Almost a year ago I wrote a piece titled Phase down or phase-out: Is there a difference? where I concluded that “phase out is a choice to save the living planet, while phase down is an attempt to save our unsustainable way of life”. I presume you will have noticed that this language has consumed a lot of column inches over the last two weeks at COP28.

Much could be written about COP28 – from its size (around three times more attendees than previous record), to the controversies (the president also being the head of a state-owned oil company, or the large number of fossil fuel lobbyists in attendance), to its wide scope (health and food have been notable focuses), to its successes (loss and damage fund launched on day-1). However, a sizable group of people have gone on record to state that only one thing matters as far as COP28 is concerned: whether or not the closing statement included the words “phase out of fossil fuels”.

We now know the outcome of COP28 and the first global stocktake. The language has shifted, and there is now a unanimous agreement to transition away from all fossil fuels to reach net zero emissions by 2050. Where does that leave us, and what happens now?

It would seem that we should bet on a continuation of the status quo, at least over the short-term. Investment organisations already have their net-zero investment strategies, so no need for significant change. However, all fossil fuel producers will still be seeking to maximise their income, so they will still be pumping. And politicians will likely still be driven by short-term incentives. Therefore, each of us should add a new belief to our set. Do we believe that the push for eliminating fossil fuels was a passing anomaly, killed off by the new language of ‘transitioning away’? Or is it a groundswell of understanding – that the pumping needs to stop, and sooner rather than later – that will eventually get its way? These have different implications. The latter would require us to plan for what eliminating fossil fuels actually means.

I would like to explore what elimination means by starting somewhat abstract. There is a significant difference between a natural transition and a forced transition. Natural transitions are what complex adaptive systems do. We used to use candles for lighting, now we use them for decoration. We have been through several transitions in the energy system through history. They take around 100 to 150 years to complete. While I am labelling these transitions as ‘natural’, they are not disruption, or pain, free. Individuals can still find themselves victims of involuntary unemployment, and find that their knowledge and experience is a stranded asset.

If we assume that the transition to renewable energy started, say, 40 years ago (solar panels were an expensive joke back then) then in 60 to 90 years we should be pretty much done. Renewables are cheaper and cleaner, so will grow as a proportion of energy used. As for the candles, we may choose to retain fossil fuels at the margin, perhaps for long-haul flights.

The problem, of course, is that the climate scientists are insistent we have already produced too many cumulative emissions, and there are other thresholds (eg planetary boundaries) we have crossed. The natural transition path will breach the small remaining carbon budget, with severe consequences for the Earth’s natural systems. Hence the need for a forced transition, of which ‘net-zero by 2050’ is an example. We are attempting to force the system to a place, or a timescale, that it wouldn’t get to on its own. As a tiny example, in the UK we were going to be forced to buy only electric vehicles in 2030 – currently weakened to 2035. It is reasonable to assume that a forced transition will be more disruptive (painful) than a natural transition. It follows that the social goal (decarbonisation) has been deemed more important than the pain and disruption that will be caused by the implementation.

This abstract treatment allows us to see clearly that elimination has nothing to do with profit, or return, maximisation. It is an entirely separate social goal. A goal that will have massive ramifications for the economy, finance and investment portfolios:

  • Volatility, in the real economy and in markets, is likely to be meaningfully higher
  • Political interventions are likely to increase in frequency, scope and impact
  • Together, the above points suggest uncertainty will go way up (ie forecasting will be more difficult / less accurate) potentially creating a reinforcing feedback loop
  • Eventually, the market will price in climate risk
  • Eventually, we will come to realise that we are not talking about a gentle transition of the energy system but a wrenching transformation of all aspects of life – yes, economic, but also food, water, health, justice etc.

All very interesting, but post-COP we are newly on a ’transition away’ journey so can we ignore all that I have written above? I don’t think so. I think transition away is a higher-emissions pathway, so I would invite you to replace the first bullet with ‘higher, and non-linear, volatility in Earth systems’. The following bullets we can probably leave as they are.

The language has changed as a result of the COP, but in essence we are still debating ‘down vs out’. The investment industry needs to decide whether the transition away will be too little, too late and we breach the net zero by 2050 part. Or whether we will truly be net zero by 2050, with all the associated transformational consequences. It is time for us to get really good at intertemporal risk management.

 

Tim Hodgson is head of research and founder of the Thinking Ahead Institute.

The wave of comments post-COP28 could easily leave some overwhelmed when it comes to volume, but underwhelmed when it comes to actual outcomes, and the question of what the global stocktake actually delivered on the pace of the climate transition? Looking from afar, existing, and emerging trends are evident in the results of this COP, even if it did not go as far as many would have liked.

However investors and corporates wrestling with the implementation of their net-zero directions should be heartened. Like Paris in 2015, where global consensus was finally reached on limiting temperature outcomes, and Glasgow 2021 which administered vital life support to the then ailing 1.5C ambition, the Dubai commitment to ‘transition away’ from fossil fuels will be widely cited and referenced, adding another foundation to climate policy and giving certainty for investment directions.

Future COPs will strive for further action and will be serially debating how to strengthen the language to ensure that they include a fossil fuel phase out. Civil society and the underlying credibility of the UNFCCC process will demand no less.

The headline commitments to triple clean energy investment and double energy efficiency investment have garnered a share of the headlines. They should also garner similar attention from investors. Pressuring national policymakers to deliver on the implementation structures and underlying policies to ensure that more capital can now flow, should now become a top line agenda item for investor groups.

The incredibly complex interplay between land use, agriculture and nature-based solutions and the wider contribution to emissions mitigation is clearly on the agenda, having grown its share of voice particularly since Glasgow. This remains a relatively new area of focus for many investors and corporates in their net-zero considerations and one where competing demands are still in the earlier stages of identification, particularly compared to the decades-long and relative conceptual simplicity of energy transition: ‘less of this – more of that.’

The cumulative impact of the plethora of other announcements, initiatives and coalitions will take some time to untangle, but they have a common theme, a growing web of partnerships around generating more private investment in climate solutions, representing in part deepening expectations on global capital and institutional investors.

The divergence between capital availability, the ease of application and the pipeline of projects in developed versus emerging economies is now evident in various forecasts and scenarios on when global net zero will be reached. Within the COP process and in multilateral forums, reforms on sustainable finance and measures to support MDBs and DFIs moving further along the risk spectrum and de-risk aspects of transition and climate investment, particularly in emerging and developing economies is part of the response. Put simply we cannot address climate change, without capital moving from the global north to the global south.

Developments at COP will likely lead policymakers to increasingly focus on investors to ‘show us the money.’ Especially following new commitments to higher emissions targets, due at COP in 2025.

Prudent investors looking to the latter half of the decade will be preparing with their underlying managers and advisers in advance for these opportunities, rather than sitting back, waiting to be asked.

Turning the lobbying tide

COP28 will also, in time, be seen to represent the high-water mark of fossil fuel influence and the insidious lobbying activities of some industry bodies over international climate policymaking. The dynamic has shifted. There’s no going back on the direct insertion of fossil fuel transition into the communique. The international spotlight has never shone so brightly on the numbers and influence of fossil fuel and other anti-climate lobbyists as it did in Dubai.

Does this mean such lobbying will now wither away? No. The Gordian Knot of corporate financial support between fossil fuel industries, other industry lobby groups and politicians has yet to be cut. It’s increasingly clear such activities are a direct economic and political contributor to a disorderly transition. A multiplier of volatility risks that fundamentally are value destructive not value accretive.

Investors need to redouble their individual and collective stewardship activities around recalcitrant corporates, board representation and the funding of lobby groups. Policymakers at national levels and the UNFCCC itself at future COPs must take steps to limit or control the reach of these groups and their activities. Or be forced to. As happened with tobacco industry lobbyists and advertising.

SDGs integral to the answers

The Dubai program and its growing thematic days also reflected that the broad Paris objectives and SDG goals are increasingly intertwined. Separate to the climate focused SDG 13, spread through the other 16 SDGs and 169 indicators are many direct and indirect measures that mirror or address Just Transition principles in emissions reduction, adaptation and resilience. These are of growing importance as the underlying social and civil negatives of a climate-affected world emerge, biodiversity targets remain at grave risk, and water scarcity affects more than 40 per cent of the world’s population.

Investors looking closely at COP outcomes will be aware of this cross-alignment. Those corporations that lead by embedding both net zero and SDG considerations into their transition business models, capex plans and supply chain management can reasonably expect sustained investor support.

Acceleration or Disruption?

Drawing a line of the eight short years from Paris 2015, Glasgow 2021 to Dubai 2023 – taking into account the Trump interregnum – the momentum effect of these three major COPs cannot be discounted. The disappointment in some quarters that the language was not stronger ignores the basics of international climate diplomacy where consensus is required.

Investors re-examining how far to implement their stated investment beliefs around net-zero and transition should take some comfort. National policymakers will furnish higher 2035 emissions targets at the Brazil COP Ratchet in 2025. And as the Inevitable Policy Response continues to highlight, there is a second Stocktake / Ratchet cycle coming in 2028-2030.

The pressure on policymakers through this decade is unrelenting. Tipping points, both climate and social will add another layer.

Undoubtedly serious headwinds are visible. Another Trump presidency could see the US again become a climate and consensus wrecker, not just at COP but as seen at other multilateral fora.

Failures at community, national and international level to spread the costs of climate action fairly could also derail social support for continued action. Popular, widespread support that needs to be continuously nurtured in such a multi decade endeavor, where negative climate impacts will get worse long before they get better. Implementation of SDG goals, buttressed by investor and corporate actions, remains a critical component here.

International conflicts or political backsteps could also derail the troika of continued international consensus, climate and clean tech competition and multilateral / regional cooperation initiatives that have emerged since Paris. These three distinct elements are instrumental to the investment acceleration required to hold later century temperature increases closer to the most ambitious reading of the Paris targets, limit overshoot and collectively addressing those negative climate impacts along the way.

Opportunity in trillions

Despite uncertainties, Dubai outcomes represent opportunity for investors: to reinforce the steps policymakers have taken; to support measures around increasing partnerships, blended finance and sustainable investment; to sideline the negative lobbying forces and risk multipliers; and to best position investment beliefs and portfolio construction for the likely outcomes post 2025, 2028 and 2030.

In 2015 the Paris COP was the first to seriously bring global finance into the process. In the intervening period calculations around the billions to trillions required, where and how they should be applied, have sharpened. Post the coming Ratchet in 2025, investors will be increasingly quizzed on what they are contributing towards climate solutions. By the 2030 Ratchet, if investment remains a lagging indicator, contributions could well become regulated.

It’s better all around for the private sector to take the growing opportunities now available… and get on with it.

 

Fiona Reynolds is an independent company director, chair of UN Global Compact (Australia) and chair of Finance for Peace. She is former CEO of the Principles for Responsible Investment.

グローバル・フィデューシャリー・シンポジウム代表を務めるクリス・バッタリア氏は、日本の大手年金基金や資産運用会社と18年間仕事をする中で、日本の退職金制度の課題、その進化を観察してきた。

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COP28 in Dubai had all the ingredients for both decisive action and controversy. Given the UAE’s status as a significant fossil fuel producer, it was seen by many as the host likeliest both to commit significant resources as well as face criticism from climate campaigners.

Perhaps inevitably, both happened.

First, action. COP28 produced the most deliberate commitment from participants to move away from fossil fuels, in the form of its annual “global stocktake”. From day one, the UAE made it clear it would deliver on expectations for large scale financial commitments, demonstrated by the Emirati government’s pledge to create a $30 billion climate-focused investment fund, Alterra. This move was met with widespread praise and announcements of further support from other nations. Less noticed, but just as significant, was the announcement the following day that the multilateral funds set up under UN auspices would begin to coordinate their mitigation efforts.

Later, controversy. By day four, headlines quoting COP28 president, Sultan al-Jaber, as saying that there is “no science” behind calls to phase out fossil fuels cast a wide shadow.

As expected, the early news out of Dubai was both powerful and contentious. Looking back, however, there is much more cause for hope than doubt that can be taken from COP28.

Those on the ground, myself included, bore witness to a significant level of innovation on display, evidence of how much deep thinking has been going on behind the scenes in the finance sector. The launch of a climate finance new think thank, the Global Climate Finance Centre, hosted by the UAE’s Abu Dhabi Global Market and co-funded by ADQ, Blackrock, HSBC, Ninety One and others, was also a much noticed early announcement.

Elsewhere, participants delved into various novel investment strategies aimed at addressing the most critical global concerns. Among the proposals explored were specialized food and agriculture funds, notably from Principal Asset Management and Federated Hermes. These funds, aligning with the newly introduced TNFD regulations, aim to channel investments to improve food security for the world’s most vulnerable populations. Additionally, innovative approaches from State Street involving agricultural mortgages and the utilization of securitization techniques were discussed as mechanisms to increase financial flows for smaller-scale farmers.

In the race to achieve the ambitious goals set last week, allocating capital to high-emitting sectors will remain critical to real-world decarbonization. The role of private equity in this effort was a focal point for many. Multiple participants engaged in discussions centered around where private capital can make the most impact, particularly toward hard-to-abate assets that need to make the transition from “grey to green” The desire from investors to look beyond the consensus view on the role private markets can play in helping transition energy production towards a more sustainable mix was evident.

By the time the final text and global stocktake was published, it was clear that the intense multilateral effort had produced further progress, albeit after arduous negotiations. Were I focused on the short term, COP28 achieved too little. But, zooming out, I sense there are more capital and countries committed to this effort than ever before, and explicit mention of the shift away from fossil fuels is a sign of more to come. Furthermore, the work being done on the sidelines by the investment community bodes well for the effort to reach net zero.

From this point on, it will be incumbent on all those who made COP28 headlines – governments, corporates, and investors alike, to follow through with concrete action that helps build stakeholder trust in the multilateral process, and in the ability of business leaders to deliver change.

Olivier Lebleu is senior advisor at FCLTGlobal.

Norges Bank Investment Management, investment manager of Norway’s $1.5 trillion wealth fund, Government Pension Fund Global, has once again petitioned policy makers in the Ministry of Finance to let it invest in private equity. NBIM is requesting a 3-5 per cent allocation with large and mid-sized managers that will extend into a co-investment program overtime.

Some four previous appeals, most recently in 2018, have fallen on deaf ears leaving GPFG excluded from the $7.8 trillion market that has grown 20 per cent every year since 2017 in marked contrast to over sovereign funds. A decision is likely to come in the first half of next year.

“Investment in private equity could give higher returns after costs than listed equities over the long term,” wrote Ida Wolden Bache, chair of the executive board and Nicolai Tangen, chief executive of NBIM in a letter sent to the Ministry of Finance.

“The unlisted equity market has grown rapidly in recent years and accounts for an ever-larger share of the global market portfolio. A broader investment universe will provide more investment opportunities and help the fund benefit from a larger share of global value creation.”

Wolden Bache and Tangen stressed the diversification benefits of investing in private equity, arguing that moving into the asset class now fits with GPFG’s gradual diversification over time. Back in 1996 the fund only invested in government bonds; listed equity was added in 1998 and more countries and market have come online over the years. Unlisted real estate was added in 2010 and unlisted infrastructure in 2019.

The strategy could also tap into NBIM’s decade of experience investing in unlisted markets. “Norges Bank will be able to draw on experience from its existing unlisted investments. This will be relevant in areas such as designing partnership agreements, structuring ownership, accounting, risk management, tax matters, regulatory compliance and reporting.”

All private equity investment would be via managers. And although GPFG will be able to draw on its deep expertise of manager selection in listed markets, a new allocation to private equity will require new hires. “We anticipate around 10-15 employees working on unlisted equity investments in the early phase, and around 20-30 in the longer term.”

Wolden Bache and Tangen rule out investing directly in unlisted companies. “Direct investments would demand considerable and different expertise to that required to invest in or with private equity funds, which primarily requires competence in manager selection. Norges Bank has built up considerable expertise in evaluating external managers in listed markets since 1998 and has good experience with this.”

NBIM would cap investment at 5 per cent in any one fund. To manage country risk, it would invest primarily with private equity funds in developed markets in Europe and North America which mainly invest in companies in the same regions. “In order to avoid too many partners and ensure cost-efficiency, we will therefore invest with mid-sized and large partners,” they add.

GPFG would be able to make much of its advantages, they continue. “Large investors in private equity often have better access to both the best managers and co-investments, and obtain lower management fees,” continuing. “An unlisted equity portfolio of 3-5 percent of the fund will enable us to take advantage of the benefits of the fund’s size and facilitate adequate diversification across managers and vintages.”

Cap on fees?

The letter recognises the resistance to private equity’s high external manager fees – even when these investments bring the fund an excess return after costs. NBIM’s agreements with external managers currently include a cap on fees and the authors acknowledge it is unlikely that a private equity fund will accept a limit on fees, flagging “this requirement will need to be adjusted if the fund invests in private equity funds.”

NBIM will therefore build expertise in its ability to co-invest alongside private equity funds in a bid to reduce fees. “Investors do not normally pay fees on co-investments, and investments of this kind are effective in reducing total fees in relation to invested capital,” they write. “Fees as a share of invested capital will fall proportionally with the share of co-investment.”

Co-investment will involve deciding whether or not to participate in co-investments offered by the private equity fund with the opportunity to opt out. “Investors are typically given ten working days to consider whether to participate in a co-investment.”

“We will build a portfolio of co-investments gradually to ensure diversification across companies, sectors, geographies, and managers. We will acquire non-controlling interests in the companies. The GPFG’s total interest in any one company will not normally exceed 15 percent,” they write.

Transparency

The submission also addressed the MofF fears around transparency given the lack of publicly available information in the asset class and lack of daily pricing. “Norges Bank will set strict requirements for selecting partners, responsible investment and transparency, as well as restricting investments geographically.”

“For unlisted equity investments, reported results will likely be negative in the early years. It will, on average, take longer to sell unlisted equity investments than investments in listed companies, and there is a risk that we will not be able to sell before the lifetime of private equity fund naturally ends.” The board also reassured that the strategy would not increase the equity market risk in the fund relative to the benchmark index.

The latest push by NBIM has raised questions from investment commentators on linked-in, voicing concerns around building an investment program from scratch with annual allocations running into billions. Rob Baur, Professor of Finance, Institutional Investors chair at Maastricht, an expert on the fund,  writes.

“I just wonder how the executive board of Norges Bank dealt with these pro and con arguments in an (academic) evidence-based way. Has this process been spelled out in a formal document? If so, where can I find it?”

Oxford University’s Ludovic Phallipou, a critic of the private equity industry, argued the GPFG is being drawn into the industry by PE fund managers and “sales guys.”

日本株にかつてほとんど興味を示さなかった海外投資家が、いま注目し始めているのは驚くことではない。デフレ脱却が見え、企業のガバナンス改善も進む。地政学リスクが高まる中国からの資金流出の「受け皿」として有望とされ、海外からの資金流入は「一時的ではない」との声も出ている。

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