What the outcomes of COP28 mean for WHEB’s investment strategy

This insight was originally produced by WHEB Asset Management, now part of Guinness Global Investors.

Organising the 28th annual Conference of the Parties (COP28) in Dubai was always going to throw up some contradictions. Delegates heading off on the rest day to the 22,500m² ski resort (complete with penguins) was perhaps one of the more bizarre examples¹. More germane to the negotiations was the fact that the talks were being chaired by the head of the Abu Dhabi National Oil Company (ADNOC), and determining who was accused of using the talks as a kind of ‘speed-dating’ programme for the country’s oil and gas industry².

This narrative was, however, immediately contradicted on the first day of the conference by the announcement of a deal on the loss and damage fund. This upended typical diplomacy at UN conferences where ‘nothing is agreed until everything is agreed’. Not only was agreement reached at the opening plenary, but by pledging $100m each to the fund, Germany and the UAE set up a bidding war, which eventually pushed contributions from 18 countries to $792m.

Phasing out fossil fuels

In the end, however, the key fight was over whether to include a commitment to phasing out fossil fuel use in the final agreement. The language in the final version of the ‘UAE Consensus’ was to “transition away from fossil fuels in energy systems, in a just, orderly, and equitable manner". For some, this represented ‘an unequivocal beginning of the end of the fossil fuel era’³. For others, such as campaigners Greta Thunberg and Vanessa Nakate, it was desperately weak and nothing more than a betrayal of future generations.

So what do the key agreements at COP28 mean for WHEB’s investment strategy?

In the short-term, probably not very much. COP discussions happen a long way from the day-to-day reality of businesses, let alone stock markets. The narrative is, however, important in maintaining momentum. And ultimately agreements do get translated down into national legislation.

Against expectations, more was probably achieved at COP28 than at most COPs. The International Energy Agency estimate that the new pledges made in Dubai, if fully implemented, would translate into global energy-related greenhouse gas emissions in 2030 being around 4 gigatonnes of CO2e lower than would be expected without them⁴.

Scaling up zero carbon energy

A key contributor to this reduction is the pledge to triple global renewable power capacity by 2030 made by 130 countries. This would take annual additions of renewables from 440GW currently, to about 1,000GW. These countries also pledged to double the annual rate of energy efficiency improvements every year to 2030.

Many countries still need to address bottlenecks from slow permitting processes and a lack of grid capacity and key labour skills. Nonetheless, the vastly improved economics of renewable energy make this commitment a relatively easy win.

The role of renewables and energy efficiency are already well-understood and based on established technologies. Our investment in Alfen and Elia in our European fund, as well as in First Solar, SolarEdge and Vestas⁵ are we believe very well-placed to benefit from the dramatic growth that these pledges imply.

Decarbonising the existing power system

Alongside the rapid scaling up of the new zero emission energy system, COP28 also secured commitments to decarbonise the existing energy system. Our direct exposure to oil and gas is zero in our strategies, and even indirect exposure represents a low single-digit percentage of revenues⁶.

Net-zero as an organising principle – including in finance

With more than 80,000 delegates including 160 heads of state and 700 CEOs, the sheer scale of the conference cemented the notion that achieving net-zero has become what McKinsey has called a ‘central organising principle’ for businesses in the 21st century⁷. This is apparent in finance as well. Over $80bn of climate finance commitments were made during COP28. Several structures such as the UAE private investment vehicle Alterra explicitly aim to deliver impact investments with both financial and environmental returns. New initiatives such as the UAE Global Finance Framework will also work to transform the importance of carbon in finance more generally.

Adaptation now critical

But none of this is enough. There remains a $41trn financing gap to get the global economy back onto a net zero by 2050 pathway⁸. The 4 gigatonnes of CO2e reduction from COP28 pledges is important, but represents c.30% of the emissions reduction needed to keep global warming to <1.5°C. Meanwhile, the impacts of climate change continue to be felt, making adaptation an urgent task.

At COP28 the importance of adaptation was formally recognised. This is something that we have also done at WHEB with Climate Adaptation now an explicit segment in our investment strategy. Even with rapid decarbonisation, companies supplying adaptation products and services like Arcadis, Advanced Drainage Systems and Xylem will continue to do well as communities around the world adapt to an already changing climate.

¹ https://www.malloftheemirates.com/en/ski-dubai
² https://www.bbc.co.uk/news/science-environment-67508331
³ https://www.e3g.org/news/the-fossil-fuel-era-is-ending-e3g-s-reacts-to-cop28-outcome/
⁴ 4GtCO2e represents about 7% of global GHG emissions.
⁵ Vestas is held in both our European and global funds.
⁶ Exposure to fossil fuels activities is largely through companies that sell safety equipment and services to the sector, or that undertake land and water remediation work.
⁷ https://www.mckinsey.com/capabilities/sustainability/our-insights/outcomes-from-cop28-what-next-to-accelerate-climate-action
⁸ https://www.mckinsey.com/mgi/our-research/from-poverty-to-empowerment-raising-the-bar-for-sustainable-and-inclusive-growth