BNP AM

The sustainable investor for a changing world

Clouds from above at dawn

Climate Lead Thibaud Clisson takes a look at what came out of the recent COP26 climate conference and which initiatives investors should be keeping an eye on.  

The gavel finally came down at COP26 a day after the conference was due to end (well, technically, a year after). Moments later, summit president Alok Sharma took to the podium and had to compose himself after a last-minute intervention from India and China to change the wording in the COP26 cover text to ‘phase down’ rather than ‘phase out’ coal.

His emotional response to changing a single word in the Glasgow Climate Pact highlights  both the high stakes and political realities of such consensus-driven negotiations. In addition to the cover text, two weeks of talks resulted in changes to the Paris Agreement’s rulebook and a flurry of announcements and initiatives from countries and companies on climate change.

What are the most-important takeaways from COP26?

The rules of the Paris Agreement

One of the main aims of the meeting was to finalise the ‘Paris rulebook’, originally to be agreed upon at COP25. Outstanding elements most notably included Article 6 on carbon markets.

COP 26 passed rules to establish a global carbon market and to facilitate bilateral carbon trading. A compromise was agreed between nations looking for a robust market that avoided any risk of emissions double-counting, and others looking to use older carbon credits from the Kyoto Protocol. Under the deal, credits extending back to 2013 can be traded between countries and used against national emissions reduction targets.

Transparency rules were agreed that will see all countries report their climate pledges and their progress towards these in a common format by 2024, allowing for easier comparability between climate plans. This agenda item survived despite significant pushback, although some low-emitting developing countries were given exemptions under the reporting rules.

A return to NDCs

To realise the ambition of the Glasgow Climate Pact and limit global warming to 1.5C means cutting emissions 45% by 2030 and to net zero by 2050. This is some way from being achieved: analysis from Climate Action Tracker puts the world on a 2.1-2.4C warming pathway accounting for existing pledges and targets (see Exhibit 1).

Parties have agreed to revisit their climate pledges – or nationally determined contributions (NDCs) – at COP27 with the aim of strengthening them by the end of 2022. This is a critical step in closing the emissions gap to 1.5C.

Glasgow saw countries agree, as part of the rulebook, to encourage other nations to set their NDCs in five-year periods beyond 2031. Many wanted the wording to be stronger here to force countries to use a five-year timetable.

Other announcements

From a financial perspective, countries agreed to phase out ‘inefficient’ fossil fuel subsidies. This, along with the specific reference to coal mentioned above, marks the first time fossil fuels have been specifically called out in a COP outcome text.

The Glasgow Climate Pact mentions for the first time the need to cut other greenhouse gases alongside CO2. In this regard, the Global Methane Pledge was signed by over 100 nations, notably without China, to reduce methane emissions 30% by 2030.

Elsewhere: 

  • Over USD 19 billion n in both public and private funds will be put towards ending deforestation by 2030. However, Indonesia – one of the world’s most heavily forested countries – has already seemingly reneged on the agreement, along with Brazil.
  • More than 20 countries committed to ending the financing of overseas fossil fuel projects, instead pledging to divert funding to green energy initiatives. Furthermore, more than 40 nations have pledged to ditch coal.
  • The Glasgow Financial Alliance for Net Zero, which comprises 450 worldwide companies including BNP Paribas Asset Management, BNP Paribas and Cardif, highlighted that more than USD 130 trillion of global assets are now focused on tackling climate issues.
  • A slew of national net-zero commitments were made. India unveiled a surprise 2070 net-zero target and Nigeria – Africa’s largest oil producer – announced it is seeking carbon neutrality by 2060.
  • Finally, several countries and six major carmakers agreed to phase out the production of fossil fuel-based vehicles by 2040. 

Concluding thoughts

Another positive outcome was an announcement from the US and China that they would boost their climate cooperation over the next decade.

The Glasgow Climate Pact includes an explicit goal for developed countries to double their climate adaptation funding for developing countries by 2025 from 2019 levels, taking the annual figure to around USD 40 billion.

An additional USD 356 million was committed to the Adaptation Fund, and an important dialogue has been started on the contentious issue of ‘loss and damage’.

While this is all welcome progress, developed countries are still failing to meet their USD 100 billion per year climate financing commitment to emerging economies, which was supposed to have been reached in 2020. At Glasgow, nations now pledged to fully deliver on that goal by 2025.

The failure to reach the USD 100 billion, alongside providing broader adaptation support, shows the continued need to push for a just transition and highlights the role that private finance can play given the failure so far to reach the public investment levels needed to achieve the goals of the Paris Agreement. This marks a clear call to action for private investors to help direct capital to where it is most needed in support of climate mitigation and adaptation.

Also watch the video with Thibaud Clisson on what happened at COP26


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

Social bonds – A tool to effect positive social change
10:47 MIN
Market weekly – Climate change: It is adapt or… (read or listen)
BNPPAM

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

FOR INSTITUTIONAL AND FINANCIAL PROFESSIONAL INVESTOR USE ONLY. THIS MATERIAL IS NOT TO BE REPRODUCED OR DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT.

BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2021 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.