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November 15, 2021 | GSAM Connect

World Climate Summit - Glasgow: Top 10 Takeaways

The World Climate Summit - The Investment COP - ​is recognized as one of the most important official side events of COP26. It is the leading forum for business and investment-driven solutions to climate change and has become a key platform for connecting markets with policies to flatten the climate curve.

Goldman Sachs Asset Management was represented by a delegation at the event and was invited to speak on one of the panels. Our team compared notes after the event and we share the top 10 takeaways below.

1. URGENCY: 2030 is the new 2050

The sense of urgency at the summit was palpable and the messages were clear:

  • Everyone must turn words and commitments into actions.
  • The world cannot afford to not make progress this decade–there are just 109 months to 2030.
  • The speed of progress needs to accelerate.

Scientific research suggests we need about a 50% cut in greenhouse gas emissions by 2030 to avoid reaching warming of 1.5°C. Prior to COP, cuts and commitments to date were projected to only flatten the curve: global emissions were still on track to still grow by 17% by 2030. Climate Action Tracker believes current 2030 targets (without considering 2050 pledges) put us on track for a 2.4°C temperature increase by the end of the century. Governments, companies, investors and consumers must take action now to address this gap.

2. INVESTMENT: Finance is recognized as a major player in solving climate issues

The role that finance can and must play in solving climate issues was notably elevated and emphasized at COP26. Business leaders, banks and investors are now literally sharing the stage with the world’s political leaders. This is an acknowledgement of the need for public and private sector collaboration; no single sector can solve the challenges.

Some of the key trends in climate finance are likely to be:

  • Significant development of blended finance solutions to mutualize risk, which is especially relevant for the emerging markets.
  • Returns for many investments will be realized over a longer time horizon than investors are used to.
  • Increasing demand for net zero-aligned investment portfolios as asset owners seek to meet commitments made via the Net Zero Asset Owner Alliance and other organizations.
  • Continued development in the ability to measure impact, factor in risks and opportunities related to climate change into models and capital markets assumptions, and build portfolios that can help investors meet climate goals over the short, medium and long term.

3. COLLABORATION: Working together – across industries, geographies, public and private sectors – is essential

Decarbonization is a global task of unprecedented scale that requires collaboration among parties, including some that might historically have been competitors. This presents a unique challenge. Encouragingly, many panels featured significant discussion about public and private cooperation that is needed to catalyze investment. Many companies shared anecdotes about collaborating with their suppliers, and even competitors, in the effort to decarbonize, recognizing the additional challenges for small businesses they work with, such as access to finance to support the transition.

4. ENGAGEMENT: Encouraging change will achieve climate outcomes

Speakers across many panels made a strong case for engaging with companies that need to make improvements on decarbonization because it is increasingly recognized as a more effective way to achieve the necessary progress to get to net zero emissions. Simply divesting from high emissions companies and countries doesn’t solve the underlying problem. Furthermore, high-carbon assets could end up in the private markets and subject to less transparency. As one of the panelists put it, the global race to get to net zero could jeopardized by the most polluting companies not changing, so climate-focused investors need to be at the table pushing for them to have a plan.

However, the threat of divestment must be real and there should be clear goals and timeframes for pulling capital if they are not achieved; this process can be supported and accelerated by constructive and thoughtful corporate engagement.

5. INNOVATION & SCALE: Catalyzing and scaling solutions is critical and creates investment opportunities

Innovation within finance, business models and supply chains was emphasized throughout; new ways of doing things will be critical to make the progress we need.  The key messages on innovation were:

  • Continued innovative problem solving across technology, finance and solutions for every industry is critical.
  • Many of the technologies and solutions needed already exist but need to get to scale.
  • Innovation can be a profitable investment: over time, every euro invested in a portfolio of cleantech solutions is expected to generate €9 of future turnover in European markets by 2050.1

6. DATA & MEASUREMENT: Consistent standards are critical to executing on corporate and financial initiatives

Financial markets need to assess the risks and opportunities facing individual companies which arise from environmental, social and governance (ESG) issues, as these affect enterprise value. This is driving significant demand for high-quality data on climate impact and performance as well as forward-looking reporting; these essential tools will help investors allocate capital for the transition.

We share the enthusiasm of the participants about the International Sustainability Standards Board (ISSB) announcement as an important outcome from COP26. This major step forward highlights a path to international standards based on existing building blocks and further support calls on companies to quickly begin reporting using the Task Force on Climate-Related Financial Disclosures (TCFD) and Sustainable Accounting Standards Board (SASB) frameworks.

7. POLICY: Private sector finance and initiatives need policy support

There was widespread agreement that government policy remains critical to enabling success in meeting net zero goals.  Companies and investors need a clear framework in which they can operate, particularly in the areas of standardization of disclosures and regulations to level the playing field. Many participants also cited the view that carbon pricing should be a key area of focus for policymakers.

8. DM VS EM: Developed and emerging markets have different needs and considerations

Climate solutions need to thoughtfully consider the very different circumstances in emerging and developed markets. Emerging markets need more adaptation finance to compensate for the greater stranded assets exposure, higher vulnerability to climate-related physical risks and generally poorer economies with lower credit ratings, many of which are still being undercut by the pandemic.  

Global climate solutions need to avoid unintended or overlooked consequences which can be material. In developing countries, climate disasters disproportionately affect women and girls; by 2025, 12.5 million won’t complete their education because of climate change. Education will be essential for climate change mitigation and adaptation as workers need to be trained and re-trained for participating in green economy.

9. BEYOND EMISSIONS: Decarbonization also means focusing on biodiversity, oceans and waste

Several environmental topics that are related to decarbonization emerged as key themes and we believe will gain increasing attention from the investment community:

  • Biodiversity is one of the material threats to planetary boundaries; it is critical to decarbonization efforts, yet is also being severely negatively impacted by current levels of emissions. The commitment on deforestation announced at COP26 was broadly celebrated.
  • Oceans are critical to decarbonization efforts, as well as in need of protection from biodiversity loss and pollution. Continued innovation and development in blue finance opportunities is needed.
  • Circular economy thinking, which focuses on product refurbishment rather than how to dispose of waste or recycle, will further aid decarbonization efforts. Rethinking waste is not enough. Companies need to re-think product design so that product lifetimes can be extended by re-use in innovative ways, all of which puts less stress on the planet.

10. ACCOUNTABILITY: Everyone must be held accountable

Governments, companies, investors and consumers are all responsible and must be held accountable. As expressed by one participant, results are crucial; nothing else matters if we don’t deliver on the plans we have made.

 


 

At Goldman Sachs Asset Management, we believe environmental, social, and governance (ESG) factors are important tools for identifying investment risk and capturing opportunity. Our investment teams across equities, fixed income, liquidity and alternatives may analyze ESG information in a manner consistent with their investment style and specific strategy guidelines. ESG factors may be utilized to set exclusions, drive tilts, or seek to select securities with strong ESG ratings. In addition, for our clients who want to benefit from and accelerate trends toward greater sustainability, we are committed to helping our clients deploy their capital in a manner that is impactful and financially sound. As of June 30, 2021, Goldman Sachs Asset Management supervises $273 billion in strategies where ESG or sustainability factors are an important component, and $97.5 billion in separate accounts with values-driven screens, bringing our total fee-based assets under supervision to $370.5 billion in ESG  and impact strategies.

 

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