Our top COP takeaways

Increasingly, the investment community is recognising the need for a fair and inclusive net-zero transition

• Every asset owner and sustainability group we spoke to agreed that emerging markets must be included in the net-zero transition. We view this as a very positive change, but words must be turned into action to finance the emerging world’s transition.
• For our clients, we view the emergingmarketsnet-zerochallenge as a major investment opportunity, aligned with a powerful structural growth trend, and the chance to make a positive contribution to the developing world’s transition.

The tide is shifting towards an ‘engage & collaborate’ approach to sustainable investing

• We detected step-change in the way the asset management industry talks about investing in the net-zero transition, with a shift towards engagement & collaboration and away from divestment & exclusion.
• “That investors should not withdraw capital from heavy-emitting sectors and countries was accepted as a given.”
• See our press release: ‘Ninety One’s Hendrik du Toit: Net Zero is a pipe dream without total inclusion’.

First thoughts on the investment implications of COP

• From an investment perspective, COP was always going to be more about sentiment – it doesn’t change (for example) the models some of our investment teams use to assess carbon risk and carbon impact. The US infrastructure bill will have a bigger impact on such forecasts.
• That said, near term, COP26 seems unlikely to be a major positive ‘sentiment event’ for environmental stocks. Emissions-reduction pledges are still inadequate to achieve a 1.5c outcome and will result in higher emissions by 2030 than today.
• On specific measures, the pledge by 100+ countries to cut methane may have important implications for companies in the waste, oil & gas, and agriculture sectors in particular. Reducing methane isn’t easy, so investors will need to monitor how companies are responding to the challenge.

Decarbonisation remains a key driver of investment outcomes, though companies may now be moving faster than governments

• The momentum behind decarbonisation remains strong, and we believe that the net-zero transition will continue to drive opportunities for investors and influence investment outcomes. We note that companies may now be moving faster than governments on net zero.
• A telling anecdote: Vietnam had planned to build two new coal-fired power plants. But Vietnamese businesses concerned about the impact on their carbon footprints –and consequently the ‘exportability’ of the goods they manufacture–successfully pressured the government to change the plants to renewables.

For asset managers, delivering ‘sustainability with substance’ matters more than ever

• “The civil voice is getting louder. The protests [at COP] were peaceful but the message is clear: no more empty promises.” Increasingly, investors and the wider public will demand what we at Ninety One call sustainability with substance.
• At the same time, the reputational stakes are rising (to say nothing of litigation risk). Any hint of greenwashing could be very damaging for an asset manager.

We need to keep pushing for better metrics to assess portfolio-level transition alignment

• The majority of the investment community is still anchored to the basic ‘Scope 1 and 2 intensity/footprint’ approach to assessing portfolio net-zero alignment.
  • We maintain our view that this approach is: i) an inadequate way of assessing alignment; and ii) risks diverting capital from where it is most needed.
• There are still very significant climate-related data and methodology issues that need to be solved.There isn’t even consensus on simple points like what baseline year to use to measure progress against. We will continue to advocate for better measures.
• As John Green, Ninety One’s Chief Commercial Officer, argued at the Green Horizons Summit, the journey to net zero is not one of a linear carbon reduction. Realistic ‘transition key performance indicators’ are needed to support emerging markets’ transition.

The devil will be in the detail for GFANZ

• Assets managed by Ninety One are included in the Glasgow Financial Alliance for Net Zero’s (GFANZ’s) US$130 trillion of private capital committed to net zero. GFANZ brings under one umbrella net-zero finance initiatives that are accepted into the Race to Zero (e.g., the Net Zero Asset Owners Alliance, Net Zero Asset Managers initiative).
• It’s early days for GFANZ, and it’s clear that‘committed to net zero’ means different things to different people. There have already been accusations of greenwashing.Ninety One will continue to engage and advocate for real-world positive change.
• One area where GFANZ could play a role is in helping multilateral and regional development banks get better at crowding private finance towards funding net-zero projects. There was a big discussion on this at COP, but our team felt that private financiers seemed to be having it among themselves.

Eyes on COP27

• Even before the (ultimately watered-down) final agreement was signed at COP26, delegates were already turning their attention to COP27, to be held in 2022 in Egypt.
• Investors seeking to manage climate-related risk and opportunity need to be prepared for a faster pace of change.