As delegates to the UN Climate Change Conference (COP26), which concluded on 12 November, we view the outcome as neither a grand success nor an abject failure. But does that mean there are no implications for investors?
Definitely not.
In fact, important new commitments and initiatives were announced by governments and the private sector that could open up opportunities for climate-oriented investors.
Prior to COP26, UN Secretary-General Antonio Guterres urged institutional investors to travel in force to Glasgow to press governments to ratchet up their commitments.
This indeed occurred. Before summarizing the key political and private sector actions at COP26, it is worth noting that the International Energy Agency (IEA) released an updated analysis showing that if countries were to follow through with their current commitments – as expressed in the Nationally Determined Contribution (NDCs) strategies – it would be enough to limit global warming to roughly 1.8 degrees Celsius this century.
This optimistic scenario from the IEA is based largely on the new country commitments announced in the lead-up to and during COP26, including from India, which pledged net zero emissions by 2070 — a big step for the world’s third-largest emitter.
But let’s be clear — the new IEA analysis is based on countries fully implementing their announced commitments and pledges, which is highly unlikely. Most climate scientists are predicting temperature increases between 2 degrees C and 4 degrees C — resulting in very different planetary outcomes.
The following represents our view of the most significant outcomes at COP26 in terms of political action and commitments by the private sector. We conclude with several observations about the relevancy for investors.
Implications for investors
- In our view, investors interested in climate-related investment should study the enhanced Nationally Determined Contributions – and all NDCs for that matter. Indeed, in many ways, the NDCs represent roadmaps for investment, in our view, by presenting national commitments and financing needs, which will likely need to be met largely by private investment and finance.
- It’s clear that the climate and green bond market (in addition to the broader sustainability-linked market) is likely set for exponential growth as both sovereigns and corporates are expected to increase issuance to finance net zero and other climate commitments. This should offer new opportunities for climate-oriented fixed-income investors, in both developed and emerging market countries.
- In our view, sustainable infrastructure, as an asset class, also represents a significant global investment opportunity, and here there are new pathways that can unite, for example, development banks and the private sector around what we believe are compelling commercial investment opportunities. Indeed, COP26 featured many discussions related to development banks and private investment, including areas such as blended finance. PIMCO took part in one such session hosted by IDB Invest, in addition to a discussion on distributed energy investment in Africa (hosted by the Shell Foundation and including CDC, the U.K. development bank, and The Rockefeller Foundation), and a session on addressing liquidity and sustainability needs in Africa convened by the UN Economic Commission for Africa.
- Related to the insurance industry’s concern around a disorderly transition, we believe investors should work with carbon-intensive and other exposed companies to help them make an early shift to more sustainable assets and business models.
A final word: Without the COP series – the 27th Conference of the Parties (COP27) will take place in Egypt next year – there would be no international forum to advance collaboration and coordinated action to address a truly global problem. And the good news is that the private sector now appears to have a strong and established seat at the table.
1Return to content↩
DISCLOSURES
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by PIMCO or any judgment exercised by PIMCO will reflect the opinions of any particular investor, and the factors utilized by PIMCO may differ from the factors that any particular investor considers relevant in evaluating an issuer’s ESG practices. In evaluating an issuer, PIMCO is dependent upon information and data obtained through voluntary or third-party reporting that may be incomplete, inaccurate or unavailable, or present conflicting information and data with respect to an issuer, which in each case could cause PIMCO to incorrectly assess an issuer’s business practices with respect to its ESG practices. Socially responsible norms differ by region, and an issuer’s ESG practices or PIMCO’s assessment of an issuer’s ESG practices may change over time. There is no assurance that the ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO.
CMR2021-1116-1924096
© PIMCO
Read more commentaries by PIMCO
