This month’s comment comes from Stéphane Monier, Chief Investment Officer at Lombard Odier Private Bank, where he is responsible for the investment strategy and offering for private clients.

COP26 was billed as the last chance to keep the goal of limiting global warming well below 2°C on track. The direction of travel was encouraging. Countries made new net zero promises. China and the US agreed to boost climate cooperation. 

If all new pledges are implemented and achieved in time, the International Energy Agency calculates that 1.8°C of warming is now within reach. Countries have been asked to submit new, more ambitious targets by the end of 2022.

But the challenges ahead are stark. China and India are not targeting net zero before 2060 and 2070. Few countries are on track with current commitments. There is no mechanism for enforcement, other than peer pressure, and the risk that misaligned countries will be locked out of key export markets. Industrial nations’ pledges to finance climate mitigation in the developing world look insufficient. A more equitable distribution, and a faster ramp-up of decarbonisation efforts, is needed.

The opportunity to kick fossil fuel dependence

Phasing out fossil fuel use is perhaps climate change’s biggest challenge – and opportunity. The Glasgow Pact agreed to “phase down” coal and “inefficient fossil fuel subsidies” by 2030 – vague wording at best. 

A separate pledge seeks to phase out coal in the 2040s, but was not signed by the US, China, India or Australia. More than 100 countries pledged to cut methane emissions by 30 percent by 2030. But these fall far short of legally binding commitments. Fossil fuels remain entrenched in economies worldwide.

A potentially greater spur could be simple economics. In China, renewables should become cost-competitive with coal-fired power by the middle of this decade. In many countries, solar is already cheaper than coal. One of COP26’s successes was more investment in clean technologies, from electric vehicles to clean steel and affordable green hydrogen.

A global carbon price?

In another tentatively encouraging move, the Glasgow Pact set new rules for trading carbon credits. These allow governments to achieve emissions goals by funding reductions in other countries, with new mechanisms to prevent double counting. EU carbon prices jumped to a record high of €66 per tonne in response.

But businesses said the new rules lacked bite. There was no announcement at Glasgow of a global carbon price, let alone one high enough to spur rapid change. Still, national and regional carbon markets are expanding. The EU’s “carbon border adjustment mechanism”, designed to price the carbon content of imported goods the same as those made within the bloc, will soon provide some sort of effective carbon price for all its trading partners.

Common investment frameworks

Under the new Glasgow Financial Alliance for Net Zero (GFANZ), financial institutions with $130 trillion in assets have committed to the transition to net zero, via decarbonising existing assets. The challenge is vast. Lombard Odier estimates that only a quarter of large cap firms today are aligned with 2°C, and only 6 percent with 1.5°C. This makes it difficult to allocate capital at scale with a net zero mind-set.

But investing solely in low carbon firms will not bring down emissions in the real economy. The greater challenge – and the greater potential for cooling the climate – is through changing the practices of today’s high-emitting firms. It is here we believe some of the greatest investment opportunities lie.

Nature as our net-zero ally

One of the most striking achievements at COP26 was greater visibility on the role nature must play in halting climate change. The Glasgow Pact recognises the need to protect, conserve and restore nature. The End Deforestation Pledge, signed by countries housing over 85 percent of global forests, seeks to halt and reverse forest loss and land degradation by 2030. 

Thirty financial institutions, including Lombard Odier, committed to eliminate deforestation risks from their portfolios by 2025. Separately, forty-five governments pledged to shift to more sustainable farming methods.

A seismic transition

Progress at COP26 was both encouraging and disappointing. This is perhaps understandable: one conference cannot solve the world’s most complex problem. 

While new pledges and agreements have been made, the hard work will be in implementing them. Reconvening at COP27 in 2022 with new climate commitments attempts to ratchet up the pressure. Such moves rarely happen in a linear fashion. As the world increasingly sees the impact of climate change, and the cost of capital increasingly reflects this reality, the transition should accelerate.

About Stéphane Monier

Stéphane Monier is Chief Investment Officer at Lombard Odier Private Bank and is responsible for the investment strategy and offering for private clients.

About The Lede

This article was originally published in The Lede, Transmission Private’s monthly newsletter that tracks the future of reputation management. Featuring interviews with leading private client advisers from the worlds of law, finance, and accountancy, sign up today to receive the newsletter in your inbox every month.