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COP 26: Big Hope or Big Hype?

Synopsis: In the last few decades, since ‘climate change’ and ‘environmental impact’ became important topics of discussion for the international community, the focus has been more on cooperation among countries, the debate between developed vs. developing economies, and who should bear the cost of clean-up and shift to a ‘low carbon economy’. However, the discussion around finance is relatively recent in this context and that is what the 26th UN Climate Change Conference of the Parties (COP26) is focused on. The event has constantly been in the news with huge expectations from what it may achieve on emission targets, Net zero and 1.5 degrees, among other things. While the agenda is ambitious, there are ominous signs that consensus is still eluding among the key participants: recent experiences on initiatives like EU Taxonomy being a case in point. There have been several reports indicating that ideological differences, bickering among major countries on issues like phasing out coal, and last-minute ‘no shows’ can’t be ruled out. In our view, a realistic approach would be helpful. COP26 must set achievable targets, both in terms of political consensus and practicality. But the most important thing would be, to deliver in time.

COP26: The 2021 Edition of the UN Annual Climate Change Conference

In a way, the 26th UN Climate Change Conference of the Parties (COP26) is just another conference of the United Nations. To be more precise, COP26 is the 2021 edition of the United Nations Annual Climate Change Conference (COP stands for Conference of the Parties or the signatories of the United Nations Framework Convention on Climate Change, UNFCCC). UNFCC was agreed in 1994 and has 197 Parties (196 countries and the EU).

The 2021 conference, hosted by the United Kingdom, is the 26th meeting of the Parties, and hence is called COP26. It is scheduled to be held in Glasgow from 1-12 November 2021. United Nations climate change conferences are among the largest international meetings in the world and often, they are messy. The negotiations between governments are complex and this makes them very unpredictable and often difficult to forecast in terms of likely outcomes.

According to the conference organizers, the conference is guided by COP26 Sustainability Governing Principles which include:

  • Actively manage potential impacts on the environment and local community
  • Identify opportunities to deliver environmental and social value 
  • Encourage more sustainable behavior 
  • Promote the use of responsible sources and responsible use of resources in the supply chain 

Why has COP26 been in the news?

The United Nations Annual Climate Change Conference in Glasgow was due to take place in 2020 but was rescheduled to November 2021 because of the Covid-19 pandemic. Some stakeholders feel that there is an urgent need for action and for the participants to do substantially more.

  • Extreme weather events – Very recently, in Germany and Belgium, floods killed several people and caused widespread damage. In the Chinese city of Zhengzhou, floodwaters impacted normal life and were responsible for the deaths of several people. There have also been several extreme weather-related incidents in many other parts of the world including the USA, Australia, Brazil, India, and Uganda. This has put the COP26 UN climate change conference in Glasgow under focus.
  • The Covid-19 pandemic – The Coronavirus pandemic has contributed to spreading more awareness around sustainability issues than any other event in history. There is much better appreciation now about how the world is so inextricably interlinked that no one is safe until everyone is safe. The widespread media coverage on Covid-26 has often highlighted how very many countries were grossly unprepared or underprepared for the pandemic. The COP26 speaks about issues like inclusivity and accessibility. It also has in its governing principles, a) Encourage healthy living, b) Ensure a safe and secure atmosphere.
  • Media coverage – These kinds of events were earlier confined to back pages of the newspapers with some boring coverage and virtually no analysis on implications and their importance in mainstream media. But with social media and some high-profile activists, the coverage has increased significantly, both in quality and quantity. There is hardly a day that has gone by without something or the other on COP26. It has also become a platform for several new climate protests with several groups and activists emphasizing the need to be heard.

The areas that COP26 is working on

The COP26 President, Alok Sharma in his foreword for the official booklet ‘COP26 EXPLAINED’ has written that while the COVID-19 pandemic has brought devastation to millions around the world, disrupting many parts of the global economy and Governments have stepped up to protect lives and livelihoods, the world can’t afford to lose focus on climate change.

The temperature rise control is an important area and he wrote that “To keep the temperature of the planet under control – limiting its increase to 1.5 degrees – the science dictates that by the second half of the century, we should be producing less carbon than we take out of the atmosphere. This is what reaching ‘net zero’ means.”

These issues reflect in the officially stated objectives of COP26 as well. There are four areas COP26 is focusing on:

  • Secure global net-zero by mid-century and keep 1.5 degrees within reach – Countries are being asked to come forward with ambitious 2030 emissions reductions targets that align with reaching net zero by the middle of the century. To deliver on these stretching targets, countries will need to: a) accelerate the phase-out of coal, b) curtail deforestation, c) speed up the switch to electric vehicles, and, d) encourage investment in renewables.
  • Adapt to protect communities and natural habitats – The climate is already changing and it will continue to change even as we reduce emissions, with devastating effects. At COP26, there is a need to work together to enable and encourage countries affected by climate change to, a) protect and restore ecosystems, b) build defenses, warning systems, and resilient infrastructure and agriculture to avoid loss of homes, livelihoods, and even lives.
  • Mobilize finance – To deliver on the first two goals, developed countries must make good on their promise to mobilize at least $100bn in climate finance per year by 2020. International financial institutions must play their part and work towards unleashing the trillions in private and public sector finance required to secure global net zero.
  • Work together to deliver – The only way to rise to the challenges of the climate crisis is by working together. At COP26 there is a need to, a) finalize the Paris Rulebook (the detailed rules that make the Paris Agreement operational), b) accelerate action to tackle the climate crisis through collaboration between governments, businesses, and civil society.

So, why is the Global Finance Industry monitoring COP26 so intently?

In the last few decades since ‘climate change’ and ‘environmental impact’ became important topics of discussion for the international community, the focus has been more on cooperation among countries, the debate between developed vs. developing economies, and who should bear the cost of clean-up and shift to a ‘low carbon economy’. However, the discussion around finance is relatively recent in this context and that is what COP26 is focused on.

If we divide the four objectives discussed in the section above into qualitative and quantitative categories, two of them are clearly numbers driven;

  • Net-zero by mid-century and keep 1.5 degrees within reach
  • Developed countries to mobilize at least $100 bn in climate finance per year by 2020

It is also the first time that a climate change conference or a global initiative focused on environmental agenda is putting finance at the center of negotiations. There is also active backing from the UK Government. On 27 February 2020, the Governor of the Bank of England, Mark Carney, launched the ‘COP26 Private Finance Agenda’ at the Guildhall, London.

On its website, the Bank of England says “The objective of the COP26 Private Finance Agenda is for every professional financial decision to take climate change into account. The right framework for reporting, risk management, and returns will embed these considerations and help finance a whole economy transition. To achieve net-zero, every company, bank, insurer and investor will need to adjust their business models for a low carbon world.”

In a blog on COP26, Fiona Reynolds, the CEO of PRI (Principles for Responsible Investment) wrote, “COP provides an opportunity for investors to consider how they can innovate in developing solutions to climate issues and in financing sector transition.” She also added, “Ultimately, government action is essential. We are already at 1 degree Celsius and still need to cut emissions by 50 percent over the next decade. Investors want to see governments raise ambition toward net-zero and deliver the Paris Agreement”. She also said that PRI and all their global signatories and stakeholders as well as the COP presidency will work to make this the finance COP.

In brief, the COP26 is being hailed as the next big thing in humankind’s fight against climate change and a conference that will lead to more proactive action from the finance industry. The expectation is that the next steps towards delivering net-zero global emissions by 2050 will be agreed upon at the COP26. The belief is that the Governments and the investors do recognize and understand the threat posed by climate change, and are ready to address these issues.

Could there be gaps between promise and delivery at COP26?

While the agenda is ambitious and the COP26 is no doubt big on promises, the concern today is that, will COP26 fall short? First, let us look at what investors think of COP26. According to a recent survey by Berenberg WAM, the coronavirus pandemic has increased the importance of the social aspects of ESG among asset managers and investors. Among 112 respondents, who were primarily from the UK and Germany, 47% considered the social ‘S’ element of ESG as the most important, followed by 35% selecting environmental factors, while 18% said governance took precedence.

The survey was conducted among members of the European investment community, including asset managers and private investors, on attitude towards ESG/impact-related topics and the UN Sustainable Development Goals. When these survey participants were asked about their expectations for the COP26, the respondents were divided: 41% were generally optimistic about the conference, but 32% said they expected little to no progress. Some respondents also believe restrictive measures on carbon emissions should be implemented in the form of carbon taxation, regulation and policies.

The signs are also ominous that consensus is still eluding the key participants: case in point being some of the recent experiences on initiatives like EU Taxonomy that have not been positive. This is leading to more skepticism on how much COP26 will actually be able to achieve. There have been several reports indicating ideological differences, bickering among major countries on issues like phasing out coal and as such, last-minute ‘no shows’ can’t be ruled out. One could surmise that overall, it’s not a pretty sight.

  • The first in-person meeting of climate ministers in 18 months has seen some tentative progress. COP26 President Alok Sharma said that the countries aligned more closely on climate issues but on some key matters they were “not yet close enough”. One of the outstanding questions is the phasing out of coal for energy.
  • India’s no-show at the London climate meet isn’t good news for UN’s COP26 talks. India’s support is key to the success of COP26, set for November, as several issues, including climate finance & carbon goals, remain sources of tension, especially in emerging economies.
  • Environment ministers from the Group of 20 nations were unable to reach full agreement on key climate goals, just 100 days before a critical international conference kicks off. After two mostly unsuccessful meetings of the world’s largest economies, only three months remain to reach an agreement on key issues.
  • Climate change: ‘No more excuses’ at COP26 climate summit – poor nations. More than 100 developing countries have set out their key negotiating demands ahead of the COP26 climate meeting in Glasgow.
  • There are also allegations that the UK government’s greenwash machine is going into overdrive with the COP 26 international climate talks coming up in Glasgow in November. The concern is that realistically speaking, there will not be much progress and the world would still fail to meet the 1.5 degrees target.
  • Nations most vulnerable to the impacts of global warming called for rich countries to live up to their promise to finance the fight against climate change. Highlighting a “worrying lack of urgency” from recent G7 and G20 summits, many countries said COP26 needed to deliver help to communities already impacted by climate-driven extreme weather.

How EMAlpha can help

Achieving political nod for a proposal and building a political consensus is a challenging problem even when all the stars align. But the pot is further stirred when multiple countries are involved, each with a different definition and hence objective on how to best deal with climate change. The countries have to protect the local industries and also minimize the transition pain for the population while not falling short of their genuine claims.

This has been the case with many climate conferences and treaties in the past. The member states had to strongly support their domestic industries and it was important for them to protect their business interest to the maximum possible extent. The political leadership was also required to be cognizant of the domestic political compulsions due to internal political pressure. But the growth in the global sustainable funds is an indicator that the momentum is on the side of a proactive approach and COP26 participants must seize this opportunity.

This requires that the ESG ecosystem needs to be better prepared with the best possible tools and support for investors and asset managers in helping with this transition. At EMAlpha, we have incorporated a Flexible Framework Management System, based on EMAlpha’s proprietary technology making inferences framework agnostic. This also offers a quick adaptation for the users (asset managers, companies, and investment advisors).

As such, the EMAlpha’s ESG and Sustainability offering is centered around addressing some of the most critical issues. The EMAlpha algorithms provide a choice for separate relevant frameworks and these can be used to review the performance more transparently. This not only helps the investment advisors but also makes the clients understand the granular details better which in turn is helpful for them to understand their preferences better. To achieve this, we focus on the following;

  • Go beyond the official reported version – The data source matters and there is a need to look beyond what the companies are reporting and what the official version is. It is essential to rely on the company-reported data because other sources might not be collating as much information. Although often, there are other sources as well for environment-related information. They include the information disclosure as mandated by regulators and the EMAlpha algorithms scan through unstructured data to pick the unofficial information too.
  • No two ESG scores are same despite same headline figure – It is the composition that makes a big difference and all the three parameters that make up ESG need to be evaluated separately. The EMAlpha algorithms provide separate scores for E, S, and G so that an investor can review the sectoral performance more transparently. Over and above, a key feature of EMAlpha’s NLP algorithms is that the attribution analysis is fairly simple and straightforward.
  • An ESG score without context and background is meaningless – The ESG is as much about intent as it is about execution. For this balanced evaluation, having an understanding of the local factors is very crucial. A very good ESG track record (probably more driven by excellent performance in E and/or S) may hide serious Governance related risks and the investors can only ignore them at their own peril. EMAlpha analysis meticulously incorporates this critical part of the ESG evaluation jigsaw puzzle.

References

  1. COP26 Explained: UN Climate Change Conference UK 2021 https://2nsbq1gn1rl23zol93eyrccj-wpengine.netdna-ssl.com/wp-content/uploads/2021/07/COP26-Explained.pdf (Accessed on 31st July 2021)
  2. What do we need to achieve at COP26? https://ukcop26.org/cop26-goals/ (Accessed on 31st July 2021)
  3. Sustainability at COP26 https://ukcop26.org/the-conference/sustainability/ (Accessed on 31st July 2021)
  4. Extreme weather raises stakes at COP26. Window is closing to prevent a much warmer and more unstable planet https://www.ft.com/content/c59ca047-082e-48fb-a479-df1b2818a66c (Accessed on 31st July 2021)
  5. New Wave of Climate Protests Ahead of COP26 Target Gas Production. Green groups and activists are gathering to protest gas industries before COP26 summit. https://www.globalcitizen.org/en/content/climate-protests-cop26-gas-production/ (Accessed on 31st July 2021)
  6. Launch of COP26 Private Finance Agenda https://www.bankofengland.co.uk/events/2020/february/cop26-private-finance-agenda-launch (Accessed on 31st July 2021)
  7. COP26: time for finance to take the lead https://www.unpri.org/pri-blog/cop26-time-for-finance-to-take-the-lead/5513.article (Accessed on 31st July 2021)
  8. What are the Principles for Responsible Investment? https://www.unpri.org/pri/what-are-the-principles-for-responsible-investment (Accessed on 1st August 2021)
  9. COP26 and investor initiatives https://www.unpri.org/sustainability-issues/climate-change/cop-26-and-investor-initiatives (Accessed on 1st August 2021)
  10. India’s no-show at London climate meet isn’t good news for UN’s COP26 talks. https://theprint.in/environment/indias-no-show-at-london-climate-meet-isnt-good-news-for-uns-cop26-talks/707776/ (Accessed on 1st August 2021)
  11. G20 ministers stumble over coal global warming targets https://www.bloomberg.com/news/articles/2021-07-23/g-20-ministers-stumble-over-coal-global-warming-targets?sref=RBX8CMa6 (Accessed on 1st August 2021)
  12. COP26 climate summit president says progress made, but not enough https://www.bbc.com/news/science-environment-57975025 (Accessed on 1st August 2021)
  13. Climate change: ‘No more excuses’ at COP26 climate summit – poor nations https://www.bbc.com/news/science-environment-57839368 (Accessed on 1st August 2021)
  14. COP26: UK ‘on the road to nowhere’ https://theecologist.org/2021/jul/11/cop26-uk-road-nowhere (Accessed on 1st August 2021)
  15. DEVELOPING NATIONS RELEASE FIVE-POINT PLAN DEMANDING CLIMATE FUNDING BEFORE COP26 https://www.firstpost.com/tech/science/developing-nations-release-five-point-plan-demanding-climate-funding-before-cop26-9810121.html (Accessed on 1st August 2021)

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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