The 28th annual United Nations climate conference (COP28) concluded on December 12 with an unprecedented, highly ambitious agreement between the conference leaders calling for the world to transition away from fossil fuels with the hope of achieving net-zero greenhouse emissions by 2050. The agreement is particularly notable given the fact that the leader of this year’s conference is the chief executive of UAE’s national oil company (ADNOC), providing certain latitude to meet the conference objectives, if needed. While the agreement is ambitious, it still lacks teeth, timelines, and accountability. For example, it doesn’t set a strict timeline for the transition and doesn’t call for a movement away from carbon producing fuels. Rather, it supports technology to leverage carbon capture and storage technology.
One way or the other, it’s clear that the investment industry will play an important role in enabling this transition, and, in truth, it already has through institutional and individual environmental investment preferences and broader funding. There is absolutely no way governments can fund and enable this transition on their own. That said, what should be top of mind for the stewards of private capital―securities and investment firms―now that the COP28 conference is over?
Net-Zero Commitments and Investor Alignment
Although many investment firms have done so already, there will likely be an increase in the number of firms announcing net-zero commitments and how they plan to align their portfolios to meet those commitments. Globally investment decisions will be influenced by country specific requirements. Retail investment products such as net-zero aligned target date funds or services that help investors align their investments to meet certain goals may gain traction as well. However, with an election coming up in less than one year, ESG markets and frameworks will become even more deeply embroiled in the U.S. culture wars, with significant implications for both American institutional asset managers and wealth managers regarding which way client appetites tilt.
Carbon Credit Markets
As the agreement reached at COP28 allows for carbon capture as an engine to lower overall emissions, the markets in which carbon credits or offsets trade are likely to expand. This will play an important role in how firms lower the emissions associated with their investments as well as hedge against unforeseen emission increases. Although seen by some as a controversial way to reduce emissions, carbon credits are expected to play an important role in allowing for overall emission reduction while the global economy slowly transitions away from fossil fuels. For the moment, there is an embryonic retail market for private individuals to invest in carbon markets, mainly through certain mutual funds and ETFs, green companies, and carbon credits. While this market absolutely needs to grow exponentially to meet climate change targets, securities and investment firms will again need to navigate highly polarizing political forces that ultimately shape clients’ investment rationale.
Advanced technology such as AI and machine learning will be necessary tools for investment firms to fulfill their role in the larger global transition to a greener economy. AI can collect and help analyze vast amounts of data and information as well as estimate metrics for the data that doesn’t yet exist such as Scope 3 GHG emissions or emissions for smaller companies that aren’t able or required to measure and disclose it themselves. AI will also help investment firms disclose the necessary information required by the onslaught of ESG and climate-related regulation coming into play around the globe.
It’s Not Enough to Just Have the Data, You Have to Know What to Do With It
In recent years, investment firms have continued to shell out large amounts of money on ESG data and ratings without always really knowing if they could trust it and how to normalize that data in the absence of standards. As the quality and availability of the data has improved, many firms with the financial and human resources to do so have also spent the time building up their in-house capabilities. The reality is most firms lack the resources to do so and find the easiest and sometimes cheaper option is to outsource processes to third parties, such as ESG data management, data collection, and reporting. Either way, this is something they will need to consider soon, even if they aren’t an ESG-focused firm. Datos Insights is paying close attention to vendors that offer impact reporting to help investors tangibly align their portfolios with their values while mitigating the potential for greenwashing.
As we enter 2024, it is clear there will be an ongoing focus on the “E” in ESG. Financial institutions need to keep tabs on and understand the emerging models, risks, and opportunities associated with COP28 goals. Firms across the capital markets and wealth management spectrum will need to consider where, when and how the evolution of the regulatory, social, and political landscape will impact their businesses. If you’d like to discuss these key findings and other important future implications, please contact Adler Smith for capital markets or Wally Okby for wealth management.