Good COP, Bad COP

5 min read 12 Nov 21

Summary: Earnings-led gains boosted investors’ confidence in October and outweighed inflation and tapering concerns. With COP26 kicking off in the month, how have pledges to date matched up to the hopes going into the conference? Investment Specialist, Kirsty Clark reviews recent market performance and decision-making in Glasgow.

Global equity markets bounced back in October, logging the best monthly gains in a year and recouping September losses. Strong earnings boosted share prices, and outweighed concerns about tapering and inflation.

The MSCI AC World Index finished the month up 5.1% in US dollar terms. Both growth and value stocks gained ground during the month, but Global Value remains ahead year-to-date. At a sector level, consumer discretionary and information technology stocks led the gains. Rising bond yields also supported financials and energy names followed the oil price higher. More defensive consumer staples and telecom services names delivered positive returns but were the sector laggards in October.

Most major regional markets ended the month in positive territory. US equities outperformed with the NASDAQ and S&P 500 indices leading the market gains. In a reversal of fortunes from last month, Japanese equities lost ground in October. The TOPIX and Nikkei 225 were the weakest performers on a regional basis.

As yields continued to rise, fixed income markets took a hit in October – 10-year government bonds sold off and global high-yield bonds also finished the month down.

In commodities, Brent crude continued to climb higher, up 7.5% in October. Gold also gained ground. Clawing back some of last month’s losses. The US dollar weakened versus the UK pound, but the Dollar index remained largely flat over the month.

Heading into COP26 in the final week of October, agenda items included phasing out coal, addressing deforestation, and ensuring a ‘just transition’ for poorer nations and the most vulnerable countries. A global challenge requires collective action.

For some, the outcomes from the conference will fall short of addressing the global challenges we face, but the initiative itself is essential in bringing nations together to facilitate much-needed collaboration and push for meaningful commitments in line with global temperature rises below 2 degrees above pre-industrial levels – to avoid the worst outcomes of climate change.

Commitments made so far have included collective action on decarbonising energy (with more than 40 countries agreeing to phase out thermal coal power generation by 2030 for advanced nations and 2040 for developing countries1), decreasing fossil fuel financing (with a group of 20 countries, including the US, pledging to end international public financing for unabated fossil fuel projects), reducing methane emissions by 30% by 2030, and tackling deforestation in an area covering 85% of the world’s forests. The surprise joint declaration of cooperation between the US and China on addressing climate challenges, while potentially more symbolic in nature, was a welcome addition to the combined commitments.

More needs to be done to accelerate a just transition for poorer and more vulnerable countries. Some associations and partnerships have been set up, for example South Africa will receive $8.5 billion and Indonesia and the Philippines are partnering with the Asian Development Bank to wind down existing coal plants. However, developed nations are struggling to meet a $100 billion-a-year climate financing commitment made to developing nations in 2009 (originally to be reached by 2020). Japan has committed an extra $2 billion per annum for the next five years, and there have been additional commitments from the UK, Italy and Denmark. The target is now expected to be reached by 2022 or 2023.

On near-term goals aligned with longer-term net zero pledges, three of the largest global emitters are among the countries that have made 2030 commitments. The US and China had already announced these prior to COP26 – halving carbon emissions and reaching peak emissions respectively – while India announced its net-zero target by 2070 and aim to have 50% of electricity generation come from renewables by 2030.

If countries and businesses follow through on all the COP26 commitments to date, according to the International Energy Agency (IEA)2 the commitments have the potential to bring global warming down to 1.8-1.9 degrees. This is a more optimistic scenario and couched in cautious language. It misses the preferred 1.5 degrees target (the initial aim in the run up to COP26) but, for the first time, gets us below the 2 degrees threshold and heading in the right direction. Now commitments need to be converted to actions.

The remaining elephant in the ‘pavilion’ is the lack of agreement on carbon pricing. The EU and UK already have systems in place – the EU and UK Emissions Trading Systems (ETS); the EU ETS covers 41% of EU emissions. An agreed carbon pricing mechanism, and workable framework to ensure a price floor, would incentivise businesses to reduce emissions. However, this requires wide adoption to create a level playing field. In lieu of broad agreement, a draft policy for a carbon border tax is being drawn up by UK Environment Secretary, George Eustice, with the goal of encouraging collaboration from other countries. This chimes with a proposal from European Commission President Ursula von der Leyen for a Carbon Border Adjustment Mechanism (CBAM) to attach a carbon levy to EU imports.

As we head into the final day of COP26, it hasn’t been without its achievements. However, action must follow pledges to close the emissions gap and take us closer to 1.5 degrees.


1 Notably, coal-dependent countries including China, the US, India and Australia are yet to commit

By Kirsty Clark

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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