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As Climate Summit Begins, Analysts See Risks--and Opportunities--for Investors

Climate change is one of the thorniest challenges confronting investors, and one that will reshape the financial markets.

Leslie Norton 1 November, 2021 | 4:28AM
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Climate Summit

The United Nations Climate Change Conference, known as COP26, is the most important climate summit since 2015, when the world agreed to strive to cap global warming to under 2 degrees Celsius above pre-industrial levels--or, better yet, to 1.5 degrees--by substantially reducing greenhouse gas emissions.

Since then, a flurry of national pledges to slash emissions to net zero--to take as much carbon out of the atmosphere as one is putting in--by 2050 has ensued. More promises have followed from an array of municipalities, companies, and other issuers. As the United States rejoined the Paris Agreement this year, President Joe Biden called for a national reduction in greenhouse gas emissions of at least 50% by 2030, from 2005 levels. Lately, even Saudi Arabia, the world’s largest exporter, promise to reach net zero emissions by 2060.

COP26 takes place in Glasgow, Scotland, just as oil and gas prices are jumping. Fossil fuels, widely agreed to cause global warming, still account for the lion’s share of the world’s energy needs. And for all the promises from the world’s most influential nations, the U.N. is admonishing us that they aren’t enough to stop a dangerously warming planet.

All Eyes on the Summit

“Right now, everyone is waiting for what happens in Glasgow,” says Michael Jantzi, founder of Sustainalytics, a Morningstar company. “Everyone is grappling with what the heck net zero means and what they signed up for.”

For investors, climate change has emerged as one of the biggest systemic risks to the financial markets. It also presents a major opportunity and one that will reshape the markets. The International Energy Agency estimates that getting the world on a 1.5-degree path will require annual investments in clean energy and infrastructure of about $4 trillion a year, up from around $1 trillion today. They include massive investments in clean electrification, energy efficiency, methane emission cuts from fossil fuel production, and clean energy innovation.

Sustainable investing has grown significantly in the past five years as more investors have become increasingly concerned about the impact that climate change and other environmental, social, and corporate governance issues have on their investments--and about the broader impact of their investments on the world.

As the climate summit kicks off, we’re providing investors with a sustainable investing framework that can help them better understand their motivations, address investing concerns, and evaluate sustainable funds and portfolios. Increasingly, mainstream asset managers--such as your exchange-traded fund manager, for example--are using the techniques of sustainable investing to assess certain risks that traditional financial metrics can’t express. Such investing approaches include applying exclusions; limiting environmental, social, and governance risk; seeking ESG opportunities; practicing active ownership; targeting sustainability themes; and assessing impact.

Our colleagues at Sustainalytics are also spotlighting a broad range of insights around global net zero by 2050, including work around the emerging biodiversity crisis, which can affect the risk profiles for companies and for investors, and around the different methods for financing sustainability that can turn climate change ambitions into climate action.

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About Author

Leslie Norton  Leslie Norton is Editorial Director of Sustainability at Morningstar

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