COP26: closing gaps but not solving the problem

COP26 ended a week ago. While the world is still too slow reacting to climate change, we are making progress and changes are happening. What does it mean for investors?

COP26 Outcomes

After two weeks of deliberations, the 26th United Nations Climate Change Conference of the Parties (COP26) finally reached a deal on further steps to reduce greenhouse gas emissions. On November 13, leaders of almost 200 countries signed the final deal, which stipulates actions to curb emissions, additional funding for low-income countries, and more frequent updates on advancements.

The 11-page document called the Glasgow Climate Pact indicates that greenhouse emissions should be reduced and that carbon dioxide must fall by 45% from 2010 levels by 2030 to maintain global warming 1.5°C above pre-industrial levels. Countries all agreed on the urgency of reducing emissions faster and promised to give annual reports.

For the first time in a COP text, nations agreed to reduce coal-fired power and to start eliminating subsidies on other fossil fuels. However, China and India asked to change the term “phase out” to “phase down” for coal pledges.

The deal also included promises to end deforestation and a pledge from the financial sector to move trillions of dollars towards companies that are committed to net-zero.

While some progress is being made, science warns that these efforts will still not be enough. Indeed, if countries meet their 2030 targets, global temperatures are still expected to rise 2.4°C above pre-industrial levels by 2100.

 

CAT-2100WarmingProjectionsGraph-PNG-2021.11.original

Source: Climateactiontracker.org

Richer countries to help poorer ones

One of the important points of the meeting was the question of funding from wealthy nations to help low- and middle-income countries. Not all countries are equal in the face of this crisis, as some still struggle to develop and feed their populations. The level of danger is not the same either, as some islands are threatened with actual annihilation as sea levels rise.

The earlier pledge of $100 billion per year from 2020 was not met, which indicated that most countries tend to fight for their own interests first. However, the new COP26 agreement includes a commitment to double “adaptation finance” to $40 billion by 2025, to help the lowest income countries improve their climate resilience.

 

 

Don’t overestimate savings

Stricter rules regarding the accounting system for carbon emission reductions were also set. In the past, one company or country invested in reductions taking place in another, resulting in double counting. With new rules governing international collaboration and carbon markets, only effective reductions will be counted and reported to the UN.

Most environmentalists applauded the outcome. “It’s basically as good as one could hope for,” says Robert Stavins, an economist at Harvard University in Cambridge, Massachusetts. Such a system will help connect different actors – countries and companies – around the world and create a more international market.

A recent analysis showed that the world would save around $300 billion annually by 2030 if a functioning global carbon market were in place, simply by reducing the cost of achieving carbon savings and creating efficiencies. If this money was reinvested in global warming reduction efforts, we could more than double emission reductions in 2030 according to James Edmonds, co-author of the analysis.

 

Investment ideas following COP26

While restrictions were not as radical as activists had hoped, investors can still reassess green energy and clean energy opportunities, in addition to the adaptability of big oil companies, which could have a strong impact on portfolios.

Bank of America expects an unprecedented switch to clean technologies at scale, though it might be slow and uneven. They estimate a doubling of annual investment in the global energy system to $5 trillion each year over the next 30 years, adding up to $150 trillion or approximately two times current global GDP. This is backed by a pledge of the financial sector to cut back on non-green investment and invest in net-zero companies.

If regulation changes and companies are forced to disclose emissions, it could be a real game-changer. Investors would have the opportunity to adjust their portfolios much more easily to include sustainability measures. Globally, we see three key points that investors might want to pay attention to:

 

  1. Tightening emission targets and rising demand for clean energy

With increasingly stricter emissions targets, the world will turn towards green alternatives. Their costs have been decreasing in the last decade. Indeed, wind is 45% cheaper and solar energy 85%, while the cost of batteries and solar storage has fallen by 89%. This makes them more competitive with natural gas. Moreover, their capacity is greatly lagging. We need 9x, 14x and 88x more capacity of wind, solar, and batteries, respectively, to cover just half of the emission reduction targets. This should represent a big growth opportunity.

A few companies involved in the renewable sector: Siemens Energy, FirstEnergy, Sunrun, Engie, Orsted, China Jushi

Some involved in storage: QuantumScape, Panasonic, Ganfeng Lithium, Zhejiang Huayou Cobal

Some in electric vehicles: Tesla, NIO, LI Auto, Schneider National, FREYR Battery

 

  1. Hydrogen and the return of nuclear

Recent COP26 decisions might be a boom for hydrogen and nuclear energy. In the US, both tend to get relatively solid bipartisan backing. Furthermore, the US Nuclear Regulatory Commission recently approved the design of a new, small modular reactor. This machine will be constructed faster and at a lower cost, while improving safety over traditional nuclear reactors. On the green hydrogen side, more investment will be needed to run the technology at scale, but it could be set for a bright future as fossil fuels become less and less desirable.

On the nuclear side: General Electric is building these new reactors, and Fluor is investing in private company NuScale Power to develop them as well.

Hydrogen stocks include China Petroleum & Chemical, Johnson Matthey, NEL, Air Products, New Fortress Energy.

 

  1. Oil, gas, and coal are still in the arena

China and India were asked to phase down their “dirty” consumption and to get rid of inefficient subsidies, which contrasts with the initial “phase-out” wording. Coal is easily the biggest polluter of the three – with 20% of emissions on its own – but it will not be so easy to get rid of. With rising energy demand throughout the world, renewables are not able to keep up yet. This will likely result in a push for carbon capture and storage at the source of fossil-fuel burning, bringing opportunities for companies such as ConocoPhillips, Bayer NextDecade, or Occidental Petroleum. Other sustainable alternative fuel opportunities include Exxon Mobil, Chevron, HollyFrontier, and Marathon Petroleum.

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