I wonder where we would be without acronyms; probably using more ink but perhaps better informed.
The acronym of the moment is of course COP26, which is the trendy acronym for the United Nations climate change conference in Glasgow. It is the 26th annual UN Conference of Parties which started in Berlin in 1995.
In simple terms the purpose of the series of conferences has been to collectively agree on the actions required to limit the impact of climate change. Cynics have suggested that the empty promises resulting from past conferences has exacerbated, rather than reduced, the hot air problem. However, in the wake of the global and existential threat that is Covid-19, the global community is awakening to the reality that a collective response is the only way to deal with a truly global threat. Retreating to your corner when you live on a sphere doesn’t really work!
The Glasgow conference has set a number of objectives, but it is the first goal of: securing global net zero by mid-century to keep the objective of limiting global warming to 1.5degC within reach which contains the greatest investment challenges and opportunities.
Countries are being asked to come forward with ambitious 2030 emissions reductions targets that align with reaching net zero by the middle of the century.
According to the UN, to deliver on this challenging target, countries will need to:
- Accelerate the phasing-out of burning coal,
- curtail deforestation,
- speed up the switch over to using electric vehicles, and
- encourage investment in renewable forms of energy.
In a world in which New Zealand only produces 0.10% of global CO2 emissions one could take the view that our impact is so minuscule that whether we play our part, or not, is irrelevant.
Of course, this very mindset expressed across individuals, businesses and nations has contributed to the urgent response that is now needed.
But much like being vaccinated, it is our collective response that will ultimately protect us all.
What does COP26 mean for your finances and investment opportunities:
1. Decarbonisation. The world is on a decarbonisation journey where our reliance on hydrocarbons and carbon (coal) is being replaced by electrons and renewable energy. This is having profound impacts across the investment landscape, such as rising energy prices, rising prices in certain commodities used in electrification like copper and aluminium, and the potential for higher inflation over coming decades due to the high costs of this transition.
2. New technologies will be a part of the answer if the world is to meet its net zero objective by 2050. Innovative companies will be looking for capital and will provide exciting investment opportunities. But with new opportunities there will always be new risks.
3. In the transition to a low carbon economy some fossil fuels, like gas, will still be needed to form an important bridge to allow the phasing out of the most egregious carbon emitting fuels, such as coal, before new green energy becomes available.
4. Like it or not, nuclear is green. In terms of carbon emissions, nuclear energy generates less carbon than solar or wind, relative to the power produced. In light of this, nuclear energy is being increasingly recognised as an essential part of the solution if the world is going to meet the targets contained within COP26.
5. Shareholder activism. Institutional investors are increasingly taking an active approach to encourage large companies to reduce emissions. This is potentially best illustrated through the incredible feat by small activist hedge fund ‘‘Engine No.1’’ which successfully campaigned to replace two Exxon Mobil Corporation directors with two environmentally focused nominees. Exxon Mobil is one of the largest and most powerful oil companies in the world and even they are having to bend to environmental pressure from shareholders.
What can you do?
I recommend a discussion with your investment adviser about whether the threats and opportunities of de-carbonisation are being addressed within your portfolio.
The same question should also be asked of your KiwiSaver provider. I am not suggesting that you need to become a green crusader by seeking out specific investments to address the problems of the world. But perhaps applying the medical maxim of first do no harm is a good starting point.
- Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.
