NordSIP (Stockholm) – To understand how COP28 reverberated through the asset management community, NordSIP reached out across our network to find attendees willing to share their perspectives. Feedback from responsAbility, Schroders, Cardano, Northern Trust Asset Management, Van Lanschot Kempen Wealth Management, the London Stock Exchange Group (LSEG) and BlackRock highlights a number of common themes.
Five facts from the COP28 meeting stand out. The disappointing progress on phasing out fossil fuels, increasing renewable energy capacity, the limited resources committed to the loss and damage fund, public climate change data and the need for transformation in the food and agriculture sector were mentioned by a range of investors.
The general sense of slow progress was well summarised by Julie Moret, Global Head of Sustainable Investing Integration, Northern Trust Asset Management. “Against a backdrop of a widening emissions gap to close, we continue to see mixed outcomes. There were some positive developments, though practicalities on implementing commitments were missing,” Moret said.
(Not Yet Phasing Out) Fossil Fuels
“For some, there was disappointment that the final text resulting from the negotiations on the ‘global stock take’ did not call out a ‘phase out of fossil fuels.’ Our view is this reflected the pragmatism of the negotiations that acknowledged fossil fuels for the first time in the COP text and acknowledged the need to ‘transition away from fossil fuels in energy systems’. We see this as a step forward,” Moret explained.
Andy Howard, Global Head of Sustainable Investment, Schroders, focused on the nuanced realities of phasing-out fossil fuels and the need for an agreement that can be implemented. “The future of fossil fuels has dominated much of the discussion in and around COP 28 in recent days. In many ways, that is unavoidable; 75% of global greenhouse gas emissions stem from fossil fuel use and reaching net zero will require a wholesale transformation of energy systems,” Howard commented.
“The final text reflects the commitment of some global leaders to pushing for a phase-out of fossil fuels, and the reluctance of others. As such, it looks like a compromise that reflects an inconsistent view on the issue across countries. However, the fact that all Parties came to an agreement on transitioning away from fossil fuels for the first time is a significant step forward. COP President Sultan Al Jaber reminded us that ‘An agreement is only as good as its implementation’ and this will be as true from this COP as any other,” Howard continued.
“One could argue it’s a typical case of the glass half full or half empty. On the one hand, the final document spoke about fossil fuels for the first time. On the other hand, the final document stopped short of calling for a phase-out and spoke about transitioning away,” Eszter Vitorino, Lead Expert, Sustainability Advisory at Van Lanschot Kempen added.
Renewables Energy Capacity and Climate Adaptation
Given commitments to increasing renewable energy capacity, there was a general sense that progress was being made on the renewable energy front.
“A positive outcome was the agreement to triple renewable energy capacity and double the average rate of energy efficiency improvements by 2030. There is acknowledgment climate finance needs to be ramped up significantly. A key area of focus in order to efficiently deploy this ramp-up in capacity is attention to infrastructure investments to address bottlenecks in grid connectivity. An additional area of key focus we think investors should pay attention to are the implications that are likely to occur from demand-supply imbalances in key commodities required to support the energy transition, namely copper, lithium and cobalt. Finally, we would underscore the importance of taking a nuanced approach as different countries will have different decarbonisation pathways determined by factors such as their current energy mix,” Moret said.
Van Lanschot Kempen’s Virotino was less sanguine. Tying this commitment with the failure to commit to phasing out fossil fuels, Vitorino noted that “the devil is in the detail, in working out the follow up steps. Globally this can mean a big movement in many countries towards renewables, but it does not raise the ambitions much above what the EU has already committed to,“ she said.
“In sync with the stated structural phase out of fossil fuels 130 countries committed to triple renewable energy generating capacity in the next decade while improving energy efficiency by a factor two,” Rik Klerkx, CIO Private Markets at Cardano, noted.
“Clear signals were that highest need for renewable capacity is in developing markets. Developing countries find themselves often in a poverty trap; as they are unable to make large upfront investments to finance renewable energy projects, they rely on the use of fossil fuels which are more expensive in the long run. By getting access to cheaper funding, developing countries can invest in renewable energy and escape from the poverty trap and benefit from cheaper and clean energy. Putting their money where their mouth is, UN Agencies, Multilateral Development Banks, private sector finance and philanthropy leaders united in a Scaling Climate Finance Capacity Building to initiate, support and fund renewable energy projects throughout developing markets. It will build the knowledge base and development capacity needed to succeed in the formidable task to install this new capacity in the next 10 years with estimated of in total USD 2,4 trillion annual investments,” Cardano’s Klerkx noted.
“On climate adaption, 150 parties representing 75% of global food production signed the “COP28 Declaration on Sustainable Agriculture, Resilient Food Systems and Climate Action” essentially announcing their intentions to integrate food and agriculture into their climate plans. Countries commit to put food systems and agriculture at the heart of their climate ambitions, addressing both global emissions and protecting the lives and livelihoods of farmers living on the frontline of climate change. As a guidance the UN Food and Agriculture Organization (FAO) unveiled a road map to bring the world’s food production in line with global climate goals. It emphasizes cutting methane emissions from livestock by 25% and halving food waste emissions by 2030, recommending growing a more biodiverse range of crops than the world currently relies on,” Cardano’s Klerkx continued.
Underfunded Loss and Damage Fund and Food & Agriculture
The transition assistance provided to countries particularly affected by climate change was another significant target that COP28 failed to meet in a satisfactory manner. “Whilst there was an early win on operationalizing the loss and damage fund for vulnerable countries affected by climate change, the resources committed are a fraction of estimates in the order of US$100-500bn annually. We anticipate attention going forward will be on the oversight and management of the fund to drive accountability,” Moret explained.
Others still focused on COP28’s contributions to the food and agriculture sector. “The recently concluded COP28 UAE Declaration emphasized the urgent need for transformation in agriculture and food systems due to climate change. This declaration aligns with responsAbility’s deep history in sustainable food and its observation of a significant emphasis on sustainable food systems during the conference. Recognizing the interconnectedness of climate change and food systems, responsAbility has been actively involved in developing private equity strategies like Sustainable Food Asia II Strategy and Sustainable Food Latin America I Strategy. These strategies concentrate on enhancing supply chain efficiencies, reducing food loss, supporting smallholder farmers, and fostering sustainable agricultural practices, reflecting responsAbility’s commitment to creating a more resilient and sustainable future for food systems worldwide,” said Robert Widen, Director Nordics, responsAbility Investments AG.
Cardano’s Klerkx echoed this focus on food and agriculture, noting that “structural changes in the Food and Agriculture sector are clearly on the climate action calendar of (inter)national governments. We expect relevant frameworks to emerge for the industry to operate within, allowing commercial investors to invest in new business models.”
Improving Climate Data
More specialised participants had a more dedicated focus on the COP proceedings. “Given the use of climate data, analytics, and indexes at scale by institutional investors and banks globally there is a need to improve the quality and consistency of reported data,” said David Harris, Head of Sustainable Finance Strategic Initiatives and Partnerships at LSEG.
“The International Sustainability Standards Board (ISSB) was present through many finance events at COP28 as they provide the basis for globally consistent data. The announcement of the 400 signatures backing ISSB global adoption was significant. However, it is going to take a number of years for governments to move toward a global climate reporting framework and for the resulting information to get published. In the meantime, we are focused on supporting the Net Zero Data Public Utility (NZDPU) as a solution to improve data availability and consistency. Their proof of concept was launched during COP,” Harris noted.
Harris highlighted three reasons motivating LSEG’s support for NZDPU. “First, it focuses on the most important quantitative data points for the financial sector. The initial scope of the NZDPU targets a critical core set of foundational climate data – detailed emissions data across each scope and reduction targets (if a company has set them),” Harris said.
“Second, the data is structured and organised in a way that is decision-useful, enabling users to break it down and apply it into their own investment strategies and models. For example, on Scope 3 – the data is broken down into each of the 15 categories set out in the Greenhouse Gas Protocol, aligning with the ISSB climate standard, and across each fiscal year. This provides granularity for the market to make sense of the data,” Harris continued.
“Third, the NZDPU will be open and available to the public, for all use cases, at no charge. While as this data is key for the financial sector, it will help a broader range of stakeholders, from policymakers to academics, more effectively monitor and advance progress toward sustainability and climate goals. Ultimately, climate data should be as reliable, consistent, and accessible as financial data. NZDPU could help us move us towards this goal,” Harris explained.
Finding Business Opportunities
COP28 was also an opportunity for asset managers to celebrate their success and find business opportunities.
“At the COP28, responsAbility’s Asia Climate Strategy received a prestigious award, highlighting its significant contributions to climate protection. The award, handed over by John Kerry, U.S. Special Presidential Envoy for Climate, in partnership with the Ministry of Foreign Affairs of Denmark, recognizes the strategy’s impact in Asia. The Asia Climate Strategy is instrumental in mobilizing substantial investments for energy transitions in emerging markets, targeting over $1 billion in key markets. Denmark’s collaboration with the U.S. in this initiative highlights the commitment of both nations to support innovative financial vehicles for sustainable energy transition in emerging markets,” responsAbility’s Widen noted.
BlackRock and ALTÉRRA, a large climate change private investment vehicle launched at the World Climate Action Summit, also announced a new partnership that will invest US$2 billion in climate opportunities across BlackRock’s private debt and infrastructure equity strategies. The investment solution created for the partnership, “BlackRock Climate Transition Vehicle,” will be capitalized with investments from both ALTÉRRA Acceleration and ALTÉRRA Transformation.
“BlackRock is honored to have been selected to participate in this important initiative, which will shape the way climate finance evolves in the coming years. The launch of ALTÉRRA will itself not only help mobilize much needed capital to support the transition in the Global South, it can also serve as a blueprint for other sovereigns and private sector actors to replicate, partnering to help unleash the trillions of dollars needed in developed and emerging markets. We look forward to bringing our expertise in mobilizing private sector capital to enable its success,” Larry Fink, Chairman and Chief Executive Officer, BlackRock, said.
“Our partnership with BlackRock is an important moment for ALTÉRRA and reflects our ambition to use this capital to mobilize at least US$250 billion of overall investment by 2030. BlackRock brings climate and industry-specific expertise and a broad variety of opportunities to invest in climate-related projects at scale. It is a high-caliber business which has committed to further enhancing its on-the-ground presence in the UAE. We look forward to collaborating closely with BlackRock as we invest to accelerate the transition to a new climate economy and a low carbon economy across markets globally,” Majid Al Suwaidi, Director General of COP28 and incoming Chief Executive Officer, ALTÉRRA, on the occasion of the new partnership’s announcement.
Looking Ahead
Going forward, asset managers expect continued efforts to close the climate transition financing gap and the investment opportunities that the transition will facilitate.
“We anticipate the focus of climate discussions ahead will be on what is needed to close the financing gap, where the current barriers are, and what tools policymakers and regulators may look to adopt in areas such as taxation,” Northern Trust’s Moret explained.
“Health was also centre stage, with discussions focusing on the human health impact of climate change and extreme weather events. Climate is not a topic to be tackled in isolation, but rather in the context of the Earth system, that all resources and living beings are part of,” Van Lanschot Kempen’s Vitorino argued.
“The key will be in the actions countries take over the coming months, years and decades to deliver a climate transition and the message they send to industries and investors about their commitments to action. At Schroders, we remain committed to transitioning the portfolios we manage for our clients to the low carbon global economy toward which we believe we are heading,” Schroders’ Howard said.
Focusing on what insights investors could extract from COP28 regarding its implications for market trends Cardano’s Klerkx was not optimistic about fossil fuels. “Investing in fossil fuels is a dead end whilst Renewable energy generation is once again confirmed to be a significant growth sector, backed by global governments, supported by development banks, aiming to de-risk needed investments in order to mobilize commercial capital. While this process had been started already, COP 28 validates this approach. The acceleration of the energy transition will lead to increased demand and competition for (scarce) raw materials, manufacturing, labour, land and access to energy infrastructure which could cause bottlenecks and most likely will affect time to delivery and locations of capacity being build. At the same time, geopolitical tensions could rise as a result of increased competition, which could further pressurize global trade and supply chains. Nevertheless, the direction globally is clear and confirmed,” Klerkx added.
“We think these structural developments are positive and signalling for more and more investment opportunities in climate finance,” Cardano’s Klerkx concluded.
