Pledges from world leaders at the U.N. climate talks in Glasgow, Scotland, to limit the increase in global temperatures are helpful, but there needs to be more concrete action, a fund manager and a climate-risk researcher said.A draft U.N. climate pact released at the COP26 meeting highlights the need to cut greenhouse gas emissions by 45% by 2030 from 2010 levels to achieve net zero. And it reaffirms the Paris Agreement goals from 2015 to cap temperature rises to 2 degrees Celsius over pre-industrial levels.
Many climate scientists say warming needs to be limited to 1.5 degrees Celsius by 2050. Pledges so far would be enough to limit the rise in global temperatures to 1.8 degrees Celsius by 2100 but doesn’t get us to net zero. The draft also calls for countries to “accelerate the phasing out of coal and subsidies for fossil fuels,” but doesn’t mention ending the use of oil and gas explicitly. A big surprise out of the conference was news late Wednesday that China and the U.S. jointly announced they’d work closer to increase climate cooperation, although details are light. Di Zhou, investment principal at Cambiar Investors, and Alicia Karspeck, head of research at Fabric, which works with investment advisers and institutions on portfolio climate risk, agree that pledges from countries and private institutions are pointing in the right direction, but that more needs to be done in terms of spending and sharing technology.
““I don’t know that the conference has done a great job of highlighting moving away from fossil fuels. It’s simply an unpopular thing to point out.” — Alicia Karspeck, head of research at Fabric”
MarketWatch spoke with Zhou and Karspeck on takeaways from the event, including how developing nations could be helped by richer ones, the current limits of renewable energy and strides made by China, the world’s most populous country. Q: Activists including Greta Thunberg say COP26 was all for show and nothing was getting accomplished. Is she right? Alicia Karspeck: No, I don’t think it’s just for show. Consider the counterfactual, which is what would be happening if a COP wasn’t as visible. It could always be better. The role of protesters — to give a skeptical eye on it — is important, almost to keep people honest about it. It’s just an incredibly complex problem. Q: Are there any wins or success stories stemming from the event? Karspeck: I saw the methane pledges [to reduce methane by 30% over 2020 levels by 2030] as a huge success. It doesn’t create this tension that you have with stopping the use of fossil fuels, where it’s going to create a crisis. Methane is a very potent greenhouse gas. Mostly what’s happening with methane is it’s being leaked through the production of fossil fuels. But there are technologies to stop that. I see this as tractable and practical and a great thing to come out of this. Di Zhou: There is a consensus about phasing out coal; it’s just a matter of which region is doing it more aggressively. Q: China wasn’t represented at COP26. The country has to balance growth and reducing carbon emissions. How can that be done? Zhou: China already announced a bunch of commitments ahead of COP26, including peaking carbon use before 2030, curbing coal consumption growth — “growth” is the key word. There is a lot of urgency in China without developing countries putting pressure on them. For example, air quality. If air quality is bad all the time and causing health issues, that’s a political issue for them, too. I do think China is very committed to reduce carbon emissions. And that has global implications because what we know with China is that it has very good execution capability. Q: There’s tension between developed Western nations calling on emerging markets to cut emissions, but the Global South — the regions of Latin America, Asia, Africa and Oceania — says richer nations haven’t fulfilled their pledges to poorer countries. Was there any consensus or progress? Zhou: Climate change is real, and we really need everyone to get on board with this. Sharing technology is important. You can’t just say, “Hey, China, India, you need to do this,” but you’re not helping them with money or technology. Their economies are based on coal. Sharing technology, creating best practices, providing funding will be helpful. It’s a carrot-and-stick approach. It can’t all just be stick. Q: What will you be watching next? Karspeck: I’m curious about what’s going to happen with the Glasgow Financial Alliance for Net Zero. It’s hundreds of banks, insurers and asset managers with more than $130 trillion in assets who are committing to net zero. The controversy around that is that they’re not actually committing to divestment of fossil fuels and it’s raising this general question about how they can credibly get to net zero. It’s going to really energize the carbon offsets market, and especially around the monitoring and validation of carbon credit offsets. As people point out, it’s unlikely they’re going actually divest from fossil fuels. So this is mostly going to have to happen through offsets. Q: This year showed the bumpiness of the energy transition, especially in Europe, and we’re seeing fossil fuel prices rise. When it comes down to the basics, most people want the lights to come on when they flip the switch. Does this conference highlight the difficulties of moving economies away from fossil fuels? Zhou: This is why emerging-markets leaders are hesitant. Getting rid of your very reliable baseload electricity production and replace it with renewables, which are intermittent and without adequate storage, is a problem. Europe had an energy crisis. If it happened in India or China, the damage would be even worse. Karspeck: I don’t know that the conference has done a great job of highlighting moving away from fossil fuels. It’s simply an unpopular thing to point out. But practically speaking, it’s true. [President] Biden did mention it at one point in one of his speeches, and I thought that’s a brave and practical truth. Q: What should investors take away from this event? Zhou: This just accelerates the need to build more renewable capacities plus storage capacity, and we need to be more committed to storage to diversify renewable energy sources. That’s a huge investment opportunity for utility companies, and it has implications for European utilities, given the energy crisis we saw this summer. It’s a once-in-a-lifetime opportunity for utilities to actually see growth. We like two European utilities, Spanish utility Iberdrola
and a U.K.-based utility, SSE
Iberdrola has one of the fastest-growing renewables businesses in Europe, and more importantly, one of the largest renewable pipelines in Europe. So it’s not what’s happening right now, but what they’re going to build. They’ve always been well-liked by investors because they have high-quality management. SSE is very similar. SSE has the second-largest offshore wind portfolios and pipelines in the world after Orsted
Karspeck: I think investors, at least ones we’re working with, need to be starting to having more serious conversations with their advisers about being able to understand the composite of their portfolio. Many folks who are individual investors are holding a basket of ETFs or mutual funds, and they may not even know what’s inside of those. So even just getting to this basic understanding of, if I’m holding a Vanguard fund, what are the assets within those? Do I hold fossil fuels? If I do, is that what I want? Even starting with those basic conversations can be really eye-opening. Debbie Carlson is a MarketWatch columnist. She doesn’t own any of the funds or stocks mentioned in this article. Follow her on Twitter @DebbieCarlson1.