To COP and beyond: a new urgency

As delegates gather at COP27, they confront the same long-term challenge posed by climate change as they did at COP26 last year. But the context has shifted dramatically: in light of the war in Ukraine, governments need to balance net-zero goals with a new imperative for energy security.

In our CIO autumn update, which shares LGIM research on sustainability themes ahead of the climate summit in Sharm El-Sheikh, we argue that these objectives are not mutually exclusive; rather, they are inextricably linked. The document, penned by our Investments and Investment Stewardship teams, also addresses:

• The underlying causes of the energy shock
• What Europe’s return to coal means for climate targets and investors
• The threat to nature and biodiversity presented by the climate crisis
• The oil-producing winners and losers of a 1.5°C world
• How energy infrastructure can and must play a pivotal role in the transition

COP26, held in Glasgow in 2021, marked an important step forward in global efforts to address climate change. Notable achievements included fresh commitments to reduce emissions worldwide; rules on reporting emissions and international carbon trading; and a clutch of new initiatives and sector-level deals.

We look to COP27 to build on this momentum, not least with regard to strengthening 2030 emissions targets. But also in making material progress towards a global carbon tax and in tackling the imbalances between developed and emerging economies – the cause of last-minute talks back in 2021.

Engagement, with consequences

Most importantly, we would stress that it is only by understanding the problem that we can reach the right solution. This is as true of the energy shock, whose roots we believe lie in underinvestment in clean power, as it is of the role asset managers should play in advancing a low-carbon economy.

At LGIM, we believe that engaging with companies critical to the energy transition – with the threat of consequences should they fail to listen – is the best way to deliver systemic change. Blanket divestment usually means ignoring the problem, by shunning some of those companies without which there will be no transition.

It also risks decreasing transparency around emissions, as the most climate damaging assets move onto private or sovereign-related balance sheets that may not share the same transition objectives.

Through programmes like our Climate Impact Pledge, we encourage and cajole long-term corporate action, on behalf of our clients, aimed at benefiting entire markets and society at large. In doing so, we seek to fulfil our purpose: to create a better future through responsible investing.

That’s why we have partnered with Lewis Pugh, the endurance swimmer and UN Patron of the Oceans. You can read about his latest swim across the Red Sea here. Lewis has undertaken this challenge to raise awareness of the rising water temperatures that are starving and even killing coral reefs, which support essential biodiversity. Biodiversity loss, due in large part to the climate crisis, is one of the greatest challenges we face and one that we urge COP27 to combat, as it builds on last year’s gains.

Indeed, the Glasgow Climate Pact will just remain words on a page unless countries and companies alike deliver on the promises made at COP26 – and take urgent steps to address those outstanding issues highlighted above.

Inaction is not an option.

Read our CIO autumn update