The last-minute changes to the COP26 Glasgow Agreement render it worthless, argues Andrew Holt, but there is still much for institutional investors to ponder.

After all the noise, what did COP26 achieve? It saw 30,000 delegates from 200 countries discuss the most important climate and green issues of the day over 14 days and try to address how to tackle them.    

The consensus on the final agreed deal was it amounted to a watered-down affair, with the failure to end coal use and fossil fuel subsidies, particular sore points.

It was because of this that Jennifer Morgan, head of Greenpeace International, described the outcome as “meek” and “weak”.

It will lead inevitably to a green slanging match among nation states, as China and India were the countries dragging their feet on the key issue of coal and other fossil fuels.

As a result, the COP26 Glasgow Agreement ended up being completely garbled. Take this key section, where the agreement calls for “accelerating efforts towards the phase down of unabated coal power and inefficient fossil fuel subsidies, recognizing the need for support towards a just transition”.

What this means in the transition to a green global economy, if anything at all, is open to debate.

This primarily emanates from the semantic shift in the agreement changing “phase out” to “phase down” coming because of the last-minute interventions – in this particular case from India – rendering the agreement close to meaningless.

US climate envoy John Kerry had the unenviable task of defending the change. “You have to phase down coal before you can end coal,” is how he justified it to a baffled audience. He sounded like a man who did not believe his own words.

The reality is that gobbledygook like this cannot be a central and effective part of any policy – particularly on such an important and debated issue as climate change.

So, what should institutional investors make of it? On one level, the outcome at COP26 changes very little for institutional investors. Most are already committed to decarbonising their portfolios, and are doing so in a more focused, transparent way than anything achieved at COP26.

In this way, investors are ahead of the global political elite in bringing about decarbonisation.  

On another level, the COP26 machinations puts the impetus more than ever with institutional investors. “If countries won’t act, now must be the time for the finance community to deliver the full phase out that we need,” said James Alexander, chief executive of UK Sustainable Investment and Finance Association (UKSIF).

“We must stop the financing of fossil fuels and remember which countries are subsidising fossil fuels when considering sovereign bond purchases,” Alexander added.

This is a good point. Institutional investors are in a strong position to take a stand against unresponsive nations on climate change. 

Although Dan Mikulskis, investment partner at Lane Clark & Peacock, offers a slightly different perspective, one that considers the journey emerging market countries need to take.

“Asking emerging markets – who have not yet peaked emissions – to hit net zero by 2050 is asking them to embark on a far more ambitious decarbonisation program than what developed markets have been on. The UK and Europe peaked emissions in 1990 – so have 60 years from peak to zero,” he said. 

This matters, Mikulskis added, for future negotiations. “Asking developing countries to apply the same standards as developed countries is likely to end in failed agreements,” he said.

Under such an approach, investors have greater freedom to maneuver on the issue of green investment. “What all this means for investors is a need to look carefully at emerging market assets and take a nuanced view,” Mikulskis said.

Expanding on his thoughts, he added: “You can’t apply the same criteria to these countries and assets as the developed world, and indeed providing transition finance into these areas could be one of the more meaningful things investors can do.

“Steering away from emerging market allocations because you don’t like the look of the emissions numbers is not good thinking,” Mikulskis added.

Could this be seen as greenwashing? Some will probably make that case, but it is likely that a picture of the dilemmas investors face when embracing climate change and decarbonization will be presented.

As the dust settles on COP26 it will be interesting to see which way institutional investors jump. China, for example, offers institutional investors so many opportunities on so many levels for it to be ostracised.

But it could well be that what happened at COP26 has no bearing on institutional investment at all. We wait to see what happens.

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