantial new investments.
We are looking for progress in three key areas: nationally determined contributions (NDCs) to emissions reduction; support for developing nations; and finalization of the Paris Rulebook.
Work to Do
The new emissions-gap report from the United Nations Environment Programme (UNEP) finds that, despite stronger climate policy and higher ambition in the latest national pledges, there is still a large gap between near-term commitments under the Paris Agreement and what would be needed to limit warming to well below 2°C and aim for below 1.5°C. To put the world on track for below 2°C warming by 2100, countries must commit to reduce emissions by an additional 11 – 13 billion tonnes of carbon dioxide equivalent (GtCO2e) by 2030 and by 25 – 28 GtCO2e for 1.5°C.
Climate Action Tracker (CAT) has analyzed the 63 countries that generate 80% of the world’s greenhouse gas (GHG) emissions, and finds that none of the major economies are on track to meet their 1.5°C targets. More than 70 countries missed a July 31 deadline to update their NDCs, while others, such as Brazil and Mexico, “updated” their NDCs by restating their 2015 targets. China, the world’s biggest polluter, has announced a new target, but hasn't formally submitted it to the UN.
Developed nations have fallen well short of their commitment to provide an already inadequate $100 billion per year in climate aid to the developing world. Even the most basic poverty-prevention needs imply that energy provision in some poorer countries must double by 2030 and triple by 2040, and that investment is required to make this sustainable.
Finalization of the Paris Rulebook will likely have a direct impact on financial markets and investors. In particular, agreement on Article 6 could help to establish a true international carbon market, tackling the current patchwork of local regimes that has led to often wide disparities in pricing. This could potentially transform the competitive landscape for businesses that are disadvantaged by the current fragmentation.
The corporate and financial communities have work to do, too. A lot of progress has been made, which we believe is testament to the power of initiatives such as the Task Force on Climate-Related Financial Disclosures (TCFD) to achieve greater transparency as a spur to action. That said, a recent report1 by the Science Based Targets initiative (SBTi) found that, while 4,200 companies in the G20 have set climate-related targets, only 20% of those targets are science-based. There were no companies with science-based targets in Argentina, Indonesia, South Korea, Russia or Saudi Arabia.
Neuberger Berman is playing its part in several ways.
We are collaborating with fellow industry stakeholders. For example, we fund research by the Transition Pathways Initiative, which assesses companies’ preparedness for the low-carbon transition. We are signatories to the Climate Action 100+ initiative, which puts pressure on the world’s largest emitters to act. We participate in the Carbon Disclosure Project’s Science-Based Targets collaborative engagement campaign.
We are taking action within our own business. We have had a Climate-related Corporate Strategy in place for almost two years, and have just formalized our net-zero commitments to enable us to join more than 120 investors worldwide as signatories to the Net Zero Asset Managers Initiative. We have had a firm-wide thermal coal exclusion policy for all of our comingled fund vehicles since 2020. In the same year, we obtained a five-year revolving credit facility that directly linked our business finance with our performance on sustainability targets.
And finally, we are empowering our clients. Security-specific climate risks have long been a part of our Environmental, Social and Governance (ESG) research integration process, and since 2020 this has been augmented by our top-down, Climate Value-at-Risk (CVaR) physical- and transition-risk modelling capability. Results from CVaR analysis were instrumental in the adoption of our thermal coal exclusion. We also manage impact strategies in equities and credit that seek to direct capital toward climate solutions, and we are committed to engagement on emissions as both shareholders and lenders.
In addition, we believe we can play a key role in helping asset owners formulate their own pathway to achieving net-zero emissions in their portfolios—which is, after all, a complex and ambitious undertaking. We have developed a seven-phase Action Plan, drawing on the widely recognized framework set out by the Institutional Investor Group on Climate Change (IIGCC), which sets out crucial first steps in goal-setting, minimum standards and exclusions, risk measurement, data and intelligence gathering, and establishing an engagement program. This Action Plan is informed by mandates we have already worked on, including a £1.3 billion climate transition-related multi-sector credit strategy with the Brunel Pension Partnership, one of Europe’s leading sustainable asset owners, which is designed to reduce the portfolio’s Scope 1 and 2 carbon footprint, over time, to zero by 2050.
A Collective Goal
Ultimately, we believe emission reduction is a collective goal that requires action from all stakeholders, from governments and businesses to investors and consumers, if we are to turn broad agreement about the challenge into the necessary urgent action. We take pride in the progress we have made as a business and an industry, while recognizing that there is much more to do. We will be looking to COP26 this week for confirmation that the world’s policymakers are behind us.
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