Max Pacella
Investment Analyst
Macro & Markets
16 Nov, 2021

The 2021 COP26 Glasgow climate summit has drawn to a close, ending – to quote my favourite T.S. Eliot – not with a bang but a whimper.

With nearly 200 countries participating over two weeks, culminating in what has been already labelled as a “disappointing” penultimate agreement, there is a lot of talk and not a lot of action to recap from the perspective of investors.

According to a report by ABC news, not a single country heading into COP26 was on track to meet their Paris Agreement goals. This left, and still does leave, a raft of opportunity for different technologies to help us meet those goals in a global effort towards decarbonisation.

There are still prospective winners and losers from COP26, however there was nothing so enticing as a roadmap of actions and new technologies/initiatives which we might embrace as a global society.

The Major Milestones and Promises

It’s important to note up front that declarations regarding emissions targets are not legally binding – there is no international court who will take a country to task (except Twitter, potentially).

Such has also been the case with most of the announcements of “milestones” from COP26, non-binding pledges that make for positive headlines but may not end up resulting in actionable change to the degree of boldness and scale necessary to achieve climate targets.

The World Wildlife Fund has assembled a “promise tracker”, which can be found here, of the five major promises outlined at COP26:

1) The 1.5 degree Celsius warming limit will be kept within reach
2) The UK will be ‘net zero’ carbon by 2050
3) Vital forests will be protected
4) Money will be redirected away from climate polluters
5) Nature will be at the heart of climate action

I’d encourage you to occasionally check on this tracker from an investment perspective as well, as getting a sense of if countries are moving towards these targets is also a means of measuring the level of commitment and investment to the various involved sectors.

One major milestone was that 110 nations signed a joint pledge to end deforestation by 2030 (with a budget of $19.2 billion USD from public and private funds) – though a 2014 New York deal of a similar nature failed to even slow deforestation. Australia was a signatory to this pledge. As well as nations, over thirty major financial companies including Aviva (AV:LON) and Schroders (SDR:LON) also signed, collectively representing over $8.7 trillion USD in assets under management.

Over 20 countries pledged to stop funding overseas fossil fuel projects (oil, gas, coal), Australia however was not one of the signatories. Though this might sound like a blow to the fossil fuel industry (and associated investments), it’s worth noting that this does not prevent usage or production of fossil fuels domestically. The main limits are placed on institutions employing public funds to invest into “dirty” infrastructure like drilling rigs, mines and power plants. The proposal will supposedly free up approx. $18 billion USD for re-investment into clean energy, however it pays to be sceptical if these funds will actually be redeployed directly into green initiatives.

A major piece of the summit was of course the Glasgow Climate Pact, signed by all 197 participating countries – but only after a last-minute proposal by India changed critical wording from “phasing out” coal to “phasing down”. Again, it is worth noting that we did not sign the Pact until after the watering down of the language around coal. However, there is the provision in the agreement for all countries to re-affirm their 2030 goals next year in Egypt for the net COP, which means the heat is not off to commit to the promises made in the last fortnight.

I willingly admit that when we planned this note just over a month ago, we envisioned a much lengthier update, outlining new initiatives and technologies which countries proposed to adopt to get to net zero. Unfortunately, what we have is more symbolic and bureaucratic than we (perhaps optimistically) planned for.

Change from the Private Sector

Where governments fail to move, private investment tends to fill the gaps.

Between public and private funds, Bank of America recently put out an estimate for an annual investment into the global energy system of $150 trillion USD to limit global warming.

With flows of that size, there are many sectors which stand to benefit from our move towards decarbonisation, many of which we have covered in past notes:

Wind and solar are two key renewable technologies which are already seeing adoption and growing cost efficiencies. In the same Bank of America report, their team estimate we need 900% more wind and 1,400% more solar capacity by 2050 to make up barely half of our global energy infrastructure.

We touched on wind power and solar power back in April, and the two ETFs (FAN and TAN respectively) mentioned in those notes remain some of the broadest ways to access these themes.

Source: Bloomberg

Source: Bloomberg

To complement the above, both hydrogen and nuclear power stand as viable alternatives for our current fossil fuel sources, and would likely act as the baseload sources to offset the potential seasonality of wind and solar.

Following our update on the new hydrogen economy, Fortescue Metals (FMG:ASX) announced a multi-billion pound deal with several companies to expand its renewable capabilities, perhaps affirming our thesis that the private sector may lead the public sector in development and adoption of renewable technologies.

Source: Bloomberg

Of course we must also take heed of the proposed move away from fossil fuels. Though the terminology of “phasing out” of coal does extend the ‘lifetime’ of that sector, in the long term oil, coal and natural gas are likely to be losers as the mounting global headwind of carbonisation forces them to adapt/divest or lose their entire market.

COP That

Though market observers have generally criticized the COP26 summit (see below), it does still provide us an indication of where various countries are heading.

Source: Twitter

As investors our role is not to deliberate on the actions (or lack thereof) of delegations and politicians. Rather, we must identify the prevalent and emerging trends and identify where our investment goals and thesis may fit into those trends.

It seems unavoidable that we will be forced in the near future to decide between drastic action and climate disaster. When that decision is made, investors on the right side of existential threats may be rewarded greatly.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.