Eva Cairns (Aberdeen Standard Investments) | December 2020 marked the fifth anniversary of the Paris Climate Agreement. For all the promises made during the talks, countries have already fallen woefully behind on their commitments to limit global warming. But could the narrative be shifting? We take a close look.
The Paris Agreement – five years on
December 2020 marked the fifth anniversary of the Paris Climate Agreement. Its goal is to “hold the increase in the global average temperature to well below 2°C above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5°C”. But for all the promises made during the talks, countries are woefully behind on their commitments to limit global warming. The world needs to halve emissions by 2030 for a chance to limit warming to 1.5°C.
So, what is holding back progress? What are the remedies? And what does this mean for investors?
The Paris Climate Agreement has singularly failed to live up to its promise. According to the UN’s 2020 Emissions Gap Report, without drastic action, temperatures could rise in excess of 3°C this century. Such an increase would leave large swathes of the planet uninhabitable, cause mass extinctions and spur large-scale migrations. As it stands, our own research supports the conclusion that we are currently on track for a 2.5°C warming world.
The fault lies at many doors. In particular, financial flows are falling short. The International Energy Agency estimates that the world needs to immediately allocate around US$3.5 trillion a year to finance the decarbonisation of the global energy system at the speed and scale implied by the Paris Agreement. Currently, the world is allocating only around half that. This shortfall is largely the result of the failure of global government policies and commitments to align with the stated objectives of the Paris Agreement.
Reasons for optimism
But even against this gloomy backdrop, the narrative around climate change is shifting. Following Trump’s withdrawal, new US President Biden will re-join the Paris Agreement. China’s commitment to be net zero by 2060 surprised many and could signal positive change. Europe’s intentions are especially encouraging, notably around its €1 trillion Green Deal.
Indeed, according to the UN’s Gap report, the most “significant” development of 2020 was the growing number of companies, cities, investors, universities and other players undertaking commitments to become carbon neutral by 2050. We should not underestimate the scale of this. Together, those committed to net zero represent over 50% of global GDP and 25% of emissions.
Most importantly, an energy transition is underway. Private sector innovation has started driving down renewable energy prices, such as solar power. A diverse range of companies, including some oil majors, are sitting up and taking notice.
Assessing the impact of different climate pathways
From oil & gas to construction, retail and utilities, detailed climate scenario analysis is increasingly important in measuring and assessing how different sectors approach the energy transition. It is also essential in helping identify the leaders from the laggards within these sectors.
Climate scenario analysis is therefore a vital part of our investment activity. It allows us to assess the financial impact on assets today of different climate pathways, ranging from 1.5°C to 4°C. This provides the important, forward-looking insight we need in order to robustly incorporate climate change risks and opportunities into our investment decision-making.
It is also a key input to developing resilient, market-leading climate-driven products for our clients. Such analysis helps us understand the impact of Paris-aligned climate pathways and identify companies that could benefit from the energy transition.
We will be publishing our climate scenario analysis white paper in February 2021 and will discuss the key results at our second Global climate series event.
Client demand for Paris-aligned investment solutions is growing rapidly. For example, the UN Net Zero Asset Owner Alliance consists of investors with combined assets of more than US$5 trillion (and growing). Each investor has committed to net-zero portfolios by 2050 and verifiable intermediate targets, albeit some stipulate caveats related to the evolution of global policy.