In today’s Exponential Investor

  • Why this climate summit is so different to Paris six years ago
  • Pain vs Gain, what’s really at stake in Glasgow
  • Reading between the headlines

I’m excited.

Six years ago, I was at university, unaware of the profound nature of events unfolding at the Climate Summit in Paris.

This time around, I’ve been working on investing in the energy disruption (some would call it a transition) for nearly three years, and I am fully plugged in to both the absolute urgency of climate action, and the gargantuan opportunities for investors.

This is the great backdrop to the next two decades.

Climate change is worse than you think.

But the effort to fight it is going much better than you think, too.

So here we are, at one minute to midnight to use our prime minister’s simplistic terminology, at the start of the biggest climate conference since the Paris Agreement was reached in 2015.

But I’m starting to wonder whether we are right to be putting our faith in COP26.

Feeling the heat?

I mean, Paris was incredible.

195 countries were coming together.

That was a landmark moment.

It showed that climate diplomacy could work, and crucially, it gave a very clear signal to businesses and investors about the direction of travel for the next decade or three.

But what is needed now is not consensus or agreement. That has been achieved. The threat is clear, and the requisite actions are mostly quite obvious too.

The path has been laid out, the debate has been framed.

What is needed now is ambition to make positive changes, at speed and on a large scale.

And I wonder whether COP26 is set up to achieve that.

The structural issue COP has is that by relying on unanimity, it makes itself vulnerable to the backward diplomacy of a few rogue nations, Australia among them.

It would be better to get 90% of the world’s emitters to agree to the rapid change they all need, rather than struggling for 100% of them to agree to a much compromised and slower change.

The need for unanimous agreement between all present nations may turn out to be a hindrance.

And I worry that complacency after Paris might have set in.

Ricky Ponting, the captain of the Australia cricket team, once said that, “When you win, you have a party. When you lose, you have a meeting.”

Mean reversion, in cricket as well as investment, is ingrained into the human mindset.

There has been much to smile about since Paris, but it’s possible that its extraordinary success might mean delegates and leaders are just a little less desperate and this could affect things.

Luckily, the agreements reached at COP26 aren’t everything.

Already, we are seeing its benefits.

An onslaught of corporate and national commitments has been coming out in the weeks leading up to the summit.

The front pages of every news outlet, paper and digital, are covered in climate news, warnings, op-eds, updates and insights.

The collection of people coming together to share ideas and form ambitions will surround the main agreements between all nations. Hundreds, indeed thousands, of people and businesses are coming together, working with governments across the world towards a common goal.

It’s a nexus event, a turbo-charger underneath the environmental network effect.

Stocks in the energy sector are already responding, with green across the board over the last couple of weeks, and at the start of this one too.

Winners and losers

The key thing for me is that this is a different kind of get-together to Paris in 2015.

Back then, fighting climate change looked like a cost that someone was going to have to bear.

And there’s still a bit of that.

But the narrative that is now growing, and that I expect to take hold at COP26 and beyond, is one of international competition.

A few months ago, I coined the idea of a “race to net zero”.

No longer was it seen as a costly, risky but noble move to transition towards a cleaner energy system.

Rather, this year has seen countries rushing to be first. They are moving to be the boldest, the fastest, and the most aggressive in their pledges and plans for getting to net zero.

The UK recently announced, proudly, its strategy for reaching net zero by 2050, and was the first country to do so.

The mood has changed. The economics of renewables and the energy system they will underpin are so much more compelling than the old system. The fossil fuel industry is collapsing under the weight of falling demand and stranded assets.

They are underinvesting in new projects not because of ESG mania, as some say, but because investing in an oil project with a 15 to 30-year payback delay is a terrible economic decision. You will likely not get your money back, unless you happen to be in charge of Saudi Aramco (which can produce a barrel of oil far more cheaply than almost anyone else).

Instead, countries that can build the necessary infrastructure for a renewably-powered grid, with energy storage and excellent grid management, will benefit from a huge cost advantage, as their zero marginal cost power drives costs lower and quality of life higher, not to mention the environmental and air quality benefits.

In 2015, the Paris agreement pushed the stone to the top of the hill. At Glasgow, it has begun to roll down the other side, with unstoppable momentum.

So perhaps reaching unanimous agreements isn’t as necessary this time, as it was back then. Because it’s about gain, not pain, as Carbon Tracker so eloquently put it.

Paris set out the rules of the game. Glasgow just might decide the winners.

Reading between the headlines…

There will be millions of words written over the next couple of weeks.

If you’ve never watched Love Island (like me) you might not be prepared for the relentless onslaught of daily updates, commentaries and “breaking news” alerts.

Here are two things to be prepared for:

  • Firstly, be prepared for things to come together very late, after a lot of agony over this line or that line, this commitment or that, one word or another. The Saudis want it to say “ought to” rather than “should”, and the Australians think the agreement should open with “G’day” instead of “Hello”.

Be patient. It’s a two-week negotiation between delegates of 200 countries, with national leaders only arriving nearer the end for finalising things.

If the commitment is there to reach agreement, those wrinkles will get ironed out in the last few days.

Peer and time pressure are two powerful forces.

  • Secondly, be prepared for it to overrun. The schedule says it lasts two weeks. However, don’t be surprised if we wake up in two Mondays’ time and find that the participants are still hashing out a few details. It happened in Paris in 2015, and at many other smaller conferences.

The sheer scale and complexity of what is being discussed make punctuality almost impossible. Don’t buy into the panic if you see headlines screaming about how no agreement has been reached.

All the best,

Kit Winder
Editor, Exponential Investor