Negative noise highlights COP27’s need to bolster climate targets

Business leaders need to help maintain momentum, writes Quilter Cheviot's Gemma Woodward

The reaction to the progress achieved by COP26 was mixed, verging on positive. Many aligned themselves with the glass-half-full crowd and perhaps, due to a desire to be seen as part of the solution, those harbouring negative views kept largely quiet.

No doubt more could have been achieved, particularly given the disappointment around the lack of concrete action on coal use, but generally the mood was optimistic, and it felt like businesses and asset managers were finally waking up to the fact that tackling climate change is simply good business.

Fast forward to the present day and the picture is looking more mixed. The volatility witnessed in energy markets and the pressure the cost of living is having on households has reignited the debate around energy security and the role of fossil fuels in this fuel mix. Notably the Conservative leadership contest has seen little airtime given to climate change.

This has arguably emboldened those that hold those negative views around climate change and responsible investment. Many feel they are being proven right that renewables are not the answer and that net zero will simply stoke inflation and make things harder.

The impact of the Russia-Ukraine conflict on the energy transition is yet to be fully understood, but there is a sense that while it is negative in the short run, longer term it could be beneficial. Meeting energy needs in the short term will see higher carbon emissions, but this must be merely an interim solution.

Ultimately, there is growing hope that it accelerates the energy transition. Energy security and the energy transition should not be seen as mutually exclusive, rather they can be viewed as two sides of the same coin.

COP27 needs to see a coordinated effort on a policy standpoint along with significant funding, but it is entirely possible that recent tragic events will provide a catalyst for this process.

It also presents an opportunity to double down on the fight against climate change to keep the 1.5-degree target alive. With that additional pressure must be placed on countries such as China, Brazil and India to step away from coal at the very least. It is likely that these countries will once again choose to limit the progress we can make and as such skilful diplomacy and innovative policies will be required to bring them closer to the consensus.

The role of business

Business leaders had an important role to play at COP26 and we expect that to continue for COP27. From an investment perspective our recent engagements with companies of late have focused on the number and quality of carbon reduction ambitions, or even better net zero strategies.

Specifically, it is important to look for a thorough and robust climate transition plan from these companies. The challenge for investors, and indeed the companies themselves, is that this is an evolving playing field and there remain significant unknown factors; creating a climate action plan that has teeth, and where the challenges and opportunities have been identified can be complex.

We want to see alignment with a 1.5-degree pathway and, in our view, that is the crux of the net-zero commitment. However, some companies are still only aligning their plans with a 2 degrees pathway. It is industry specific, but we are looking for a focus on the next decade.

The key is not just 2050 targets but meaningful interim targets in order to ensure that the plan is on track. We also have to be mindful that the road to net zero is not linear and that trying to balance target setting can be tricky – you need to be ambitious but also realistic. 2050 targets are admirable but, given the time to delivery, their effectiveness can be hard to measure until a significant amount of time has elapsed.

We also want to see this conference have a focus on a reduction in absolute emissions, on a Scope 1, 2 and 3 basis, as well as companies taking ownership of Scope 3 emissions, which can be notoriously difficult to calculate. The recognition and acceptance of their presence demonstrates desirable transparency characteristics for us as investors.

One shortcoming with the approach taken by most of the investment industry, as well as many large companies, we have seen is the targeting of carbon intensity, rather than an absolute figure in their plans to reduce carbon emissions.

As carbon intensity is measured per unit of revenue, it is quite feasible that a company could claim a reduction in intensity even though its overall carbon footprint has increased, providing revenue growth outstrips the rise in carbon emissions.

If COP27 can go some way to tackling these issues and find a way to bring more countries, business and people on this journey, then we will be looking at its effectiveness in the glass-half full camp, just as we did