COP26 is the 26th iteration of the United Nations climate change conference.

For nearly three decades, an annual meeting of world governments, or Conference of Parties (COP), has been held to develop a global response to climate change. This year, governments are under increasing pressure to come up with meaningful responses to the challenges posed by climate change.

As well as the more frequent warning signs of climate change via extreme weather events, the publication of the Intergovernmental Panel on Climate Change (IPCC) report earlier this year provided the most comprehensive scientific assessment of climate change ever undertaken. The report makes for grim reading. It concludes that global warming is likely to reach 1.5°C above pre-industrial levels between 2030 and 2052 if temperatures continue to increase at the current rate. The extreme weather, land loss, food and water impact and associated poverty driven by this climate change only increase if warming reaches 2°C. Global CO2 emissions therefore need to start declining well before 2030 to limit warming to 1.5°C.

Investors are sitting up and taking notice. The growth in sustainably managed investments has been stratospheric in the past few years as investors seek products that reflect their values, and an increasing number of products have been launched to suit these needs. For example, in 2020 alone, US$27bn was invested in the major Environmental, Social and Governance (ESG) focussed exchange traded funds (ETFs), and 2021 looks set to surpass this record.

Yet sustainable investing is not for the faint hearted. Understanding how the world will transition to a lower carbon economy is complex and still uncertain. Working to ensure this doesn’t negatively impact people and communities is imperative.

However, investment managers cannot opt out. The need to focus on sustainability is paramount for two main reasons.

Firstly, to ensure continued good investment performance. Companies that ignore sustainability risks will be caught out by changing regulation, consumer preferences and costs. As investors better understand how these developments unfold, markets will price these risks before they materialise and those investors that are left behind will see their returns suffer.

Secondly, to help drive a timely and just transition. While governments and regulators will ultimately determine the direction and pace of change, it will take a unilateral effort to deliver. The International Monetary Fund has cited estimates that reaching net zero by 2050 will mean investing an addition 0.6%-1% of annual global GDP over the next two decades, amounting to a cumulative US$12 trillion-$20 trillion. Investors have a big role to play.

There are many ways in which investments can progress sustainable outcomes. Some investment funds exclude companies they consider unsustainable, such as gambling and fossil fuels. Others choose to engage with the companies they invest in to ensure they are behaving responsibly. Impact funds direct their capital towards companies focused on particular environmental or social outcomes. All these strategies can work if deployed effectively. As investors, it is important we don’t get side-tracked by which path we take to reach the same goal.

At Milford, our strength lies in engagement. As an active manager, we frequently meet management teams and Directors in our search for the best companies to invest in. Our large team of investment specialists have dedicated resources to understanding the complexities of the transition so we can factor this risk into our investment decisions. We can share this research with companies to help drive positive outcomes. We also believe every company needs to play its part, and existing players can be best placed to drive the transition of unsustainable industries such as fossil fuels, while keeping the lights on for those who need it most.

Sustainable investing will help returns and help the planet. When the heat is on, who can argue with that?