An investor's guide to COP

Climate change is directly linked to increased weather events like heatwaves, floods, and, over the longer term, rising sea levels. These events affect crop yields and infrastructure, as well as trigger disease outbreaks. Unsurprisingly, they also hurt economic activity.

A study by Swiss RE1 estimates that global economic output could fall by 11 per cent – 14 per cent by 2050 compared to a world that did not experience a changing climate. 

COP, which stands for Conference of the Parties, are global meetings organised by the United Nations. These events create a framework of agreements that aim to develop coordinated action to halt the rise in global temperatures by reducing greenhouse-gas emissions. 

What is the rationale and structure of COP?

COP is the supreme decision-making body of the United Nations Framework Convention on Climate Change (UNFCCC). The UNFCCC was formed in 1992 and aims to ensure that the volume of greenhouse gas in the atmosphere is maintained at a level that is not detrimental to the earth’s climate system. 

It has been a challenge getting all countries and territories to agree to this goal because they have differences in their levels of economic development. Specifically, some emerging markets argue it is unfair to implement climate measures if this harms or slows their economic progress. Therefore, the COP was established to acknowledge this and expects developed markets to carry more of the financial burden, support climate change activities, and share technology with less-advanced nations – helping them grow while limiting their greenhouse-gas emissions.

As such, this gave COP genuinely global responsibility and credibility, and it now has 197 countries and territories as members. All parties to the UNFCCC are represented at COP, where they review the implementation of the laws it adopts. The COP also makes decisions that promote the effective enactment of the UNFCCC by agreeing on practical administrative arrangements.

The agreements made at these conferences are significant because climate change needs a global response rather than uncoordinated action at the national level. 

COP Milestones  

COP 1: Berlin, 1995     An acceptance that the emission of polluting gases must be reduced
COP 3: Kyoto, 1997   Approval of a broad outline that sets emissions targets and built a foundation of the carbon market
COP 21: Paris, 2015   An agreement to limit temperature rises to below 2 °C (3.6 °F) above pre-industrial levels, and preferably to 1.5 °C (2.7 °F)
COP 26: Glasgow, 2021 The Glasgow Financial Alliance for Net Zero announced a pledge of US$130 trillion of private capital dedicated to accelerating the transition to a net-zero economy

However, despite these bright spots, there is a lack of progress in some areas. One of the difficulties with climate agreements is ensuring they are fully implemented. This lack of certainty makes it more difficult for businesses and governments to develop longer-term plans. 

More positively, each successive COP makes incremental progress towards its established goals. For instance, at COP 26 in Glasgow, the guidelines for the full implementation of the Paris Agreement were agreed. Another significant milestone was finalising the

Enhanced Transparency Framework negotiations2, which will help the private sector boost its disclosure and transparency.

How does COP impact the investment industry? 

The challenges posed by climate change are complex and continue to steer the direction of the investment industry. Many governments and institutions appreciate that tackling environmental challenges is an important and worthwhile goal. This is triggering a growing interest in environmental, social, and governance (ESG)-related products and strategies. According to a report from Bloomberg Intelligence3, ESG assets could exceed US$41 trillion by 2022 and US$50 trillion by 2025. This is a notable increase from $30.6 trillion in 2018. 

COP agreements can also encourage investment to flow away from businesses and projects that cannot demonstrate their sustainability. For example, 110 countries and territories at COP 26 pledged to stop deforestation by 2030. 

Meanwhile, direct action is sometimes taken outside of the COP framework. In 2020, a group of European investment companies threatened to sell their Brazilian assets if deforestation in the Amazon basin was not curtailed4

How could COP affect your investment?  

Investors concerned about environmental issues should review their portfolio to ensure they are aware of the types of assets it holds and whether they are compatible with COP goals. 

When assessing direct investments, identifying companies with solid sustainability characteristics could be rational because they may already have an ESG policy in place that seeks to reduce their environmental impact. 

A market participant who uses a fund or investment manager could choose one that employs a sustainability lens or uses ESG, net zero or sustainable development goals to select their portfolio holdings. This type of fund would be similar to a product specifically designed to help reduce climate change. 

Looking ahead, the next COP27 summit takes place in Sharm El Sheikh, Egypt, in November 2022. Investors should be mindful of the conference discussions as they could drive new investment trends and opportunities, and ultimately, affect portfolio performance.

1 Source: Swiss Re Institute 
2 Source: United Nations Framework Convention on Climate Change  
3 Source: Bloomberg Intelligence 
4 Source: Reuters