This article is intended for Institutional Investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) only and is not suitable or intended for persons who do not qualify as such.
Four years after the landmark Paris Agreement at the COP21 conference, it is becoming clear that climate change has been raging on unabated and that the need for action is not only imperative, but ever more urgent, if the world is to steer away from the dire consequences across the breadth of society and industry. In this article for The Intelligence Report, we cover some of the main issues.
The recent COP25 meeting covered the next crucial steps in the UN climate change process, including work ahead of the 2020 meeting at which countries have committed to revising the ‘Paris’ targets and submitting new and updated national climate action plans . What is the current state of play?
It is clear that today’s climate change policies have been insufficient to ensure that the rise in global temperatures will be limited to 2°C by 2030, and that the other Paris Agreement goal of keeping the increase to well below 2°C is now looking even less feasible.
Instead, temperatures look set to have risen by a bleak 3°C by the end of the century, with current policies having barely any impact on global annual CO2e emissions. And even a 4°C increase by the end of this millennium can no longer be ruled out.
Such scenarios – be it 3°C or even 4°C warmer – imply that business as usual is unthinkable. Extreme heatwaves, droughts and metres-higher sea levels would hit food security, animal and plant life, and would drive millions more people into extreme poverty.[a]
The hiatus between the Paris Agreement ambitions and the latest projections was starkly exposed in the latest annual UN ‘gap report’. At the same time, recent UN data has shown that the volume of carbon dioxide in the atmosphere is still rising – not falling. Burning fossil fuels is a major cause.
The gap report warns that unless global emissions of heat-trapping greenhouse gases fall by 7.6% a year between 2020 and 2030, the world cannot get on track towards the ‘Paris’ 1.5°C goal.
It is clear that more and more forceful action at many levels is needed as the destructive and disruptive effects of climate change – including severe storms, floods and extensive forest fires – become visible year after year and the wake-up calls reverberate.
More measures are required to adapt to climate change and mitigate it, and to finance both these pathways. Stakeholders ranging from multinational organisations to national governments, from companies to NGOs, and from civil society to individual citizens including investors need to step up.
Given the unthinkable alternatives – meaning the significant risk to life and limb, to society at large, to the economy and investments – it should be obvious that a delay would only result in chaotic disruption and the need to impose more draconian policies.
We focus on developments that investors should be aware of and can take action on. They include:
On climate finance, which is essential to enable climate action on mitigation and adaptation, we see a need to redirect capital flows towards a net zero-carbon economy. Incentives are needed to foster the uptake of low-carbon technologies and practices, while legislation should be imposed on firms to go public on the physical, regulatory, technology and market risks related to climate change.
The OECD estimates that USD 6.3 trillion is needed in investments in energy, transport and infrastructure every year between 2016 and 2030, with an additional USD 0.6 trillion to make the investments compatible with the Paris Agreement.[b] A different estimate says USD 29 trillion is needed over the 35 years to 2050 in terms of investment in the energy transition.[c]
While those sums may come across as daunting, it is worth noting that the amount of money in the world economy is a large multiple of that: more than USD 80 trillion, by some estimates.[d] Looking at the 10 countries that save the most, their savings could cover the amount projected by the OECD.[e]
In terms of the ‘fiscal space’[f] that could be used for these investments, one estimate suggests that Australia, Germany, the Netherlands and Sweden are countries with substantial room for additional government spending, partly on the back of their access to stable and cheap funding from financial markets. While Brazil, Italy, and Pakistan, for example, have limited space, there is “money in the bank”, albeit no extensive amounts, in countries including China, Russia, Saudi Arabia and the US.[g]
Such an assessment fits with a growing chorus calling for more fiscal action. Given that it is for the common good, spending can be expected to centre on infrastructure upgrades, but likely with an ESG slant, as well as on climate-friendly projects outright, in particular on the energy transition.
Here, central banks could blaze the trail by using their asset purchase programmes to endorse green assets and buy climate-related instruments such as green bonds. Such action would send a strong signal to other institutional investors, the wider banking community and indirectly to retail investors.
As an aside, the success of the green bond market itself can be seen as indicative of the growing interest in sustainable finance. The drive for sustainability should also get a lift from EU criteria being drafted to define green investment products , which should boost transparency for investors, enhance the credibility of green financing instruments and counteract greenwashing.
Encouragingly, investors themselves are coming off the sidelines. The Climate Action 100+ lobby group, backed by more than 370 investors (including BNP Paribas Asset Management) with more than USD 35 trillion in assets, is urging the world’s largest greenhouse gas emitters to take action on climate change. Investors, in other words, are putting their money where their mouth is by challenging and engaging.
The overall sentiment then should be where there is a will, there is a way to tackle climate change.
 Helena Vines Fiestas, BNPP AM’s Deputy Global Head of Sustainability, is a member of the TEG’s Taxonomy Working Group. The TEG consists of experts from finance, academia, civil society and industry appointed by the European Commission to identify sustainable economic activities and the level of environmental performance they must achieve. Also read What does ‘green’ mean? The EU’s taxonomy spells it out and The EU taxonomy: the metric system of the 21st century
For more on sustainable finance, read Towards a sustainable finance system: further yet to go
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This article appeared in The Intelligence Report
[d] A measure known as broad money; according to the CIA World Factbook as seen on https://www.businessinsider.com/heres-how-much-money-there-is-in-the-world-2017-10?r=US&IR=T
[e] One year’s worth of estimated investment; assuming a national savings rate at roughly 40% of GDP; the countries include Singapore, China, South Korea, Ireland and Switzerland; source https://www.investopedia.com/articles/personal-finance/022415/top-10-countries-save-most.asp