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COP27: The Investment Opportunities from Accelerated Climate Action

The 27th UN climate conference (known as COP27) convenes this week in Sharm el-Sheikh, Egypt, and sadly, the prospects of this meeting yielding any meaningful results seem remote, and already there is greater focus on the controversies than the issues at hand (the appointment of Coca-Cola, arguably the brand associated with the worst plastic pollution, as the lead sponsor is not even the most controversial issue).

By Philippa Owen, ESG lead, at GraySwan

Addressing the existential global threat of climate change effectively seems even more daunting given the ongoing global energy crisis (caused by the Russian invasion of Ukraine, a continuing Covid health emergency, and a global economic downturn tied to inflation). While the agendas have been set, the media briefed and the delegates prepped, it remains to be seen whether, under these unfavourable conditions, COP27 can accomplish much – COP 26 in Glasgow was hailed as something of a disappointment as measured by the perceived progress made by member countries towards reaching Net Zero (emissions) targets. And, with even more catastrophic evidence of the cost of climate inaction over the last 12 months the urgency has just become even greater. Another key issue to be considered at this year’s COP is climate injustice. Climate injustice is a phenomenon or term used to describe the situation in which countries that contribute the least to the climate crisis nevertheless pay the highest price.

Ahead of COP27, some of the nation’s most vulnerable to the effects of climate change were pushing for a funding facility for loss and damage to be established. This was also a major topic of conversation at last year’s COP 26, with major polluters like the US and EU opposing the creation of a separate fund to address this issue. But the need to help countries pay for damages caused by climate consequences has never been more apparent. Denmark has been the first to pay “loss and damage compensation”, recently voluntarily promising 100 million Danish crowns (€13.4 million) to developing nations damaged by climate change. 

This makes COP27 a decisive event on the fate of countries most vulnerable to climate change. The fortnight of negotiations will kick off with a World Leader’s Summit on 7 and 8 November. After this, government officials will tackle some of the weightiest issues surrounding climate including finance, decarbonisation, adaptation, and agriculture.

How tackling climate change presents long-term opportunities for investors

Mitigating and adapting to climate change will completely transform the global economy, making this one of the most significant megatrends taking root in financial markets. As such, investors should already be assessing their portfolios and adjusting where needed.

As climate change progresses, scientists warn that floods, droughts, heatwaves, wildfires, and storms will become more frequent and more severe. This poses risks to infrastructure, food production, and social and political stability.

This is already evident in South Africa, which in recent years has endured heatwaves, a prolonged drought in the Cape Town region that affected agriculture, and deadly floods in KwaZulu-Natal. Elsewhere, temperature records have been shattered in North America, the UK and Europe.

Given the circumstances, investing responsibly, with sustainability in mind, is not simply the right thing to do – it also makes sense from a risk management perspective.

Assessing investments through an environmental, social and governance (ESG) lens allows investors to reduce their exposure to assets that would be most adversely affected by climate change, shifting consumer habits, and outdated environmental policies. This approach also assists in gaining greater exposure to investments that are “doing well by doing good”.  

Investment firms across the globe are starting to offer products aligned to these risks and opportunities.

Globally, asset managers are coming together to tackle climate risks, with the Net Zero Asset Managers alliance being a prominent example.

Large institutional investors have also started joining forces to drive a reduction in greenhouse gas emissions. Representing $68 trillion in assets, the Climate Action 100+ group of investors is using its might to push companies to do better.

This highlights the fact that a shift in momentum since the Paris Agreement was concluded is well underway, both locally and abroad. And while the goals of this climate accord are still achievable, meeting them requires a war-like effort.

As such, an offshore investment portfolio that is constructed in line with the climate megatrend stands to benefit from the opportunities on offer, while also avoiding or hedging against the unintended risks of an economy changing for the greater good.

Investors have a significant role to play in the transition and are better placed than ever before to participate in the opportunities it will bring but to also manage the associated risks.

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