Zeroing in: Fostering innovative technology

Henning Stein (00:05):

In today's episode, we will reflect on COP26, the United Nations conference on climate change. I'm Henning Stein, Global Head of Thought Leadership at Invesco, and I'm joined by Cathrine de Coninck-Lopez, our Global Head of ESG, and Graham Hook, our Head of UK Government Relations and Public Policy. Cathrine, Graham, it's good to see you again. How are you both?

Graham Hook (00:26):

Very good. Thanks, Henning.

Cathrine de Coninck-Lopez (00:27):

Very good, Henning.

Henning Stein (00:29):

So we were all among the delegates of COP26, and it certainly wasn't Paris 2015, but I think we saw some really positive developments. Cathrine, we're obviously especially interested in your take on the investment side of things in tackling the climate crisis. Do you think it was given enough attention in Glasgow?

Cathrine de Coninck-Lopez (00:49):

Well, Henning, I think, actually, if I look at it from history and versus today, I think finance was given a huge platform. And actually this was called the investment COP, so really focusing on how do we scale finance? And I think, in the actual agreement, perhaps it wasn't the level of commitments that we were all hoping for, but on the sidelines, there has been significant interest, commitments from asset management. So, our industry, $57 trillion, we've then seen the banking sector committing $63 trillion, and asset owners committing $10 trillion towards net zero. And so this is the so-called GFANZ overall commitment, which will be helpful in achieving the $173 trillion in infrastructure investment, which could actually be needed if we were to achieve net zero globally by 2050.

Cathrine de Coninck-Lopez (01:48):

So I think, look, as the financial world, we are in a very privileged position to make a real difference. And I think what you saw at this COP was a recognition that finance can actually change things through the responsible allocation of capital.

Graham Hook (02:04):

I think that's really interesting, Cathrine. From a policy perspective, too, I think I take a sort of glass half full perspective that there really was positive progress made at this COP. I think, as ever, you need to take a bit of a step back away from the media headlines and assess what was actually achieved during the negotiations.

Graham Hook (02:23):

I think there was always the prospect of the COP ending with rather higher-level, less-ambitious declarations than the hard binding commitments that many people wanted to see in particular areas, but that's particularly a reflection of COP being a consensus based process, any agreement needing the approval of almost 200 different countries.

Graham Hook (02:46):

But if you look at the Glasgow Climate Pact that emerged from the two weeks of negotiations, yes, it doesn't put us on a path to limit global warming to one and a half degrees in line with the ambition of the Paris Agreement yet, but it does represent a significant advance. It fills in some of those crucial details that were missing from Paris, such as on things like exchanging carbon credits; it actually does contain the first reference to fossil fuels, albeit in a watered down form from previous drafts; and it commits all countries, which I think is really important, to revisiting and strengthening, next year, their national commitments to emissions targets for 2030, rather than waiting for the next five-year cycle that was established under the Paris Agreement, so I think there is tangible progress there.

Graham Hook (03:38):

I think one of the other interesting points from Glasgow was, and perhaps recognizing the limitations of trying to get unanimity among 200-odd countries was, that the UK government was willing to put together what you might term "coalitions of the willing" in areas that smaller groups of countries were prepared to go for further and faster than the slowest. So we saw 130 world leaders pledging to end deforestation by 2030, we saw more than 100 countries committing to cut methane emissions by 30% by 2030, we saw more than 40 countries agreeing to shift away from coal. And of course the agreement that rather took everyone by surprise given the recent backdrop, the US-China agreement, where you've got the two top greenhouse gas emitting countries agreeing to cooperate across a range of areas, including on cutting their methane and CO2 emissions.

Graham Hook (04:33):

So I think, as ever the devil is in the detail and the implementation of these agreements, and, of course, there are some key countries missing from some of those statements, particularly on coal and methane. But I think the hope is that, rather like snowballs, they attract more and more countries to sign up to them over time.

Henning Stein (04:54):

Yeah, I agree, Graham, with the US-China declaration, that really came out of a big surprise, particularly the importance of this collaboration. And I think recent history really has shown other nations tend to follow if the two biggest leaders here, superpowers, come together. And we saw some really interesting movements towards the issue also of loss and damage for poor countries affected by climate change. We saw, for example, that deal with South Africa. That surprised me. $8.5 billion from wealthier nations to help end the reliance of South Africa on coal, I think was an important one.

Henning Stein (05:35):

But then I agree with you, I think there was also something missing that needs to come into the debate over time. This unanimity you don't have, you need the coalition of the willing, as you say. And for that, I think we also need to focus on things, like agriculture, that was totally in the shadow of the conference. So far, 30% of all emissions come from factory farming, come from the agricultural sector.

Henning Stein (06:03):

And I spent a lot of time personally at the conference with FAIRR, which is a global investor network, Cathrine knows them well, that push the idea of sustainability in this sector. And they argue, basically, the problem from agriculture, that needs to become a major issue for COP27; maybe the main focus, even, of COP27 should be on agriculture. I don't know, Cathrine, what your take is on that?

Cathrine de Coninck-Lopez (06:30):

Well, certainly, sustainable agriculture is a theme that demands much greater attention, and one that we are definitely looking at. I think another thing from COP that I wanted to reflect on was, what are we actually trying to achieve? In nine years, by 2030, we are actually hoping to halve our emissions, so that is very significant from a net zero perspective.

Cathrine de Coninck-Lopez (06:56):

I think what was very interesting for me, for example, at the World Climate Summit, that the shipping sector is seeing big shipping contracts in four years' time, in three years' time, and these are long term decisions. And if you're making a decision now for four years' time, say, about new shifts, you just halved your timeline in terms of net zero, so in terms of 50% reduction by 2030. And so you are actually thinking about a very kind of this is now, this is here for actually concrete business, concrete investment decisions. Now is the time to be thinking about this kind of trajectory. And I think you did see at the COP that sort of realization of the urgency nine years from now, so I think definitely there were hints of progress.

Cathrine de Coninck-Lopez (07:57):

The one area that we didn't necessarily see much rhetoric on, much discussion on, was the carbon market. Now, I think that's, perhaps, expected, but obviously as capital markets players having a price on carbon and actually having engagement with several companies that have their own internal purses of carbon already, that was probably a major gap in terms of really making sure that we are getting to that urgency, really valuing carbon going forward.

Graham Hook (08:32):

I think that's absolutely right, Cathrine and Henning. I think tackling emissions from agriculture, that sense of urgency, making progress on carbon pricing, those are all really vital to making substantive progress in limiting the degree of climate change.

Graham Hook (08:48):

I think, just reflecting on your point, Cathrine, on what's been elusive, I mean, certainly, in terms of some of the conversations I had, many of the issues tended to be framed slightly in terms of black and white; and what was missing was more of a sense of the shades of green and a degree of nuance around some of the policy issues. And I'm thinking particularly of the discussion around the role of nuclear, which, it excites a huge amount of passion on both sides of the argument. There's clearly, at the moment, a lack of consensus about it. But I just wonder whether things like the recent spike in the gas price, the current limitations around the managing the intermittency of renewables, the Finnish repository for spent nuclear fuel, I just wonder whether some of these things might just get policy makers who've previously been opposed to nuclear just to take a fresh look at the role that it could play in decarbonizing the economy.

Graham Hook (09:45):

I'd say the other area that, perhaps, was missing overall is a greater sense of trust between some of the major parties. I mean, obviously, that's crucial when you're looking for shared solutions to shared problems. Of course, we all know COP26 has been held against the backdrop of some pretty major and rising global tensions, whether it's around Taiwan, whether it's around Ukraine, or Belarus, and other areas, and I think there is just that question of whether a greater degree of trust between, certainly, the major emitters and the major economies in the world might have helped deliver a stronger overall outcome.

Henning Stein (10:24):

Yeah, I agree, all the advanced nuclear modern technology that is probably becoming more and more interesting to look at because it is a different story than 10 years ago, much safer than it was, and some countries might decide to reverse the course they started 10 or 20 years ago in exiting nuclear.

Henning Stein (10:47):

And so maybe we didn't get the big reveal from COP, but one of the best things I think, personally for me, was seeing this multi-stakeholder approach that, really, people are serious about it, and a lot of great ideas, success stories have emerged, and that's really away from the political theater of the main stage. I met, for example, many people who also recognize the transition to net zero can't happen without innovation and disruption, new technologies, such as the one we just mentioned. I had a really fascinating discussion with a geo-engineer, someone who believes that this could be a huge game-changer in this story. And that's something that's underappreciated, because the UN currently blocks this idea.

Henning Stein (11:39):

We have Switzerland, we have Canada came out several times proposing this, but there is the fear you don't want to mess with the weather, basically, the weather system. I take a different view. I think we should test that and see on a small scale what can be achieved through technologies like this. I also had a lot of conversations about emerging energy tech sectors and the need to embrace carbon reduction innovation at scale. This is already possible, but it's very costly, So how can we scale that up with them?

Henning Stein (12:12):

And now, Cathrine, what was your most interesting conversation if you look back on the past few days?

Cathrine de Coninck-Lopez (12:18):

Well, I think one of my most interesting conversations was with the Rainforest Partnership. So they're a coalition, or an NGO really, that focuses around conservation of the rainforest, primarily in Latin America. And obviously, given the Deforestation Pledge and halting deforestation by 2030 with actual financial backing specifically allocated towards that pledge, meeting them and hearing their take on, is it enough? Is it what they were hoping for? Was really interesting.

Cathrine de Coninck-Lopez (12:56):

And one of the things they said is that they'd been at COPs for the last many, many years arguing on this topic, and it just had never come up previously. What's interesting at COP26 is you are seeing these specific issues coming out, deforestation, carbon emissions from transport, coal, these more specific issues, you are getting into the granularity of the real economy issues. So speaking to them and hearing that they were cautiously optimistic, let's put it that way, around this resolution was incredibly encouraging for me

Graham Hook (13:35):

Yeah, I agree. I think that talking to the representatives from the Rainforest Partnership, it's got some really interesting potential there. I think what struck me was just some of the interesting numbers we heard about in different presentations through COP that help highlight some of the real policy challenges that we face. So, I mean, everyone was talking about the warning from the prime minister of Barbados that two degrees warming would effectively be a death sentence for island nations.

Graham Hook (14:04):

I think coming back to your point, Henning, on agriculture, the fact that 8% of greenhouse gas emissions are linked to food waste or losses, perhaps that highlights some potentially lower hanging fruit for policy makers in the near term. I think during the middle of COP a poll was taken in the UK, finding that 50% of voters would be happy to pay more in taxes if it leads to less carbon being emitted into the atmosphere; but, of course, the flip side of that, roughly half wouldn't be prepared to pay for that, so, again, that highlights the fiscal challenge facing governments today.

Graham Hook (14:45):

And then finally, I think it was 80% of the buildings that we'll inhabit in the UK in 2050 have already been built, and I think that highlights one of the biggest domestic policy challenges here in the UK, the challenge of retrofitting people's homes to make the switch from gas to electric heating and doing that in an affordable way that meets the consent of taxpayers. So some really thought provoking statistics flying around.

Henning Stein (15:18):

Yeah, I agree, low hanging fruits, if you will. We all did plenty of talking, but then critics like Greta, they would say COP is ultimately an illustration of people talking the talk, but not walking the walk. And as investors, what questions should we be asking to really ensure our various stakeholders, businesses, policy makers, clients, and so on, that truly walk the walk in relation to climate change? Cathrine, maybe, first.

Cathrine de Coninck-Lopez (15:49):

Well, one of my kind of favorite areas of reflections, let's say, from the World Climate Summit was articulating what it actually would take from an asset management perspective to be aligned to net zero and the net zero pledges. And one of the core components there is to actually have a view on what corporates are doing in terms of alignment. And as I was saying that, lo and behold, one of the leading sustainability officers from a leading car maker came up and said, "What do you need? What can I do so that, in your assessment, I am aligned to the next zero transition?"

Cathrine de Coninck-Lopez (16:30):

And so I think where I'm seeing incredible power and incredible influence from investors is in that dialogue with companies, that kind of constant two-way rhetoric and information sharing around what is required from an investment perspective and what is required from a corporate perspective in terms of disclosures, but also concrete actions. And so, I'm very hopeful in terms of having that dialogue, having that engagement, it could really drive meaningful progress.

Cathrine de Coninck-Lopez (17:03):

And at Invesco in 2020, we recorded over 2,000 corporate dialogues and ESG more broadly, 800 specifically on the environmental theme, and, look, that's just going to continue.

Graham Hook (17:17):

And Henning, again, look, I think you're right, there was a lot of talking at COP, but I think if we take a step back and we think about the bigger picture view here, I think if you compare where we are today compared with, say, the Kyoto Protocol of 1997, I think the scale of the emissions reductions agreed on back then, what was it, 5% in greenhouse gas emissions between 2008 and 2012 for a relatively small group of developed countries, I mean, those look extremely modest now compared to the net zero commitments that have been pledged in the run up to the COP in Glasgow.

Graham Hook (17:56):

So I think it is encouraging to see how far we've come, but the key question for policy makers, of course, is, how far and how fast can we go? And for me, that's why it's really important to get that commitment for countries to come back next year with more ambitious targets for 2030. I think that continuous ratchet effect is really important and powerful to push countries to continually raise their level of ambition. And I guess the most important thing now, is starting to get the really detailed implementation plans that sit below the headline commitments, because that's where the real gap is now.

Graham Hook (18:34):

We've seen the head of the IEA estimate that if all existing commitments are met, we can maintain warming to 1.8 degrees. Clearly, that's not enough to meet the full ambition of the Paris Agreement, but I think what it does highlight is also that there is still a massive gap between those headline commitments and the policies that are actually needed to implement them, so I think that's where the progress now needs to come.

Henning Stein (18:58):

Yeah, I think it's always difficult to talk in degrees because it is hypothetical, but it maybe gives people a way of framing this somehow. But I prefer the net zero approach, because that's something we can really influence rather than [crosstalk 00:19:13] the degrees Celsius.

Graham Hook (19:14):

Yeah.

Henning Stein (19:15):

But you already mentioned what your expectations are a little bit for next year, Graham, and maybe, Cathrine, so where do we go from here? What should we hope for in COP27?

Cathrine de Coninck-Lopez (19:25):

Well, I think I completely agree with Graham. I think kind of seeing the renewed targets in the indices, seeing where that aligns us to in terms of carbon emissions trajectories is incredibly important and we do need to continue to tighten that. I think right now it looks like the International Energy Association has put us on a 2.8 degrees trajectory, but there are kind of varying interpretations of these indices in terms of short term, long term action, will they actually be implemented? Et cetera.

Cathrine de Coninck-Lopez (20:02):

I think what we could hope for in COP27 are some of those concrete, shorter term targets that came out, for example, India saying they're going to have 50% renewables by 2030 was very meaningful. Again, that is in nine years, they're going to have 50% renewables.

Henning Stein (20:22):

Right.

Cathrine de Coninck-Lopez (20:22):

Let's see if that happens. But that was incredibly meaningful, I think, and so for COP27, I'm hopeful we are going to see even more of those kind of shorter term targets, specific targets, some specific issues coming to the fore.

Henning Stein (20:38):

Well, on the whole, I think, we have to be optimistic. We have to reflect on how we present this crisis really in an also optimistic way. We need to move on, I think, from this language of just moralism and technocracy to start embedding this almost in a language of opportunity and show people, look, this is probably the biggest growth opportunity in human history if we get that right. And we also need to explain why the crisis offers a unique chance to improve almost every aspect of billions of people's lives, and so I stay hopeful, and so you do know what my impression is, and I thank you both for your time today.

Henning Stein (21:21):

I think we covered a lot of really good ground and I think we agree COP26 brought some solid successes. We also agree there was a lot of encouraging activity behind the scenes, but we need to acknowledge many important issues are still underrepresented in the global debate on climate change, and, ultimately, we need more collaboration, more innovation, more investment. And of course, climate change isn't an issue that crops up just once a year, it's addressing this on a constant basis, and you can find out more about Invesco's ongoing efforts in this space by visiting the address that's now on the screen.

Henning Stein (22:02):

Cathrine, Graham, many thanks again.

Graham Hook (22:04):

Thank you, Henning.

Cathrine de Coninck-Lopez (22:05):

Thank you very much, Henning, appreciate it. (silence).