Global COP-eration or just “bla bla bla”?

The United Nation’s 26^th Climate Change Conference, COP26, concluded with a new climate deal, the Glasgow Climate Pact. The agreement has been endorsed by almost 200 countries.

Encouragingly, the final agreement targets 1.5°C, medium-term 2030 ambitions, methane, and language that clearly addresses fossil fuels for the first time ever – a “phase down” of coal and the “phase out” of inefficient fossil fuel subsidies. Moreover, Climate Action Tracker (CAT) estimates that key sectoral pledges on methane, coal, deforestation and transport can close the emissions gap by 9%.

Another key outcome was conclusion of the Paris rulebook following agreement on article 6 regarding carbon markets. The new framework addresses concerns around double-counting and will require labelling of old offsets. In total, the IEA estimates that COP26 climate commitments could limit global warming to 1.8°C, significantly down from the 2.7°C pre-Glasgow trajectory. The caveat is that a quick and full implementation of all commitments is required for these estimations to become a reality. We think the next 6-12 months will be key to determining the success for the outcome of COP26.

What are the implications for green companies?

The wide range of pledges announced on methane, coal, transport and deforestation have been a positive step in the right direction, particularly at the macro-level when assessing the scope of global collaboration. There were several announcements that we would flag as relevant to our investment themes:

The emphasis on 1.5°C instead of 2°C will likely place pressure on companies to commit to ambitious 1.5°C targets, and the investment community will be following such developments. The announcement of the 'Breakthrough Agenda,' a 10-year plan to make clean technologies and solutions more affordable before 2030, was encouraging. The break-through agenda covers power, road transport, steel, hydrogen, and agriculture.

DNB Renewable Energy and DNB Future Waves invest in sustainable enablers of a better environment, companies that demonstrate a solid ability to reduce or avoid emissions for their customers or their customers’ customers or improve resource efficiency. As these funds invest in solutions-providers to climate and environment challenges, we believe that the underlying portfolio companies stand to benefit from additional demand as companies look for opportunities to position themselves for the green transition and deliver on 1.5°C.

However, it is also important that these companies address their own operational and supply chain emissions. DNB Renewable Energy therefore commits to engage with at least 80% of its portfolio holdings by weight on science-based net zero targets on an annual basis starting from 2022. Additionally, DNB Future Waves has a strong focus on decarbonising the blue economy and supporting solutions that protect the ocean’s crucial role as the largest carbon sink of the planet. All of DNB Future Waves’ portfolio companies have committed to net zero, a commitment that is regularly monitored through engagement. The acceleration of e-mobility seems probable as the agreement pointed to a transition to 100% zero emission for road transportation with significant targets to be achieved by 2030 and 2040.

We expect that the phase-down of coal will catalyse even faster penetration of renewables. However, an accelerated phase-down is also likely to raise concerns around energy security and volatility. Research from Nordea shows that this may give more credibility to natural gas as a bridge fuel, particularly if it ends up being included in the EU Taxonomy. The phase-out of inefficient fossil fuel subsidies may impact mid-term demand for oil but is likely to depend on how “inefficient” is interpreted. We see investments in renewables as key part of the puzzle to delivering on 1.5°C. Both DNB Renewable Energy and DNB Future Waves invest in names such as Scatec, Vestas and Ørsted – all of which stand to benefit from the accelerated roll-out of renewables.

Glasgow Leaders' Declaration on Forests & Land Use

Over 120 countries covering more than 90% of the world's forests endorsed the Glasgow Leaders' Declaration on Forests & Land Use. The goal is to halt and reverse forest loss and land degradation by 2030. The pledge is expected to add further momentum to the biodiversity and supply chain transparency discussions.

DNB Future Waves addresses this by identifying companies are more advanced in identifying and adapting to biodiversity risk than their peers, as well as companies are well positioned in terms of offering products and solutions to improve biodiversity.

We see investments in nature and alternative land management benefiting biodiversity (e.g. reforestation, regenerative agriculture, supply chain monitoring and product certifications). Future Waves also invests in the transformation of the fashion industry as it has a significant role to play in helping meet climate change commitments, with several new targets around emissions, supply chains and new materials announced during COP26. The new priority materials targets will accelerate the adoption of new sustainable materials and processes triggering opportunities for Future Waves.

The focus on biodiversity is also relevant for DNB Renewable Energy, as these challenges are highly interlinked with climate challenges. Portfolio examples include Tomra, which delivers advanced sorting and recycling systems, and Chr. Hansen, which provides bio-based alternatives to chemical pesticides, which improve soil quality and reduce negative impacts to biodiversity from traditional alternatives.

Methane Emission Cuts

The increased focus on methane from COP26 and from the AR6 IPCC report could provide some interesting opportunities moving forward. The main sources of methane emissions are energy extraction and production (oil, gas and coal), such as flaring, and land-use and agriculture.

To address methane emissions from energy, measures and technologies are mostly established already, including drone/sensor technology. Within agriculture, solutions include feed additives for cattle, and alternative solutions for managing water (including precision agriculture and irrigation systems), and soil carbon and land management (such as farming practices, regenerative agriculture, etc). We may also see the increased focus on methane emissions from livestock acting as a catalyst for consumers’ and value chains’ shift towards low-CO2 sources of proteins, such as chicken, fish and plant-based alternatives.

DNB Renewable Energy and Future Waves plays on this trend through, for example, its investment in Benchmark Holdings, which provides biology and technology to the aquaculture sector. DNB Future Waves is invested in companies providing plant based or seaweed-based protein alternatives.

COP26 confirmed a positive growth outlook for green technologies but did not provide a significant step up in expectations. Even with national target updates, 1.5°C scenario seems challenging. COP26 suggests that the private sector's role will grow in reaction to consumer demands to embrace net zero and the need to finance the global transition. We are well positioned to identify companies will have a competitive advantage in the transition to net zero.

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