Market Views: Equities

Climate change talks reach successful conclusion

We welcome the degree of consensus behind the Paris Agreement and see it as an important step in the transition to a low carbon economy

15/12/2015

Solange Le Jeune

ESG Analyst

Clear signal

The international climate negotiations taking place in Paris over the last two weeks concluded successfully on Saturday 12 December as 195 countries signed a legally binding agreement.

The ‘Paris Agreement’ sent a clear signal to businesses and financial markets that there is more political will than ever to tackle the risks of climate change.

Common approach

The Paris Agreement places all countries for the first time on a level playing field in terms of reporting requirements and governance.

At the same time, the agreement also recognises differentiated responsibilities through the financial mechanisms by which developing countries will receive support to adapt to and mitigate climate change.

The agreement seeks to ensure global greenhouse gas emissions peak as early as possible, with the aim of holding the increase in the global average temperature to well below 2⁰C and to pursue efforts to limit the temperature increase to 1.5⁰C.

It also includes a monitoring framework for countries’ reduction pledges to be reviewed every five years, and for each successive emissions reduction objective to be progressive.

A separate working group was established to look into the accounting of greenhouse gas emissions.

Degree of consensus is encouraging

We think this degree of consensus is an achievement in itself which shows the determination of all countries to address the climate change challenge and the risks it poses to our societies and economies.

There will be a ratification process starting as soon as next year, with a hurdle rate of 55 of the parties to the conference and 55% of global emissions, and which could lead to an earlier than 2020 enforcement.

The agreement also contains enough flexibility to allow countries to progress beyond targets, which leaves hope to reconcile with the 2⁰C emissions pathway (given that current country climate pledges – made prior to the Paris conference - lead to a warming of 2.7⁰C according to the UN).

These ratcheting up mechanisms and the regular review framework mean that governments will keep the optionality, and incentive, to tighten up their climate change regulations and emissions reduction policy going forward.

Although the final agreement has been criticised in some quarters for not providing concrete policy measures to drive the energy transition and committing to clear emissions pathways, we do not believe the international policy and legal framework could have delivered on such an outcome in the first place.

On the other hand, we think the aspirational and consensual nature of the agreement is an acknowledgement that markets are more efficient in delivering the transition to low carbon economies.

The benefit of a flexible text is that it is easier this way for countries to support the most efficient market mechanisms to enable the development of clean energy and transport technology.

Strong contribution from civil society and corporates

Last but not least, although this has been a government led negotiation process, we have welcomed the contribution of non-state actors of civil society and corporates during the conference to make it a meaningful milestone.

Our research providers counted some 2,000 cities and 2,000 companies which made climate commitments.

A growing body of national governments and US-state level legislators have formed an alliance to promote and commit to Zero Emission Vehicles in their regions.

And investors should also benefit from the Financial Stability Board announcement of the creation of a task force to make climate related financial disclosure consistent across companies – this will help financial markets understand the climate risks in their investments and make more efficient capital allocation decisions.

Overall, we see the conference as a success which has created further political momentum to address climate change, and a suitable governance framework to ensure that this is maintained.

The shift away from fossil fuels is already well underway and is increasingly being driven by the economics of clean energy and electric vehicles rapidly becoming superior to fossil fuels.

With global political momentum likely to increase policy support for these technologies further, we have likely passed a tipping point in the transition to a low carbon economy.