How can we navigate the road to COP26?

Vicki Bakhshi Director, Analyst, Responsible Investment Team

At our Responsible Investment Conference in June, Principles for Responsible Investment CEO Fiona Reynolds discussed the net zero emissions transition ahead of the UN Climate Change Conference (COP26), due to take place in Glasgow later this year. A crucial message she conveyed was that the world cannot get to net zero without the investment community. So how can investors drive positive change towards this ambitious transition?

Back to basics briefly

‘1.5 degrees’ and ‘net zero emissions’ – terms we hear often… but are we absolutely clear on what they mean, and whether we’re on track to meet them? Let’s recap quickly:

• We know we are facing a climate emergency as temperatures rise, with many communities around the world already suffering some of the symptoms, such as extreme weather.
• COP is the short name for the United Nations Climate Change Conference (strictly speaking it stands for Conferences of the Parties) – annual conferences to assess progress in tackling climate change.
• At COP21 in Paris, a legally binding international treaty on climate change was adopted, with the aim of limiting global warming to well below 2 degrees Celsius (preferably to 1.5 degrees) compared with pre-industrial levels. It’s known as the Paris Climate Agreement or simply the Paris Agreement.
• To limit the global temperature rise to 1.5 degrees Celsius, countries must aim to reach net zero greenhouse gas emissions by 2050.
• But the commitments made so far don’t get us to 1.5 degrees – we’re currently on a trajectory towards a 3 degree increase in temperature, the effects of which would be catastrophic.
• COP26 is the most important climate summit since COP21. This year, the main objective of the conference is to accelerate action towards the Paris Agreement goal, by getting countries to agree far more ambitious emissions reductions targets, and make new commitments on financing the transition.

Investors’ role in the transition

It’s not just governments who are responsible for driving us all towards net zero emissions. Investors, companies and individuals each have a role to play, while regulators are stepping up to create more robust frameworks.

As investors, we need to think about how to protect our portfolios throughout the transition to avoid getting caught out. For example, the UK has pushed up its date for banning the sale of new internal combustion-engine vehicles to 2030, while there is a global momentum behind phasing out fossil fuels. We need to ensure that our portfolios are positioned to mitigate risks of stranded assets during these shifts. But we can also make the most of the opportunities arising from the global search for climate-friendly solutions, such as innovation in sectors like technology, renewable energy and transport.

As responsible investors, however, our role goes beyond making better investment decisions. We must urgently use our influence to drive the net zero ambition, engaging with companies to help them transition. Divesting shares in industries deemed climate-unfriendly, such as oil & gas, coal mining and airlines, is one approach that BMO GAM has implemented in some of our ethically screened funds, for investors that want to avoid these sectors altogether. But there is also an argument that by staying invested, we can use our shareholder influence to engage companies – which can achieve positive change. As investors, we also need to be willing to back up this engagement with the use of our voting power, including voting against key resolutions such as the election of directors or the report and accounts for companies failing to meet basic expectations on climate risk management.

“I strongly believe that you cannot get to net zero without the finance community, without the investment community.”

Fiona Reynolds, CEO, Principles for Responsible Investment

Our responsibility to individuals

There are so many ideas about how individuals can best reduce their carbon footprint (the total greenhouse gas emissions they cause), from adopting a plant-based diet to going flight-free. But one of the biggest contributions an individual can make is actually through their savings and investments. With so many advisers, wealth managers, pension trustees etc relying on investment managers to manage their clients’ money, it’s crucial they understand how managers are working towards the net zero transition. To ensure transparency, we must provide regular, detailed information about how we’re investing and engaging with companies on the transition to net zero. At BMO GAM, this is something we are very committed to. We produce annual impact reports for a growing number of our responsible and sustainable strategies, which include details of our climate-related engagement, as well as our portfolios’ carbon intensity versus their benchmark.

Don’t go it alone

One of the important messages Fiona Reynolds conveyed was that this transition to a net zero future is highly complex – and it’s never been done before. To address such a large challenge as this one, collaborating with other investors can be more effective than attempting to drive the transition alone. At BMO GAM, we are a founder signatory of the Net Zero Asset Managers Initiative – a global group of asset managers committed to the net zero transition with $87 trillion in combined assets under management. Through this initiative, we are collaborating with other investors via related initiatives, such as Climate Action 100+ and the Paris Aligned Investment Initiative, to ensure that we all have access to the right insights, data and resources to be able to engage more successfully with our investee companies, to ultimately drive meaningful change in the real world towards net zero.

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