Cara Williams of Mercer: More skills, better data

COP27 highlighted for me the urgent need to upskill workforces so they are equipped to deliver on sustainability goals.

I believe this is not well enough understood by many companies yet – they’re making substantive net-zero commitments but will need engagement and involvement from their employees to deliver them.

One of the big questions over the past two weeks focused on how best to implement climate goals. By investing in strategies that focus on the implementation phase, I believe investors can have an opportunity to make a real-world impact.

For example, in the context of the global south, investing in the transition has the potential to support critical climate adaptation, from the delivery of renewable energy sources and improvements in energy efficiency to the enhancement of economies’ infrastructure and resilience to the effects of global warming.

However, many investors are still facing challenges on how best to accelerate capital flows to the global south. A key sticking point seems to be data.

Our recent research of more than 400 asset management companies on understanding the barriers to implementation and increasing capital allocations across emerging and frontier markets uncovered a trust gap between managers’ perceptions of the reliability and robustness of companies’ climate data inputs across emerging markets relative to developed markets.

Some 60% of managers that responded to the survey said they do not regard the climate data of companies in these markets as robust or reliable – while just 25% thought the same of developed market data.

A significant step change in the robustness of data, transparency and disclosure around company reporting and ESG factors is needed to overcome current barriers to investment into emerging and frontier markets.

Cara Williams is the global ESG strategy leader at Mercer

Eoin Murray of Federated Hermes: Biodiversity on the agenda

COP27 saw the challenge of biodiversity and ecosystem loss being recognised on an equal footing with the problem of climate change.

The two remain in somewhat separate silos in many investors’ minds, but it is increasingly clear that they are inextricably linked and that a joint approach in terms of engagement and capital allocation is the way forward. Full consideration of impacts and dependencies is central to integration in investment decision-making, regardless of the asset class being used for implementation.

With roughly half of economic activity either highly dependent or dependent on nature, market and policy actors are attempting to incentivise the correct valuation and the financing of biodiversity at a huge scale. On the back of this, a financial and political architecture is now emerging to allow investors to participate more explicitly in the opportunities provided by nature.

With voluntary climate and nature disclosures already on the rise, it is to be expected that many counties will implement a framework for mandatory compliance and disclosure in the next several years. This means that companies will be legally bound to disclose their impacts and dependencies on biodiversity, and for investors – an opportunity to get ahead of the curve.

Eoin Murray is the head of investment at Federated Hermes

Isobel Edwards of NN Investment Partners: Green bonds need attention

One topic that came up frequently was climate finance. Many conversations focused on how to direct finance from richer countries towards the countries that have and will experience the most climate-related impacts. This renewed focus started in Glasgow last year and many of the most impacted countries came to COP27 determined to get firm commitments.

In the green bonds space, there are several ways this could be put into practice. At the moment, emerging market green bond issuers are less likely to pass the screening criteria set by EU investors or the EU taxonomy.

This is often because of a lack of data, since many of the green bond criteria that have been developed on the market were done so from a European viewpoint and do not necessarily always reflect the most frequently used environmental performance metrics on the ground in many regions.

As a result of these criteria, EU-based green bond investors can often have a minority allocation to emerging market green bonds. Moving forward from this would involve starting a more direct dialogue with emerging market green bond issuers to discuss frameworks and how to bridge data gaps and reporting requirements. We also expect dialogue between EU investors and regulators on ways to consider interoperability between taxonomies in different regions.

We have already begun to plan more meetings with syndicates and emerging market issuers themselves to discuss these topics and how emerging market green bonds could potentially get more interest from EU investors as we move forward. It is important not to gatekeep the finance for solutions to the climate crisis from the countries that will experience the most severe impacts.

Isobel Edwards is a green, social and impact bonds analyst at NN Investment Partners

Claire Dorrian of London Stock Exchange Group: Now for implementation

Finance Day at COP27 focused on the nuts and bolts of implementing the commitments made at COP26. In contrast to Glasgow, where new commitments from the global finance sector grabbed the headlines, the focus turned to technical implementation.

A focus on industry initiatives and public policy recommendations will help address low levels of sustainability-related disclosure and ensure international alignment on reporting standards.

One important step forward came from the UK government’s Transition Plan Taskforce with new guidance for companies seeking to publish climate transition plans. This will give companies the tools they need to produce robust plans ahead of mandatory disclosure for UK-listed companies from next year.

While thousands of corporates have made public emissions reduction targets, some as soon as 2030, very few have communicated publicly the detail of how they plan to achieve these goals. This type of guidance can help close the gap.

The publication of an RFP to build the Net Zero Data Public Utility is also noteworthy. The initiative, spearheaded by French president Emmanuel Macron, Bloomberg, LSEG and others will deliver a centralised repository of key climate transition-related data. This will allow all stakeholders to easily access and compare climate commitments.

Finally, new research from LSEG’s index provider, FTSE Russell, found that G20 countries’ Nationally Determined Contributions on average, now align with a 2.7C global temperature rise and that 2030 climate commitments continue to be notably weaker than 2050 targets.

The report also concludes that the physical risks arising from climate change are already having a material impact on G20 countries today and will be a significant economic and policy issue by 2050.

However, COP27 has seen some countries that are key to the climate transition make new commitments, including Australia and Saudi Arabia.

Claire Dorrian is the head of sustainable finance and capital markets at the London Stock Exchange Group

Matthew Powell of BeyondNetZero: We need a carbon price

It is striking that the world has been talking about a carbon price for at least 30 years, but it is still not a serious item on the COP agenda. There are plenty of announcements and initiatives that try to make up for its absence: John Kerry’s proposal, for example, to raise money from rich polluters and use it to decarbonise developing nations.

However, these are not sufficient substitutes for a market mechanism. As this year’s energy crisis has shown, price signals are an incredibly powerful way to encourage changes in the way we produce and consume energy.

As investors in climate solutions, there is nothing we would like more than a level playing field. Until that happens, we must encourage investors in carbon-intensive industries to set an example by putting a price – even if hypothetical – on the emissions coming from their assets.

I believe this will help investors start to make better decisions today, ready for a change in circumstances tomorrow. We also need to redouble efforts to convince policymakers that a universally applied carbon price, with proceeds that are redistributed in a way that protects and helps the poorest, should be put back on the agenda.

Matthew Powell is the head of ESG and reporting at BeyondNetZero

Gill Lofts of EY: It’s all about the money

The resounding message from COP27 for the private sector was the need to get finance moving where it needs to go. This is the main issue I will take away from this year’s conference to discuss with clients over the next 12 months.

If previous COPs provided us with agreements on what is required, or defined a set of rules for how to deliver on promises, COP27 has shown us that implementation will be the defining challenge of the years to come.

This was reflected in many of the discussions I witnessed in Sharm el-Sheikh, with a range of global leaders addressing the urgent need for a just transition and a step change in the flows of finance to the global south.

There is growing attention on the mitigation and adaptation needs of developing markets, the need for rich countries to live up to their promises on climate financing and the social impact of decarbonization in developing markets.

The key message we will be sharing with our clients is that the transition to net zero will require a total transformation for firms.

Leaders across financial services must understand the deep implications of this for their business models, develop a fully funded transformation strategy, and communicate it effectively to stakeholders as early as possible. This will, to a large extent, involve assessing resilience to a range of physical and transition risk scenarios, and ensuring that firms are ready to report on their planetary value, not just their financial value.

The financial industry now has many of the tools it needs to make its net-zero commitments real. There is a window of opportunity for financial institutions to build on their existing momentum and come through on commitments to have a critical impact on climate action.

Gill Lofts is a global sustainable finance leader at EY

Jennifer Anderson of Lazard Asset Management: Mind the gap

Moving from high ambitions to technical implementation was the prescribed arch between COP26 and COP27.

The commitment of $130bn from the Glasgow Financial Alliance for Net Zero last year was supposed to help mobilise capital – but the complexities of implementation, setting up appropriate guardrails, and evaluating tools to measure success all continue to be barriers to the massive scale-up of climate investment that is needed to meet the Paris Agreement.

The financing gap between developed and emerging markets was a major focus in Egypt and the current one-size-fits-all framework for net-zero investing fails to acknowledge the differences between emerging markets countries and the individual challenges they face.

The cost of capital is already higher in emerging markets. If investors choose to artificially reduce carbon in their portfolios by divesting from there, it could run the risk of starving countries and companies of much-needed capital for green and transition investment.

Coming out of COP27, the asset management industry should reflect on the Paris Agreement’s commitment to common but differentiated responsibilities and respective capabilities.

We have started to engage with standard-setting agencies and industry associations to collaborate on the development of emerging market-specific standards. We also encourage clients with net-zero targets to adopt a different set of guardrails for such allocations.

As we look ahead to COP28 in Dubai, we will continue to look for attractive investment opportunities in emerging markets, including corporates that are beneficiaries of a low-carbon and just transition.

As active investors, we think engagement with companies is one of our most powerful tools but it could also be effective for investors to engage with emerging market sovereigns, where country-level policy and legal frameworks surrounding decarbonisation are generally less advanced than developed markets.

Jennifer Anderson is co-head of sustainable investment & ESG at Lazard Asset Management