What does COP26 mean for Investors?

Over the past two weeks at the 26th Convention of Parties conference (COP26) in Glasgow, the International Financial Reporting Standards (IFRS) Foundation Trustees announced the creation of the International Sustainability Standards Board (ISSB). The Trustees confirmed that they are in advanced stages in appointing the Chair and vice-Chair to the Board. This has been long called for amongst many industries, allowing a stable, consistent foundation for companies’ ESG reporting standards. This is a positive change for investors: in PwC’s 2021 Global Investor ESG survey, 79% of investors said they would be better informed if companies applied a single set of ESG reporting standards. Finance Ministers and Central Bank Governors from forty jurisdictions, including the United Kingdom, have publicly welcomed the creation of the ISSB and its work program. It is hoped that these new, rigorous standards will prevent companies from greenwashing, and push forward green initiatives within investable companies. Although there is a country-level push towards achieving net-zero pledges at COP26, it must be recognised that the real differences will be made by industry and not just by governmental decisions.

Investment sentiment, with heightening ESG debates within the media, is trending towards sustainable funds and stocks. COP26 is looking to create accountability with firms, allowing investors to more accurately stock select based on a robust, globally accepted reporting framework. Like-for-like assessments such as P/E ratios, dividend yields and D/E ratios are what investors are often looking for; with ESG criteria becoming just as valuable, it is likely an ESG rating will come alongside. Transparency between firms should not be elusive. Investors must have access to comparable information that allows one company’s sustainability performance to be shown against another’s. They need to clearly understand how a company’s overall performance relates to its value creation. Without this knowledge, it is very difficult to make fully informed business and investment decisions that align with globally accepted climate goals set out in COP26.

The creation of the ISSB not only facilitates institutional and private investors in ESG focused decision making, but also relieves significant issues for businesses when compiling reports. The simple nature of the report format may spur businesses to provide reliable, detailed information which investors desire. Forbes has described the inception of the ISSB as ‘the biggest change in corporate reporting since the 1930s.’ Not only does this simplicity aid in-house practices, but will also likely increase investment into companies that previously struggled with ESG reporting. According to a recent survey by the Saltus Wealth Index, 64% of respondents had invested in either ESG, green or impact funds. These new reporting standards have the potential to inspire greater growth in green-focused funds, although more time must pass before any trends emerge.

The COP26 conference has had a sizeable impact on investment in emerging markets (EM). Climate change is critical for these markets, with EM constituting 90% of the UK’s most vulnerable markets to climate change. Promises such as further investment from developed countries in emerging markets should give rise to more development and investment security within these countries. When considering environmental impacts to industry, a more nuanced understanding of the impact on EM must be made, although COP26 may have answered some of these concerns. Rishi Sunak has announced 500 billion USD to be invested in the countries that need it most, largely those in EM, which is a step towards a more secure ESG future in developing countries.

Several pledges from big corporations promising ‘net-zero’ by 2040 or before suggests ESG is becoming increasingly important in business, although the nature through which they achieve this is unregulated. These pledges are still a positive step, as one in three of the largest public companies in G20 have a net-zero target, up from one in five last year, according to a research initiative called ‘Net Zero Tracker’. What must be noted from these claims is that many corporate net-zero plans are reliant on carbon offsets, an inherently temporary solution. Future conferences may bring into question these companies’ approaches to achieving net-zero emissions, thus invalidating their ESG approaches, something which investors should be aware of. The carbon offset market is highly unregulated with wildly variable standards, allowing companies to claim carbon neutrality on paper while continuing to produce emissions in practice – this all may change with the ISSB reporting standards.

Overall, the most recent COP26 conference will provide new approaches and opportunities for worldwide investments. The creation of the ISSB provides another criterion for investors to look for when selecting stocks that will survive into the future in what, climatically, is likely to be a turbulent time. Increased global focus on EM allows for investor confidence in an area that is the most susceptible to global warming, and this confidence should not only translate to real returns but also social advantages to vulnerable communities. Corporate statements on carbon emissions still should not be taken at face value, with the unregulated nature of the offset market. Regardless, what is certain is that COP26 has gotten investors, both institutional and private, to view business as inseparable from ESG.

By Louis Christie

Sector Head: Philipp Jiang

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