Foresight - Markets
Climate Progress Dashboard: lack of action raises risk of significant disruption ahead
The lack of progress so far on limiting temperature rises means more urgent action will be needed in the coming years.
Entering the final quarter of 2019, Schroders’ Climate Progress Dashboard holds steady, implying a long run temperature rise around 3.8°C. In 2015, global leaders committed to limiting rises to 2°C over pre-industrial levels. The gap between the trajectory the world is on and the trajectory it needs to meet underlines the significant work still remaining. The slow pace of action means significant disruption looks inevitable.
The Climate Progress Dashboard provides a bird’s eye view of the speed and scale of climate action across the spectrum of areas that will drive decarbonisation. Schroders created the dashboard to provide our analysts, fund managers and clients with an objective measure of the pace of climate action. This helps them to navigate a challenge that will have a dramatic impact on financial markets, but which is too often dominated by sound bites, emotion and rhetoric.
As has been consistently the case since we started tracking climate indicators through this Dashboard, last quarter saw both positive and negative moves in different areas. Over the last three months, the steps forward cancelled out the backward movements, leaving the Dashboard unchanged in pointing to a long run temperature rise of around 3.8°C if current trends continue.
Subdued oil & gas investment represents one larger step forward
The biggest positive move over the last quarter stems from the relatively subdued levels of capital investment we continue to see across the oil and gas industry. Insofar as oil and gas fields are depleting assets, the industry must develop new capacity to maintain overall capacity. Even under the demand trajectory implied by the Paris Accord, which implies fossil fuel demand dwindles toward zero over the next half century or so, some new investment will still be required.
To gauge the temperature rises implied by companies’ capital investment, we compare oil, gas and coal companies’ capital investment to their combined assets, from which we deduct the natural rate of depletion from existing fields. The approach is designed to gauge the pace of production growth implied by companies’ spending, and the temperature rise implied by that growth in the long run.
Typically, capital investment picks up as oil prices rise. In this cycle, that rise has been limited, albeit commodity prices remain relatively low.
By our calculations, the industry still invests much more in developing new capacity than will be required under Paris Accord commitments. However, this apparent discipline is a step in the right direction, whether enforced by funding constraints or a reflection of forward-looking planning for a more carbon-constrained global economy.
Three small steps backward
On the other hand, overall progress was held back by three smaller steps backward:
- Carbon prices in Europe have dropped from the highs seen earlier this year. We don’t view the drop (to just over €25/tonne from highs close to €30/tonne in the middle of the year) as a major step backward in the context of the three-fold increase since early last year (view the price information here).
- The pace of growth in fossil fuel reserves rose a little in the latest update, primarily reflecting statistical updates, which we similarly don’t consider a material change.
- Changes in the outlook implied by corporate planning also provided a small headwind this quarter. We examine the data companies provide to the CDP to gauge the strength of their collective commitments to climate action and preparedness for its impacts (find out more about the CDP here). Our analysis is based on the sales-weighted performance scores CDP calculates for over 7,000 companies which respond to its annual questionnaire. The most recent CDP responses show a small step backward in that measure of corporate preparation. While the impact on the Climate Progress Dashboard is modest, the reversal from a previously improving trajectory is concerning.
The net effect of those positives and negatives leaves the overall prospects for long run temperature rises roughly unchanged from last quarter. However, the need for faster change to meet the commitments made in Paris almost four years ago is becoming more urgent, and the likely impact of those actions more disruptive.
COP half full?
COP25, the 25th Conference of the Parties, was supposed to be held in Santiago, Chile during the first and second weeks of December. However, Chile has withdrawn from hosting due to civil unrest and the event is now due to be hosted by Spain. The annual COP event brings global political leaders together to agree steps toward the commitments they have made under the Paris Accord to limit long run temperature rises to no more than 2°C over pre-industrial levels.
The 2015 agreement laid out a timetable under which the Paris Accord will become operational in 2020, before which individual countries are expected to revisit their commitments to reduce greenhouse gas (GHG) emissions. From 2020 onward they will be required to report those emissions regularly and consistently and ratchet those commitments every five years. In the face of evidence that GHG emissions will need to begin falling as soon as 2030 in order to meet the commitments made in Paris, there is a clear need for both greater ambition and a stronger willingness to translate ambition to action.
Since the Paris Accord was ratified in 2016, the UN Framework Convention on Climate Change (UNFCCC) has maintained a database of national commitments on climate action. We have examined that database, tracking the dates of the last official commitments countries have made over time (left chart below). Many countries have expressed intentions beyond those documents, which may provide an opportunity for positive news as official documents are updated to reflect those more ambitious goals (such as the UK’s commitment to carbon neutrality by 2050).
However, it is also clear that far more work remains to be done. Climate Action Tracker aggregates national commitments to gauge the long run temperature rise implied by those goals and policies. The implied temperature increases have dropped a little over the last few years but are a long way from the “below two degree” goal they collectively agreed.
The prospect of significantly tougher political action on climate change seems inevitable as the gap between individual pledges and the global commitment comes under more scrutiny, even if the timing of that action remains unclear.
Our analysis of the pace of progress across the areas that must change in order to reduce GHG emissions and limit long run temperature rises underlines the need for more stringent action. With time running out to mould a smooth transition, the chances of a faster change, with unavoidably disruptive impacts on financial markets, are rising. It is unclear when the commitment will become clearer, translating into resetting of valuations in financial markets, but the risks grow bigger the longer we wait.
Summary of changes
The chart below plots the changes in each indicator relative to the last update (Q2 2019).
The chart below plots changes in each indicator since we launched the Climate Progress Dashboard in mid-2017.
Please see Climate Progress Dashboard: Marking progress one year on for further detail.