Business and governments face big challenges, but are still committed to action 

Between rising global tensions and economic uncertainty, this year’s United Nations Climate Change Conference (COP27) may be a more subdued affair, but investors have become acutely aware of the financial impacts of climate change and the importance of reaching net-zero emissions by 2050.

Those are some of the conclusions of a BMO Sustainability Leaders’ podcast moderated by the BMO Climate Institute’s Susan McGeachie, looking at the shape of this year’s negotiations between parties at COP27. Interviewing BMO Capital Markets Director of ESG Strategy Doug Morrow and Nalini Feuilloley, Director of Responsible Investment at BMO Global Asset Management, the discussion also looked at why investments in the transition will not be derailed.

Sustainability Leaders podcast is live on all major channels including Apple, Google and Spotify  

“The world is a fundamentally different place than it was in November 2021,” said Doug Morrow, a seasoned ESG specialist with BMO research, noting that investors, particularly those with long-term investment horizons, are committed to weathering the uncertainties created by a rapidly changing environment. 

Similarly, financial institutions, some of which have been challenged for their commitment to the transition, are holding the course, arguing that their focus on climate change is driven by their fiduciary responsibility, said Susan McGeachie, who is also an adjunct professor at the University of Toronto where she teaches a graduate course in climate finance, and a member of the Canadian Climate Governance Experts panel.

McGeachie underscored the reverberating echo among high profile investors, that the global energy transition is one of the most significant events to affect the long-term value of the companies they finance.

Global Conflict Tests Climate Change Commitments

With the war in Ukraine having triggered “a short-term scramble for quick energy solutions,” including the restart of highly polluting coal-fired electrical generation in Europe and elsewhere, energy security will take centre stage at COP27, said Morrow, noting that while the conflict has underscored the continued need for fossil fuels, at least as the current energy system is designed, it’s also putting a greater focus on the importance of renewables.

“The conflict has actually accelerated plans for some countries and regions that are looking to transition away from fossil fuels,” said Nalini Feuilloley, Director of Responsible Investment at BMO Global Asset Management. “I don’t see this impacting the long-term trajectory of the climate action goals that the financial community has set in place.”

The finance community, however, “has to keep our head in the game around the commitments we've made to get to a net-zero future,” she said, noting that the war has seen some companies slow down their climate action agendas.

Recession May Weigh

With global recession looming, governments are also balancing the drive to reach emission reduction targets with balancing for economic growth, noted Morrow, at the same time lauding the “incredible deployment” of renewables that has improved the calculation between the number of emissions needed to generate a unit of economic output.

With growth becoming increasingly harder to come by in the coming months, having the political resolve to maintain and increase carbon pricing policies could become more difficult, he added.

Carbon pricing “is the most important driver” in the transition, said Morrow, yet only 23% of global emissions are currently covered and at a price below where it needs to be to become a sustained driver of change. Unfortunately, the Paris Agreement, which many countries signed onto pledging to bring carbon emissions to 1.5 degrees Celsius above pre-industrial levels by 2100, is not legally binding, which means when the going gets tough, governments could decide to forgo carbon pricing without consequence.

De-Risking Climate Change

Ultimately, governments can only do so much, so it’s up to the finance community to help fund the transition, says Feuilloley. There are some barriers to how asset classes are structured and how companies view risk and return. She hopes to see institutions and governments engage in conversations at COP27 to develop ways to provide guarantees around the often high-risk tech investments needed to combat climate change.

“If we can find a way to balance that out then we can potentially unleash a flood of private capital towards that gap that is so needed to be plugged,” she said.

Having more policies and regulations will also help increase investments, she added. While rules can be disruptive, she admitted, with countries falling behind on their commitments around environmental, social and governance practices would encourage and guide private sector companies to take more action over the long term. 

“We've seen a whole host of new regulation come out just in this last year that has actually changed the way our community is looking at the work that we do in this space,” said Feuilloley. “We're trying to get rid of greenwashing. We're trying to encourage more disclosure. On the climate front, you saw this huge consultation the SEC put out earlier this year around climate disclosures – these are the kinds of things that will move the needle and the industry forward.”

COP 27 to Reaffirm Climate Commitments

Despite economic and energy security uncertainty, there is no shortage of opportunities for companies to take advantage of, especially in the private markets, said Feuilloley.

The jury is still out for efforts like GFANZ, the Glasgow Financial Alliance for Net Zero, the association of private-sector institutions committed to facilitating the global energy transition launched during COP26, she said. While GFANZ has helped financial institutions push public issuer companies to adopt more sustainable practices, it’s unclear whether these efforts working, she explained.

What could be more effective is a rethink of private market asset classes, while developing new ways to support and scale technologies that still generate returns for investors.

Businesses and governments still have a lot of work to do around the energy transition, but BMO’s experts don’t expect to see the same big ideas coming out of COP27 and as those from COP26, with Morrow adding that there will likely be less of an emphasis on the role of the private sector this year and more of a focus on implementation.

For instance, he expects to see some developments around climate finance, which Morrow said are essentially climate reparation payments where developed countries pay developing countries to help with climate adaptation and emission reductions. In 2009, developed countries pledged to deliver $100 billion per year to emerging nations by 2020, but that hasn’t happened. At the same time, developing countries are bearing the brunt of climate change impacts.

Climate Finance

“Climate finance is going to be a top issue at COP27,” Morrow said. “There’s palpable frustration in the developing world at the lack of climate finance flowing from developed countries and that could prove to be a significantly divisive issue going forward.”

The heightened pressure to accelerate climate action and be transparent on our progress has created a rapid evolution in the strategic and competitive environment for all providers of capital, McGeachie explained. Financial institutions will need to play a collaborative role with government and other partners in shaping economic incentives to rapidly decarbonize so that we can build transition plans that are credibly aligned with net zero.

To learn more about COP27 from a Global Asset Management perspective, read Nalini Feuilloley’s recent piece, What is COP27, and why is it important?