COP27: Implementing regulatory solutions high on trustees’ agenda

Frustration marred the negotiations at the UN’s recent COP27 climate summit in Egypt, with late-night talks between almost 200 nations eventually resulting in an agreement for a new fund to compensate the hardest-hit countries for climate damages.

But strengthened commitments on the phasing out of fossil fuels did not materialise, drawing contrasts between the deals struck a year prior in Glasgow.

For pension schemes and trustees, the takeaways from the summit appear to be diluted and not of a grand magnitude, yet the summit has presented an opportunity to revisit how schemes can address the issues of climate inequality, biodiversity and evolving regulations.

We believe that investing in natural capital, such as certified sustainable forestry, offers investors an opportunity to play a role in a decarbonising economy and contribute positively to ecosystem services such as carbon storage, biodiversity and climate resilience

Claire Curtin, Pension Protection Fund

Implementing plans

COP27 was something of a “mixed bag”, says Simon Jones, head of responsible investment at Hymans Robertson.

He points to the Sharm el-Sheikh implementation plan – an agreement that global transformation to a low-carbon economy will require an investment of between $4tn (£3.4tn) and $6tn a year – as evidence of the swift and comprehensive revolution the financial system must undergo to meet decarbonisation efforts.

Notably, the “loss and damage” fund to provide compensation is “welcome”, yet it must still be established and funded, factors which will “likely prolong the debate about taking responsibility over the coming years”. 

“Given the previous commitment for developed countries to provide $100mn per annum of finance for mitigation action has not yet been met, one of the big unresolved challenges seems to be the finance gap,” Jones adds.

The deal marks a significant point of reflection on the “inability of developed nations to deliver on their 2009 climate finance commitment”, which is now expected to be achieved three years behind as it is scheduled in 2023, says M&G equities chief investment officer Fabiana Fedeli.

She says shortcomings have “eroded trust” between developed and developing countries, and the focus following COP27 will be on “rebuilding momentum and providing scalable solutions to address the collective shortfalls”.

Similarly, Isio deputy head of ESG research Leah Worrall says that while implementation has been “at the heart of the conference”, the issue of financing remains key and unresolved.

For schemes, this represents the need to be aware of the evolving dynamics between wealthy nations and the proposed beneficiaries of the implementation plan.

While the agreement touts flows of capital towards emerging markets and climate-sensitive nations in this instance, past performance may be an indicator of future returns.

Regulatory focus

On the back of agreements made in Egypt, pension schemes should prepare for the UK’s existing regulatory pipeline to “evolve to focus on implementation aspects”, Worrall says.

“This could include delivering the UK’s green strategy to align financial flows with a clean and resilient future, and to increase the competitiveness of the UK financial industry,” she notes.

The global nature of COP27 also shone a spotlight on potential regulatory developments at the supranational level, with governments starting to “claim the leadership position” that institutional investors have all been advocating for, Fedeli says.

She points to the US Inflation Reduction Act as a “global standard for incentivising emissions reductions” by providing long-term subsidy visibility for wind, solar, biofuels, hydrogen, carbon capture, and carbon storage.

Fedeli says the bill is “pivotal in providing a strong framework to encourage private sector investment” and may be viewed as a bellwether for future regulatory developments.

This aligns with those being called for by scheme members, says Worrall, who explains that defined benefit members in particular are seeking more regulatory clarity on how trustees invest sustainably, while defined contribution platforms “are already offering more options in this space”.

On the back of COP27 and major regulatory moves such as the implementation of the Task Force on Climate-related Financial Disclosures, schemes may increasingly seek to engage with existing managers to understand “how they can better manage climate-related risks and opportunities”, Worrall adds.

Biodiverse agenda

Biodiversity was a key theme of the summit and is set to remain a prominent area of discussion heading into the UN Biodiversity Conference in Montreal in December.

Institutional investors are showing a growing interest in biodiversity-related finance, says Claire Curtin, head of ESG and sustainability at the Pension Protection Fund.

“We believe that investing in natural capital, such as certified sustainable forestry, offers investors an opportunity to play a role in a decarbonising economy and contribute positively to ecosystem services such as carbon storage, biodiversity and climate resilience.”

But while the evidence surrounding the impact of climate change on biodiversity is clear, there is little data to inform the return expectations of different biodiversity solutions, Worrall notes.

She believes it will become increasingly essential that investors integrate nature-related risks and opportunities with other “existing climate change commitments, as well as social issues, to ensure a holistic portfolio approach to ESG issues”.

Trustee decision-making in this area will drive ESG priorities over the coming years, yet awareness must also be made on the “associated trade-offs” that will inevitably emerge, she adds.