Special Report: For Investors, COP27 Summit Brings New Opportunities
As the planet slashes emissions, here’s what investors can expect.
It was a year that brought catastrophic flooding to Pakistan, wildfires in Europe, and drought around the world, the latest consequences of global warming. In the United States, as U.N. Secretary-General António Guterres noted in October, Hurricane Ian “delivered a brutal reminder that no country and no economy is immune from the climate crisis.”
These are the issues facing the world as nations gather in Sharm el-Sheikh, Egypt, for the climate summit known as COP27, which opens this weekend.
This is the same summit where nations met 12 years ago to sign the Paris Agreement to curb climate change. Since then, a flurry of national pledges to slash greenhouse gas emissions to net zero (to take as much carbon out of the atmosphere as one is putting in) by 2050 has materialized. The target is aimed at keeping global temperatures to 1.5 degrees above preindustrial levels, forestalling the worst effects of global warming.
The arc of climate change is a lot like parenting: The days are long, but the years are short. To get to net zero credibly, companies and nations need to have slashed emissions by 45% by 2030—just seven years away.
“Climate change isn’t a potential risk anymore, it’s a certainty,” said Annie Chor Joyce, head of ESG at Amundi U.S., speaking at a recent Reuters ESG conference.
For investors, the world’s move to reduce carbon will create risks and opportunities aplenty.
This year’s climate summit “will be the workman’s COP,” says Ian Simm, CEO of Impax Asset Management, referring to the acronym for the summit. “It’s important that the statements coming out of COP27 reconfirm the statements from COP26, and no backsliding.”
Last year’s summit resulted in agreements to reduce coal plants and methane emissions, roll back deforestation, and finance efforts by developing nations to address global warming. “It was a success because of the momentum it created around achieving net zero by 2050,” Hortense Bioy, global director of sustainability research for Morningstar, said at a recent briefing for reporters.
That momentum will be harder than usual to achieve this year. The Russia-Ukraine conflict coincided with food and energy shortages that sent prices soaring for fossil fuels. Such complications may be one reason a number of key executives have decided against attending the summit, including BlackRock CEO Larry Fink and Citigroup CEO Jane Fraser.
“My concerns around COP27 are that a lot of bank and asset manager CEOs have pulled out,” raising questions about effectiveness, says Anya Solovieva, global commercial lead on climate solutions at Morningstar Sustainalytics.
All these considerations create an array of risks and opportunities for investors. “The whole project of decarbonizing is the largest intentional reshaping of the economy,” says Paul Bodnar, BlackRock’s global head of sustainable investing, at a recent conference.
In an interview with Morningstar, Deirdre Cooper, who manages Vanguard Global Environmental Fund VEOIX, notes that the world is currently investing more than $600 billion a year in climate finance. “If we move to a net-zero scenario, that number needs to be $4-$6 trillion.”
Indeed, the Russia-Ukraine conflict has focused attention on the need for energy efficiency. Says Simm of Impax: “It’s sent a powerful signal to everybody to save energy. Energy efficiency opportunities have never had it so good.”
One positive note: The U.S. Inflation Reduction Act of 2022, providing tax credits for U.S. companies in renewable energy, electric cars, and energy efficiency. That’s helping with the mainstreaming of what once was called alternative energy. Indeed, the new law “sets us up to deliver low-cost highly visible energy systems that will aid a manufacturing renaissance” in the U.S., says Vanguard’s Cooper.
And Morningstar analysts are here to help you understand the risks and opportunities of climate change. Jon Hale, director of sustainability research for Morningstar, recently offered a list of funds and ETFs that might benefit from the Inflation Reduction Act.
Bioy also notes that funds tracking climate benchmarks have seen extraordinary growth and that existing conventional and sustainable funds are converting into fully fledged climate funds. Alyssa Stankiewicz, ESG research analyst for Morningstar, shared that one way to ensure that your fund is addressing climate change is through Morningstar’s new impact metrics.
In the coming week, watch out for our new articles and videos around COP27, including our special report on Investing in Water. Check for coverage on Morningstar.co.uk, Morningstar.ca, and Morningstar.it. Meanwhile, have a look at our previous special reports on investing in energy and investing in food.
Here are some water stocks and water funds to consider.
Expect water to be a big subject during climate talks.
As COP27 discussions start, expect asset managers to consider climate and water-related risks in tandem.
Here’s how to build a portfolio that fits your sustainability goals and interests, like climate change.
Water risk should be considered with the same scrutiny as carbon emissions.
A look at the companies, funds, and ETFs that could benefit from the move to nuclear energy, which doesn’t produce direct carbon emissions.
The number of climate funds has reached a record high of 1,140 globally.
Environmental activist Ed Gillespie sits down with U.K. editor Ollie Smith to give his take on the climate summit.
In the second part of our interview with ecologist and climate activist Ed Gillespie, Ollie Smith asks how hopeful Ed feels about the future.
Risks associated with climate change include drought, loss of agricultural crops, and floods.
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