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Sustainability Matters

Climate Summit Sparks Risks, Opportunities for Investors

Climate change is one of the thorniest challenges confronting investors, and one that will reshape the financial markets.

The United Nations Climate Change Conference, known as COP26, is the most important climate summit since 2015, when the world agreed to strive to cap global warming to under 2 degrees Celsius above pre-industrial levels--or, better yet, to 1.5 degrees--by substantially reducing greenhouse gas emissions.

Since then, a flurry of national pledges to slash emissions to net zero--to take as much carbon out of the atmosphere as one is putting in--by 2050 has ensued. More promises have followed from an array of municipalities, companies, and other issuers. As the United States rejoined the Paris Agreement this year, President Joe Biden called for a national reduction in greenhouse gas emissions of at least 50% by 2030, from 2005 levels. Lately, even Saudi Arabia, the world’s largest exporter, promise to reach net zero emissions by 2060.

COP26 takes place in Glasgow, Scotland, just as oil and gas prices are jumping. Fossil fuels, widely agreed to cause global warming, still account for the lion’s share of the world’s energy needs. And for all the promises from the world’s most influential nations, the U.N. is admonishing us that they aren’t enough to stop a dangerously warming planet.

“Right now, everyone is waiting for what happens in Glasgow,” says Michael Jantzi, founder of Sustainalytics, a Morningstar company. “Everyone is grappling with what the heck net zero means and what they signed up for.”

For investors, climate change has emerged as one of the biggest systemic risks to the financial markets. It also presents a major opportunity and one that will reshape the markets. The International Energy Agency estimates that getting the world on a 1.5-degree path will require annual investments in clean energy and infrastructure of about $4 trillion a year, up from around $1 trillion today. They include massive investments in clean electrification, energy efficiency, methane emission cuts from fossil fuel production, and clean energy innovation.

Sustainable investing has grown significantly in the past five years as more investors have become increasingly concerned about the impact that climate change and other environmental, social, and corporate governance issues have on their investments--and about the broader impact of their investments on the world.

As the climate summit kicks off, we’re providing investors with a sustainable investing framework that can help them better understand their motivations, address investing concerns, and evaluate sustainable funds and portfolios. Increasingly, mainstream asset managers--such as your exchange-traded fund manager, for example--are using the techniques of sustainable investing to assess certain risks that traditional financial metrics can’t express. Such investing approaches include applying exclusions; limiting environmental, social, and governance risk; seeking ESG opportunities; practicing active ownership; targeting sustainability themes; and assessing impact.

Our colleagues at Sustainalytics are also spotlighting a broad range of insights around global net zero by 2050, including work around the emerging biodiversity crisis, which can affect the risk profiles for companies and for investors, and around the different methods for financing sustainability that can turn climate change ambitions into climate action.

Climate change is one of the thorniest challenges confronting investors. Here are some articles that can help provide clarity:

How Can You Invest in Climate Funds?
Uncover what climate solutions can fit into your portfolio.

How to Wield Two Tools in ESG Investing
Using divestment and engagement effectively.

COP26 Deforestation Pledge Will Empower Companies, Investors to Attack Supply Chain Emissions
Plan to save forests aims to end deforestation by 2030, slowing global warming.

At COP26, Financial Industry's Net-Zero Commitments Are Critical for Utilities and Global Economy
Financial industry's capital committed to net-zero initiatives now equals amount needed for net-zero overhaul, group says.

3 Solid Climate Tech Funds for Investors
These strategies should play only a bit part in a diversified portfolio.

4 Steps to Add Sustainable Investing Strategies to Your Portfolio
Your guide to uncovering what your sustainability goals look like and how to put them into practice.

Utilities' Clean Energy Transition: Our Forecast
Wind and solar generation will drive the U.S. economy's decarbonization plan.

Are Water Funds Too Watered Down?
Climate change has underscored the need for clean drinking water. Does that make investing in water funds a compelling option?

Ahead of Climate Summit, Fund Managers Struggle With Portfolio Decarbonization
You and your fund have a critical role to play in helping reduce greenhouse gas emissions--once your fund manager figures it out.

COP26 and the Climate Finance Bubble
Targeted private capital will play a critical role in ensuring nations meet the Paris Agreement's emission reduction targets.

These European ETFs That Track Official Climate Benchmarks Receive the Low Carbon Designation
Today, some 30 European ETFs are tracking official climate transition benchmarks. Ten have the low-carbon designation. Expect that number to increase soon.

What Do Asset Managers Want From COP26
Here's what 12 prominent asset managers told us they hope to see at the major climate summit in Glasgow.

The Number of New Sustainable Funds Hits an All-Time Record
Sustainable fund assets continue to surge higher in the third quarter.

Our colleagues at Sustainalytics have covered these issues: