How has COP26 changed the investment landscape?

15 December 2021

Giles Coghlan, chief currency analyst, HYCM, takes a view

It has been just weeks since global leaders met in Glasgow at the UN’s conference on climate change, known as COP26, to make new and urgent commitments to tackle climate change. Adding to a football analogy made at the G20 summit, where he said the world was 5-1 down in a match against climate change, Prime Minister Boris Johnson said that “We’ve pulled back a goal, or perhaps even two” but that now world powers “will have to take this thing to extra time”.

While acknowledging the progress that has already been made, the general sentiment at COP26 was that the road to net-zero carbon has only just begun. No doubt, traders and investors will be well aware of this, and will be considering the commitments made at the summit when drawing up their investment activities.

That said, while major political events and meetings usually have an immediate impact on the financial markets, it will take some time to see the promises made at COP26 feed through into the financial markets. Up to now, although the first day of trading on the London Stock Exchange following the summit saw some global mining giants taking losses, the FTSE 100 otherwise managed to close the day at 7351.86, up 3.95 points. This is hardly surprising given that the markets generally struggle to align themselves with any long-term view – especially considering that world leaders are using very tentative language to discuss net-zero goals, where “phasing down”, rather than “phasing out” coal is the current modus operandi.

As such, it appears that just 45% investors consider sustainable investing to be important to them at present, according to recent research commissioned by HYCM. Naturally, investors are struggling to price climate action into their investment strategies in the absence of strong words or tangible action to tackle climate change. Presently, just 19% of investors consider ESG investment to be a savvy investment strategy, and I suspect it will take concrete action to convert skeptical investors.

With this in mind, what is driving the cynicism around ESG, and what should traders and investors consider when managing their portfolios?

Greenwashing fears

The first factor worth considering is that apprehensions about ‘greenwashing’ may be scaring off traders and investors when it comes to shifting their strategy. Currently, more than a third (38%) of investors surveyed by HYCM believe that ESG investing is surrounded by “too much hype”.

In many ways, these fears are grounded in reality. Indeed, many companies might convey a false representation about environmentally sound their products are, in order to attract an increasingly socially conscious cohort of investors. However, investors would do well to make themselves aware of legitimately ‘green’ investment opportunities, which will not only be profitable in the future, but also important to the greater goal of phasing out carbon.

Considering investment from a growth perspective, investors should look to the capital goods area, where there is vast potential in the supply chain for climate solutions. More broadly, investment in ‘green’ technologies will be vital to creating innovative climate solutions in the future, so investors would do well to mull over these sectors when looking for new opportunities.

Right now, only one third (33%) of the investors surveyed by HYCM said that they plan to invest (or increase their investment) in green energy such as wind power, water stocks and solar energy over the next 12 months. Nevertheless, these figures are likely to increase, should any new environment policies be implemented. For example, activists are pushing for a global carbon tax – the likes of which would shock the stock market.

In the medium term, green metals, such as copper, aluminium, nickel and lithium could also see gains, as their demand is expected to increase, as well as alternatives to traditional energy, such as oil. Indeed, these commodities are already proving popular with traders and investors – presently, oil is one of the top traded commodities at HYCM.

Younger investors and the climate movement

Traders and investors should also be aware of another trend: that is, that younger investors are likely to be at the helm of the shift to net-zero. When asked about their general attitude towards ESG investment, under half (45%) of the investors surveyed by HYCM said that sustainable investing was important to them, compared to a huge 60% of younger investors (aged 18-34) who said that this was priority.

These findings seem to chime with other bodies of research, too. Research from MSCI, for example, has indicated that millennials have driven the growth of sustainable investing throughout the 2010s, when investors contributed $51.1 billion in sustainable funds in 2020 – a staggering total, compared to the figure five years ago, which came in at just $5 billion. This suggests that a more value-driven approach towards investment may become even more prevalent in the not-so-distant future. Consequently, traders and investors should monitor the actions of larger corporations, who will be keen to prove their ESG credentials – take for example, Microsoft, Tesla and Nike.

In the wake of COP26, many individuals may have been surprised by the lack of impact on the stock market. However, looking ahead, the summit will likely have a significant bearing on the actions of investors in the medium to long term – changes to environmental policy are almost a given, so traders and investors should monitor these developments accordingly.

Professional Paraplanner