COP28 spotlight: Investors concerned about potential backslide on 1.5C

As COP28 kicked off in Dubai amidst controversy, investment teams expressed concern about unfulfilled promises and lacking plans.

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A fossil fuel phase-out, or 'phase-down', is top of the wish list for many in the industry, but there are roadblocks.

As the 28th United Nations Climate Change Conference (COP28) kicked off in Dubai, UAE, last week amidst controversy, the investment industry turned its eyes to what it tentatively hoped would be a successful event.

For investment teams at insurers, the conference had implications for ongoing plans to decarbonise portfolios (especially in the UK and Europe) and reporting needs in 2024 and beyond. It was convened with the promise to “unite, act, and deliver”, but concerns were widespread, particularly when it came to a potential ‘backslide’ on the 1.5C temperature target, as set out in the Paris Agreement, which could mean efforts to align investment portfolios to this target and meet interim net-zero goals are delayed or seen as less significant.

Meeting targets

Morningstar’s Global Director of Sustainability Research, Hortense Bioy, told Insurance Investor that, from the investor perspective, the environment around emission reduction was increasingly difficult to navigate. “It isn’t easy for investors,” she said. “There are very few companies aligned today to 1.5C, though more are trying to reduce their carbon footprint. Businesses need more visibility.”

Countries recommitted to the target in Glasgow at COP26 two years ago, but there have been myriad difficulties in making it a tangible reality. Even at the dawn of last year’s COP in Sharm El Sheikh, there was little to no consensus on concrete plans to mitigate further temperature changes and keep the 1.5C number in sight. This uncertainty prevails despite the fact that many insurers are moving quickly to decarbonise, with some feeling thwarted by slow-developing industry regulations.

“Phasing out more than just coal would be a good compromise,
but I doubt it will happen.”

It wasn’t just investment organisations; governments were also having difficulties, as the recent news about the UAE’s alleged fossil fuel hypocrisy proves. There are also the recent comments made by COP28 president Sultan Al-Jaber – Chair of the Abu Dhabi National Oil Company – which indicate a long, fraught journey to a fossil fuel phase out, even as negotiations (and draft texts) began on the topic late last week.

Many are hoping to see an agreement reached by the end of the conference that would at the very least significantly limit fossil fuel emissions. “We’re seeing governments backtracking on the initiatives they’ve put in place,” Bioy said. “Phasing out more than just coal would be a good compromise, but I doubt it will happen.”

For insurers that have committed to net-zero targets – and are looking into mechanisms such as carbon credits or offsets – backtracking governments and backsliding climate goals mean costlier, more difficult journeys ahead.

The role of institutional investment

But many in the industry put blame not just on regulators and policymakers, but also on the wider investment community.

At the UK Sustainable Investment and Finance Association’s (UKSIF) 2023 Leader Conference in November in London, a panel discussion covering investor perspective on COP28 saw panellists speak candidly. To expect “anything great” from the negotiations this year was naïve, said Chris Dodwell, Head of Policy and Advocacy at Impax Asset Management. “It will just be a statement, and it will probably be watered down,” he said. “Nobody should be surprised.”

This anticipation of letdown was echoed by fellow panellist Mark Campanale, Founder of financial think tank The Carbon Tracker Initiative, who said he wasn’t seeing any concrete evidence of improvement in the industry. “We hear [organisations say] that you can influence companies if you hold them – but, guess what? We’re not doing it. There’s no evidence of change.”

“We hear that you can influence companies if you hold them – but, guess what?
We’re not doing it. There’s no evidence of change.”

Asked if COP events could ever be effective in affecting real change, both Dodwell and Campanale had rather pessimistic opinions. “[COP] is a reflection rather than a dictator of consensus,” Dodwell said, while Campanale added that there was a miscommunication between public and private sectors. “Governments think that the private sector is going to step up to the plate, but we haven’t seen the incentives to do that,” he said.

The potential of more public-private partnerships after this year’s conference is possible and would certainly be welcomed by many insurance organisations and institutional investors. It's a goal that is also, said Dodwell, in the wheelhouse of what an event like COP can do: get a cross section of organisations, both public and private, in the room talking to one another. “It’s one of the things that COP is good at – bringing together public and private institutions on questions of needs in developing countries,” he said.

The engagement debate

Likely one of the biggest debates that will impact insurance investment teams moving forward revolves around engagement, a tactic some view more sceptically than others, or, as Campanale put it: “what engagement?”. The question is a necessary one, as clear examples of successful ‘engagement’ cases can be tricky to come by.

Dodwell said part of the difficulty was the mismatch between the needs of developed and emerging economies. “It’s a fiction to think any [emerging economies] will move voluntarily to reduce their supply,” he said. “But if you can get [those countries] to say there’s an existential threat, maybe things can move forward. We need to focus on countries that have made commitments and have populous support.”

Engaging with fossil fuel emitters has long been controversial – though in recent years the consensus has shifted, with many saying that there is no other option. For invesmtent teams at insurers, these developments are critical as they have wider implications for both investment and underwriting activities, set against impending net-zero deadlines.

“We need to focus on countries that have made
commitments and have populous support.”

At Clear Path Analysis’s ESG Investment Leader | Europe event, held last month in London, a panel discussion on active stewardship and supply chain management pointed to new developments in the debate. The landscape around engagement was changing due to new introductions such as Active Ownership 2.0, a framework for “more ambitious” stewardship by the United Nations’s Principles for Responsible Investment initiative (UN PRI), said Arun Kelshiker, an ESG advisor and former Head of Asset Allocation and Portfolio Strategy.

Helen Price, Director of Governance at the Church of England Pensions Board, said she was noticing “an elevation to objectives”, with organisations drilling down and identifying why they were engaging with their investee companies and suppliers, as well as what changes they were seeking to affect within a particular supply chain.

Nevertheless, all panellists in that discussion agreed that data – accessing and interpreting high quality information – was an enormous hurdle, and there needed to be more collaborative infrastructure in place to address the difficulties.

Focus on impact

It is also the case that, often, the economies most reliant on continued investment in fossil fuels are those in countries highly exposed to the effects of climate change.

This condition is one past COPs have sought to address, especially with last year’s agreement to establish a climate damages fund, and this year’s official outlining of the Loss and Damages Fund – which saw countries pledging $400 million to help those suffering most from climate change.

The creation of this fund comes as the UK’s Financial Conduct Authority (FCA) launched, this week, its labelling guidelines, paving the road for enhanced regulatory oversight and guidance around sustainable investing. In what it called a “substantial package of measures to improve the trust and transparency of sustainable investment products and minimise greenwashing”, the FCA finally made good on a long-awaited promise.

“Companies are catalysts to increase ambition, achieve objectives such as
increasing renewable capacity by 2030, or unlock funding.”

It's an important development in the investment landscape because it means that regulators are moving in the direction of upholding tangible change. The maintenance, and continual evolution, of this infrastructure still remains to be seen; however, the commitment is welcome.

Mónica Zuleta, Corporate Sustainability Director at Spanish insurer MAPFRE, noted that additional mitigation measures were more necessary than ever. “More ambitious targets must be set to reduce emissions by 43% by 2030 to reach net zero emissions by 2050,” she said. “Companies are catalysts to increase ambition, achieve objectives such as increasing renewable capacity by 2030, or unlock funding for the Loss and Damages Fund.”

With Zuleta emphasising that “current commitments are not enough to avoid catastrophic consequences”, many in the industry have echoed the same call to action: do more now.

As the timeframe to make a difference quickly shrinks, environmental risk and climate-related liabilities only increase on insurers’ balance sheets. And with COP28 ending later this month, stakeholders are hoping for better options.