Foresight

Climate Progress Dashboard: will 2021 be the year of decisive change?

A long-run temperature rise of around 3.7 degrees over pre-industrial levels is the latest estimate our Climate Progress Dashboard suggests.

This result, based on analysis of projections from four key categories in the fourth quarter of 2020,  is marginally down from the 3.8 degree rise implied in the autumn of 2020.

But it’s still a long way from the “below 2 degree” target enshrined in the Paris Accord in 2015.

The headline finding may be disappointing, but pressure is building and 2021 could prove the year of decisive change, as our analysis shows.

In the run up to the 26th Conference of the Parties (COP26) in November, the stream of announcements from policymakers and companies is set to gather pace.

With the global summit – postponed from last year due to the pandemic – now set to go ahead, we should start to see the much-needed details and actions for meeting the Paris Agreement ambition.

There’s a disconnect in ambition over climate change – but one clear direction of travel

Over the last few years, the share of the world’s economic output generated under governments with net zero commitments has risen sharply. The proportion of companies with science-based targets, committing them to similar decarbonisation pathways, has also increased. 

However, looking through the value chain of policymakers, corporates and investors, we’ve noticed a sharp disconnect in ambition.

As the second chart below shows, around two-thirds of global GDP and emissions are now generated in regions committed to decarbonisation.

By contrast, just under one-fifth of the value of large, listed global companies has been committed to decarbonisation in line with the goals laid out in the Paris Accord, through science-based targets.

Even more starkly, well under one-tenth of institutional assets are managed by asset managers with net zero ambitions.

Nonetheless, the direction of travel and the pressures that will feed through that value chain are clear. 

Govs-with-net-zero-ambitions-and-scientific-targets.png

Net-zero-science-based-targets.png

Data above as at February 2021

We are one of those asset managers committed to a net zero target. We joined 29 other asset managers in the Net Zero Asset Managers Initiative last December. The move reflects our commitment to aligning the assets we manage for our clients to science-based goals, in collaboration with our clients.

Its becoming increasingly clear our industry must move further in this direction.

How companies’ climate change preparedness is being monitored

Climate change is a force we expect to create and destroy value on a huge scale in the coming years and decades. 

The companies we invest in seem to have recognised that pressure. CDP is a charitable organisation that runs the disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.

Each year CDP assesses companies’ climate change preparedness. The number of companies in stronger bands has continued to grow over the years. The share of companies assessed in CDP’s top band for preparedness has risen by more than 60% over the last two years.

Share-of-global-companies-in-each-band-of-CPD-climate-scoring.png

How our Climate Progress Dashboard reflects incremental improvements

To date, policymaker announcements have tended to focus more on long-term targets than on shorter-term policy action. But there are signs of tangible steps being taken in many countries. 

The scale of change may be modest, but the indications are reflected in the dashboard. Every indicator is either unchanged or has improved since the last reading, with sharply higher carbon prices the biggest driver of change. 

EU Emissions Trading System (ETS) prices have reached close to EUR40/t at the time of writing, new highs for that market. 

In the US, prices in the Regional Greenhouse Gas Initiative (RGGI) carbon price auction have been similarly strong.

With the Biden administration likely to drive a new direction in climate policy, pressure on the US could well accelerate.

Coordinated response needed

As an active asset manager that invests across the public and private markets globally, we have a fundamental responsibility and imperative to encourage companies to re-orientate their business models towards decarbonisation, and to lead by example as regards our own business practices.

Now is not the time to be complacent. We are in a pivotal moment, and whilst some progress is being made, we need an aggressive and coordinated approach across policy markets, corporates and investors.

The Paris Agreement in a nutshell

The central aim of the Paris Agreement is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels. Signatories are aiming to limit the temperature increase even further to 1.5 degrees Celsius.

What is Schroders’ Climate Progress Dashboard?

Schroders developed the Climate Progress Dashboard to track the progress implied by a range of factors, from carbon prices to renewable and carbon capture and storage capacity. The dashboard was developed in mid-2017.

Summary of changes

The chart below plots the changes in each indicator relative to the last update (Q3 2020).

Change-in-temp-relative-to-last-quarter.png

The chart below plots changes in each indicator since we launched the Climate Progress Dashboard in mid-2017.

Change-in-temp-since-inception.png

Schroders Climate Progress Dashboard

Climate-Progress-Dashboard-Q4-2020.png

 

Important Information:
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.