The impact of COP26 and the global carbon market deal on stocks

The annual two-week COP26 climate summit — where global leaders lay out plans to tackle climate change — is nearing an end. And the results from the conference mean big implications for investors…

Major announcements from the summit…

• 100+ countries vowed to end deforestation by 2030 — covering 85% of the world’s forest.
• 40+ countries pledged to end coal power— the largest source of carbon dioxide emissions — but the largest coal consumers, US, China and India, didn’t sign.

The spotlight of the summit — a global carbon market deal — is being hammered out in negotiations. For years, world leaders failed to implement a carbon market system.

• The incentive: Giving countries financial incentives to lower carbon dioxide (CO2) emissions — punishing high polluting countries while rewarding lower polluting ones.
• The market: Excessive creators of CO2 can buy credits from other countries that earned them from avoiding emissions or endorsing emission-lowering initiatives.

According to a report by the IETA, a global carbon market agreement could unleash $1T of new capital in developing countries to reduce emissions and encourage new technology.

Don’t be on the wrong side of the trade

But getting hundreds of countries to agree is difficult and implementation has greater challenges — requiring immense regulatory and accounting oversight.

Negotiations broke down several times in recent years — but a deal would force a transition towards renewable energy sources even faster.

Bank of America strategists estimate $2.3T of stock market value to be wiped out from the transition — and the network of oil pumping infrastructure would be made useless.

• Carbon pricing policies would negatively impact the highest-polluting sectors (i.e. energy, airlines, transportation, manufacturing).
• Companies in the oil and coal sector will lose in the transition — with strategists advising to cut exposure to oil and related stocks.

Investors: Grass greener on the other side?

Clean technologies such as wind turbines, solar panels, lithium-ion batteries, energy storage and fuel cells seem likely to benefit. And several ETFs are available to take advantage of the clean energy transition including:

• iShares Global Clean Energy ETF (NASDAQ:ICLN) — exposure to companies producing energy from solar, wind and other renewable sources.
• Lithium & Battery Tech ETF (NYSE:LIT) — exposure to lithium battery tech essential to electric vehicles, renewable energy storage and mobile devices.

Stick around — as we dive into specific companies powering the clean energy sector in upcoming issues.