Have we reached a new tipping point in the battle to halt climate change?
The recent UN Climate Action Summit prompted significant commitments by countries, corporations and investors alike. However, more decisive action will be needed to achieve the targets set out in the Paris Agreement.
On 20 September, 2019, an estimated four million people around the world took to the streets to demand that their governments take immediate and decisive action to combat climate change. These were the largest environmental protests in history. And with further high-profile events lined up in the coming months, the pressure on politicians, companies and investors to take action to address climate change looks set to intensify.
So, why has climate change become such a hot topic this year?
We are in a “climate super year”. The impact of human activity on the planet is now so severe that the scientific community is on the brink of introducing a new geological age.
This is a key moment in our history. In this new “Anthropocene” era (or age of humans) we as a species are now recognised as the single most powerful geological force on the planet. We are shaping the earth beneath us and the climate above us.
It draws to an end the approximately 12,000-year Holocene era of stable and predictable climate, which allowed us to build the societies, economies, and trade networks we live and work in today.
The 2015 Paris Agreement aims to limit the increase in global average temperatures to well below 2°C above pre-industrial levels, ultimately striving to limit the global temperature rise to 1.5°C. While considerably negative, the consequences of a 1.5°C increase in global mean surface temperature (GMST) are understood to be manageable. However, research by the Intergovernmental Panel on Climate Change (IPCC) in 2019 concluded that the world’s mean surface temperature has already increased by around 1°C, and by more than 1.5°C if we take into account temperature above land in isolation.
As climate change investors, we see this discrepancy between where we are and were we ought to be as one of the most attractive investment opportunities of our time.
What progress has been made this year?
The recent global protests were part of the Fridays For Future school strike movement that was inspired by Swedish teenage climate activist Greta Thunberg. While global civil involvement peaked before the UN Climate Action Summit on September 23, the level of civil action has been steadily rising in the recent past. These range from public protests, votes in favour of parties supporting a climate agenda or a shift in private pension allocations towards more sustainable investments.
Following the summit, 77 countries committed to cutting greenhouse gases (GHGs) to net zero by 2050, with 70 announcing that they will boost their national action plans by 2020. While this could be perceived as a strong signal by policymakers, the share of global emissions actually captured by such commitments is still low, barely passing the 10% mark of global emissions. The top three CO2 emitting countries (China, USA, and India) have not yet committed to net zero targets.
In addition to country pledges, the summit also saw a significant number of private sector organisations commit to new targets aligned with the Paris agreement. These include the world’s largest asset-owners directing more than $2 trillion in investments, 87 major companies, and around one-third of the global banking sector, demonstrating the importance and opportunities associated with addressing climate change.
Is this enough?
Some progress has been made and more stringent targets have been set. However, there is still a long way to go if we are to avoid a significant increase in global temperatures and the knock-on effects that this will have on the environment and, consequently, the global economy.
While Thunberg and her army of activists have done much to raise public awareness of the issue, achieving climate change targets is going to require radical changes to the global economy and the way we live our lives – a complete structural rewiring of the economy as we know it. This includes first and foremost the transition from fossil fuels to renewable sources of energy. But it will also require other fundamental shifts such as the electrification of our current economy, including transportation, and more sustainable solutions for industries such as food and fashion.
Why does climate change matter to investors?
Climate change is one of the defining themes of the 21st century and will affect all of us for decades to come. Companies and entire sectors providing the solutions needed to help us mitigate and adapt to climate change will by necessity require significant growth. This poses attractive investment opportunities for investors in this space.
Ultimately, every company, and by extension every investor, will be affected by climate change in one way or the other. This is either as a result of the actions taken to achieve the targets set out in the Paris Agreement or through the physical impacts of rising temperatures. Seeking out those companies striving to transform and improve their business models to this new reality will generate attractive new investment opportunities for years to come.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.