Climate and COP27: Political Pressures, Investment ImplicationsBy Gavin Power
- The annual UN Climate Change Conference reinforces climate action as a global priority and convenes governments, investors (including PIMCO), and other stakeholders to strategize on solutions, discuss challenges, and forge new partnerships.
- At COP27, UN Member States agreed to help vulnerable countries cope with severe climate impacts.
- Key investment-related themes of COP27 included carbon markets, risks related to direct climate-change impacts, and long-term opportunities to invest in the physical assets needed to achieve global net zero goals.
As political drama, the recent UN Climate Conference (COP27) in Egypt did not disappoint, with negotiators from nearly 200 countries grinding through exhausting, late-night discussions in an effort to reach a climate-action milestone. Near dawn, the so-called Sharm el-Sheikh Implementation Plan was gaveled: UN Member States agreed to set up a “loss and damage fund” to help vulnerable countries cope with severe climate impacts, and also reaffirmed the goal of keeping global warming to 1.5 degrees Celsius above pre-industrial levels.
However, this political achievement left many government negotiators, climate scientists, and civil society advocates frustrated because the final text does not include explicit references to reducing the use of fossil fuels as some, such as the EU and India, had requested. This is the realpolitik of UN conferences – famous for final agreements that most tolerate, some celebrate, and others reject.
In our view, the political outcomes of COP27 have ramifications for investors. As two delegates who participated in several high-level events, sideline sessions, and bilateral discussions, we believe COP27 was an important stepping stone for the investor community, particularly with regard to the global energy transition.
Private sector perspectives on climate risk and solutions
COP27 featured the vocal presence of the private sector and private finance. Private sector participants focused on three main themes: 1) investment risk related to direct impacts of climate change, 2) transition costs and considerations as carbon markets rebalance the economics of fossil fuel investment and renewables, and 3) long-term investment opportunities in the physical assets needed to achieve global net zero goals. Each of these drivers found strong expression at COP27.
In assessing climate risks to portfolios and economies, a pre-conference report issued by the Deloitte Center for Sustainable Progress estimates that climate change, if left unchecked, would cost the global economy $178 trillion over the next 50 years – representing a 7.6% hit to global GDP in the year 2070 alone. Responding to such forecasts, delegates (including PIMCO) attending the UN Global Compact’s High-Level Caring for Climate event discussed ways to set more ambitious private sector decarbonization strategies, engage with policymakers and regulators to set effective industrial and commercial product standards, and expand and improve the credibility of climate and green bond markets. (For investor-focused perspectives on reducing fixed income portfolio exposure to greenhouse gases, please read our recent piece, “PIMCOs Net Zero Framework to Decarbonize Bond Portfolios .”)
COP27 addressed the rapidly evolving carbon market. Carbon pricing now covers more than 40% of global emissions, according to the OECD, with prices rising to levels in the $90 per ton range. Related, new efforts are underway to scale voluntary carbon markets, including the Global Carbon Trust, launched at COP27 by Bloomberg Philanthropies and partners. U.S. special envoy John Kerry launched the Energy Transition Accelerator, a carbon offset scheme aimed at developing countries. While acknowledging geopolitical uncertainties and other sources of energy market volatility, we note the longer-term trend toward higher global carbon prices seems assured, strengthening the investment argument for a transition to net-zero-aligned energy sources. (Learn more in our recent Viewpoint, “Energy Transition: A Jarring Path to Green .”)
Turning to investment opportunities, spending on the physical assets and sustainable infrastructure implied by global net zero commitments could amount to $275 trillion between 2021 and 2050, according to McKinsey Sustainability estimates. A COP27 side event, “Accelerating the Transition,” discussed the implications of the scale of those spending estimates, and also emphasized the importance of investing with an energy resiliency mindset. The importance of such a mindset could have interesting implications with respect to how investors engage with companies and even sovereigns in the future. Some key questions come to mind: Do management teams and public authorities understand the importance of energy resiliency, and if so, what specific policies and measures are they putting in place? Does the concept of resiliency extend to other sustainability issues – for example, supply chain management and geopolitical risk? What material KPIs (key performance indicators) could relate to the concept and implementation of resiliency?
Further takeaways for investors
Three additional topics at COP27 caught our attention as meaningful for markets and investors:
- Science-based targets. Many stakeholders, including regulators, are increasingly scrutinizing net zero commitments by business and investor alliances, and these initiatives may need to create new guidelines and transition assessment plans. In this regard, the importance of setting and monitoring science-based targets was emphasized. For example, nearly 2,000 companies have set targets that are validated and endorsed by the Science-Based Targets initiative (SBTi), a partnership of several international agencies that seeks to define and promote best practices in emissions reductions and net zero targets in line with climate science.
- Climate and the SDGs. At a special session convened by PIMCO and Mercer, delegates discussed the importance of ensuring a strong link between climate action and the broad Sustainable Development Goals (SDGs), including key “S” goals in areas such as health, labor rights, and gender equality. Strategic thinking and partnerships can help contribute to the just transition to a more sustainable global economy – in essence, minimizing social disruptions to communities and workers, while maximizing new economic opportunities, especially related to employment.
- Partnerships. COP27 emphasized the importance of cross-sectoral and multi-stakeholder partnerships. Addressing climate change and broader global objectives, such as the SDGs, is beyond the capabilities of any one stakeholder group, whether public sector or private sector. Initiatives such as the UN Global Compact, the Principles for Responsible Investment, and other alliances are crucial for advancing peer-to-peer learning and multi-party action.
A final word: Many observers in the international community, including investors and companies, had fairly low expectations for COP27. While we would characterize the global policy and political achievements as passable, we also continue to believe that the UN COP series serves a valuable purpose in maintaining climate action as a global priority and convening large numbers of actors (including investors) to strategize on solutions, discuss challenges, and forge new partnerships.
Visit PIMCO's ESG webpage for further insights into sustainable investing.
PIMCO is committed to the integration of Environmental, Social and Governance (""ESG"") factors into our broad research process and engaging with issuers on sustainability factors and our climate change investment analysis. At PIMCO, we define ESG integration as the consistent consideration of material ESG factors into our investment research process, which may include, but are not limited to, climate change risks, diversity, inclusion and social equality, regulatory risks, human capital management, and others. Further information is available in PIMCO’s Environmental, Social and Governance (ESG) Investment Policy Statement.
With respect to comingled funds with sustainability objectives (“ESG-dedicated funds”), we have built on PIMCO’s 50-year core investment processes and utilize three guiding principles: Exclude, Evaluate and Engage. In this way, PIMCO’s ESG-dedicated funds seek to deliver attractive returns while also seeking to achieve positive ESG outcomes through its investments. Please see each ESG-dedicated fund’s prospectus for more detailed information related to its investment objectives, investment strategies and approach to ESG.
All investments contain risk and may lose value.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.