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The Leaders’ Summit on Climate

08/06/2021
Sustainable investing
ESG

Key Takeaways

  • Over 40 world leaders participated in the Leaders’ Summit on Climate in April, coinciding with Earth Day and the 5th anniversary of the Paris Agreement. Renewed pledges toward decarbonisation were made by key economies.
  • The Summit is an example of a global event paving the way for more innovation and opportunities. Investors should evaluate a company’s ESG practices as a form of risk management when considering investment opportunities.
  • Company disclosures that signal strong ESG practices, performance and future commitments can help investors identify those that are well-positioned for success. 

What is the Leaders’ Summit on Climate?

Coinciding with Earth Day and the 5th anniversary of the Paris Agreement1, the Leaders’ Summit on Climate convened in April with over 40 world leaders in attendance. The virtual forum was hosted by US President Biden and seen as a milestone towards the UN Climate Conference (COP26) in November. Both events are expected to catalyse efforts for stronger climate action and increased ambition to invest in climate solutions by economies.2

The Leaders’ Summit on Climate had also brought together the Major Economies Forum on Energy and Climate (MEF), whose 17 members are responsible for 80% of global emissions2 (see Figure 1). Aside from increased climate action, other topics discussed include climate security, adaptation and resilience of solutions and unleashing climate innovation.

Highlights of announcements from MEF member countries are as follows:

  • Mainland China will strengthen control of non-CO2 greenhouse gases and strictly-control coal-fired power generation
  • The US renewed their pledge to cut GHGs by at least 50% by 2030, from 2005 levels
  • A heavily coal-dependent country, India reiterated its target to meet 450 gigawatts of renewable energy by 2030
  • Japan will cut emissions by 46-50% (from 2013 levels) by 2030
  • Canada will increase GHG reductions to 45% by 2030, from 2005 levels
  • South Korea – to end all new financing of overseas cola projects (as part of their “Green New Deal” proposed in 2020)
  • The UK will embed in law to achieve a 78% GHG reduction (below 1990 levels) by 2035
  • The EU will embed in law to reduce net GHG emissions by at least 55% by 2030 and a net-zero target by 2050

1.UN Framework Convention on Climate Change; an international treaty ratified by 189 territories globally to keep temperature rise to below 2 degrees C

2.Whitehouse.gov

As an investor, how is this event relevant to me?

The Summit is one of many global events highlighting future investment opportunities. The transition to a low carbon economy will require tremendous effort and tools for decarbonisation, delivered by companies with such know-how. Investors exploring for opportunities should prioritise companies with embedded ESG practices as a means of risk management within their portfolios.

Companies integrating ESG practices are taking a path towards achieving positive environmental or social impact. It also provides transparency to shareholders and investors, where the beneficiaries can embrace this in the form of risk management.

Investors who analyse companies with ESG practices take into account all of the medium to long-term environmental, social and governance issues a company or industry faces. A sample process is detailed in Figure 2 below.

The last step is critical because even if a company faces many disruptive ESG threats, with an agile and attentive board, it may be able to avoid or even exploit and profit from the risks. On the contrary, a company without preparation to respond to ESG threats could be undone, regardless if it were only one risk.

We believe that this type of ESG analysis can help investors avoid the downside economic risks of ESG disruption, be it from climate change, rapid social change or company governance issues.

Investors can also explore funds with ESG analysis already done by professional fund managers. An Impact Fund is an example 

where ESG analysis is considered, as they aim to deliver strong financial returns and positive environmental and social benefits.

To illustrate, managers of a green bond fund (those that support projects exclusively to benefit the environment) may look at the following:

  • Emerging ESG risks that the issuing entity, a company or government, may be facing
  • The issuing entity’s credit strength
  • Use of green bond proceeds and whether the projects in question are sensible and impactful to the environment

How can investors identify companies with sound ESG practices?

Investors should pay attention to company disclosures that signal strong ESG practices, performance and future plans. Historically, most disclosures have focused on achievements, such as reduction of carbon emissions from the previous year. More important for investors’ evaluation are time-based ESG targets that are emerging – not just the achievements that the company has made, but where the direction of travel is.

The most important and visible disclosure on future plans has been the adoption of net-zero commitments. Net-zero refers to the balancing of human-induced GHG emissions against their removal from the atmosphere, a process involving techniques such as carbon-capture and reforestation3.

Net-zero commitments align with the goals set out in the Paris Agreement, an international treaty limiting global warming to no more than 2°C and aiming to offset the carbon from unavoidable emissions sources.

According to the United Nations, the number of companies with net-zero commitments have more than tripled in recent years, from 500 in 2019 to 1,541 in 2020. This is expected to trend upward with global climate change ambition, as well as investments toward climate change solutions.

Understanding these types of future plans and commitments can help investors identify companies well-positioned for success, as they give a good indication of how a company is preparing to address these challenges

Glossary

ESG disclosure: data released by companies on operations and business impact in three areas: environmental, social and corporate governance; such information can aid investors to screen companies with greater financial risk from existing ESG practices

Green bonds: a financial debt instrument issued by governments, sub-sovereigns (i.e. states, provinces, cities, or towns), financial institutions and companies to raise money exclusively for environmental projects

Major Economies Forum on Energy and Climate (MEF): compromised of 17 major economies, the MEF was launched in 2009 by the US to advance the exploration of initiatives in the supply of clean energy and reduction of greenhouse gas emissions4

Net-zero: the balance between the amount of greenhouse gases produced by society and the amount removed from the earth’s atmosphere (e.g. re-forestation to absorb carbon dioxide)

 

3.World Resources Institute

4.US Department of State

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