by NEI Investments.
Our Chief Investment Officer and Director of Corporate Engagement are back from Glasgow with a renewed sense of purpose toward climate change. Now that the United Nations’ COP26 conference is over and the Glasgow Climate Pact has been signed, John Bai and Jamie Bonham take a moment to reflect on all they heard and to discuss what’s next for NEI. The two were in Scotland attending a sister conference to COP26 hosted by NEI sub-advisor Federated Hermes.
JAMIE BONHAM, DIRECTOR OF CORPORATE ENGAGEMENT: There seemed to be something of a consensus in the post-conference media articles that COP26 fell short of expectations—that we did not see the level of ambition we needed to solve this incredibly challenging problem. While this view is not wrong per se, and it remains the case that we do not have the commitments in place to reach our goals, I do take a more optimistic view. You have to remember—this is a consensus agreement. Nearly 200 countries signed the Glasgow Climate Pact, which commits all of them to living up to the language in that document. I believe that is a big achievement. It certainly puts us further ahead than we were before. What’s more, it’s not like this is the end of the discussion. We’ll push again in Egypt next year, then again the year after that, and again the next year, and so on. I do think we need to be as positive as we can be, otherwise we’re all just going to lose steam, lose hope.
I think a critical shortcoming of COP26 was the inability of developed nations to make good on the pledge to support the transition and adaptation efforts of the developing world—this is the $100B that was previously committed and won’t be lived up to until 2023. While this is a setback, the prominence this failing received at the conference is, I hope, a turning point in the conversation. It was made clear that we can’t meet our international goals without dealing with the current inequities, where poorer nations are going to feel the brunt of the impacts but are still being asked to increase their ambition. The same could be said for some of the traditionally marginalized voices such as Indigenous communities and leadership. They were still largely on the outside looking in at this conference, but that dynamic was made apparent in a way we haven’t seen previously. It gives me hope that we might see progress in future COP meetings, or that at the very least we won’t see the disparities and inequities swept under the rug anymore.
JOHN BAI, CHIEF INVESTMENT OFFICER: The energy at the conference was certainly mixed. Plenty of people were obviously disillusioned and appear to feel like policymakers are never going to get it right. Developing nations in particular, as Jamie says, are dealing with some of the heaviest effects of climate change, yet are not being provided the resources to do much about it. But we must continue to try, and to try harder.
I feel like I have a renewed purpose in my role leading the investment function of NEI. There is no question there is a lot of work to do, and it can seem overwhelming. But you have to look at the strong position we are in as an experienced responsible investor, and the opportunities we have now that so many more people and countries are committed to taking meaningful action.
We cannot wait for policymakers and regulators to move at the speed that’s required. Asset managers have a critical role to play in setting a faster pace of transition. We need to get every company, every industry, every individual investor aligned with this shared objective. Responsible investment firms have two incredibly powerful tools at their disposal to make this happen. The first is capital allocation—that is our job, after all. It’s a question of where to allocate that capital. We need to identify the innovators who are capable and willing to drive harder toward decarbonization. In NEI’s case, that comes from our sub-advisor selection and oversight, and from our sub-advisors’ bottom-up analysis and security selection.
The second tool—and this is not necessarily as readily available to all investment managers—is corporate engagement. NEI has an amazing team and a deep network with long history, which puts us in a great place. But in Glasgow, it became clear how much more we need to do and how critical it will be to elevate corporate engagement as a critical transition activity undertaken by institutional investors. We can help companies understand the importance of decarbonizing their operations, but more importantly, we can share ideas for how they can do that. We can bring together likeminded investors and likeminded companies as well, to build scale and momentum.
JAMIE: I’d like to point out a few initiatives that were unveiled during the conference that I believe are good indicators of the sense of urgency and heightened ambition. Look at the $130 trillion commitment from the Glasgow Financial Alliance for Net Zero. That’s more than 450 finance firms committed to using science-based guidelines to reach net zero by 2050, and to providing 2030 interim goals. There are still a lot of valid questions about these commitments and whether they will lead to meaningful action, but we are already seeing efforts to insert some accountability on these pledges in a way that isn’t happening at the national level. Success on this front will stiffen the resolve of governments to move faster. Frankly, what we need right now more than new commitments are clear signs of progress on the commitments we already have.
We also got the Global Methane Pledge, and Canada plays a significant role there. Signatories have committed to a 30% reduction versus 2020 levels by 2030. Canada has also committed to reducing methane emissions from the oil and gas sector by at least 75% below 2012 levels. Carbon gets much of the headline play as a greenhouse gas, but the fact is methane is significantly more damaging in the near-term, and reducing it is key to achieving net zero. Beyond the global pledge, there were important bilateral deals struck between the U.S. and Canada, and there have been lots of developments on the technology side such as satellite tracking and on-the-ground measurement. Methane has been a focus for investors and this global commitment will be a boost to those efforts.
The deforestation declaration supports a critical nature-based solution to climate change. Over 100 countries committed to putting up almost $20 billion in public and private funds. What’s important to note is that countries who signed on, including Brazil, Russia, China, Indonesia, the U.S., the Democratic Republic of the Congo, Canada—cover roughly 85% of the worlds’ forests. As long as there’s follow-through, this represents a big achievement. Indonesia almost immediately seemed to backtrack on the commitment, but I think what they pointed out—that this commitment can’t come at the sole expense of lost revenues for the country—is critical. There has to be a way to address the economic realities of developing nations to make deforestation pledges sustainable. The effort lines up nicely with NEI’s own recent commitment to eliminate sources of commodity-related deforestation in our funds. You can find that commitment in our climate strategy.
The zero-emission vehicle declaration is also worth noting, although that one feels more mixed in terms of its success. Signatories agreed that all sales of new cars and vans would be zero emission by 2040, and by no later than 2035 in so-called leading markets. Canada signed, but not the U.S.—although California signed. Major U.S. automakers signed, as well as Uber, but not Toyota or Hyundai or Volkswagen. Germany and China did not sign either. So, there’s work to do there. But the path of transportation is crystal clear, and aside from the opportunities to be had in the auto sector, this will have huge ramifications for the mining sector.
Lastly, I would highlight the consideration that biodiversity received as a critical solution to our climate crisis. It made me happy to see the level of attention paid to this area, which until now has not been much in the spotlight. Protection of natural habitats is an essential part of the overall solution set for a successful transition. (Editor’s note: You can find NEI’s early thoughts on the topic in our 2021 Focus List.) I’ve said this before—Canada has an opportunity unique on the global stage to combine Indigenous reconciliation with protection and conservation of our boreal forest, and to show the world how that can be done effectively. I do have an expectation that we’ll see more government dollars flowing into this area.
JOHN: I want to reiterate a point I made in our pre-COP conversation, where we talked at length about the importance of collaboration. It was driven home to me in Glasgow just how critical it is that financial advisors grab hold of this opportunity, this responsibility we all have to improve our environment in the face of this economic and existential threat.
Advisors have significantly more influence here than I suspect they realize. They hold the key to how their clients’ money is allocated. Yes, it’s NEI’s job to create the investment solutions we believe will get us where we need to go. But it’s the advisor’s job to guide their clients in ways that contribute to a successful transition, rather than hinder it. This is a tremendous area for us to step up our education efforts.
Bottom line is, the 2020s are going to be an absolutely critical decade. The world didn’t do all that well curbing emissions in the decade prior, but that’s going to change. It’s got to. NEI is ready and willing to do its part.
I’d like to end with thanks to our sub-advisor Federated Hermes, who invited Jamie and I to Glasgow to attend their sustainability conference in connection to COP26. We’re looking forward to an even stronger and more productive partnership on these issues in the years ahead.