05/10/2021
Since the Paris Agreement was ratified in late 2016, there has been a remarkable global acceleration and elevation of awareness, ambition and action across government, business and community actors. The change has felt exponential over the last two years. I recall Al Gore on the CEDA stage in Brisbane during climate week of June 2019 describing the remarkable movement he was seeing - technologically, financially and politically.
And he shared an adapted quote to underscore the point, that “change happens slower than you want it to, but when it comes, it happens faster than you thought it could”. Indeed, none of us in the room would have believed that just two years later we would have so many countries and major businesses signed up to the goal of net zero carbon emissions by 2050.
Even COVID-19 has failed to break this run of sentiment. As the crisis emerged, there were many who naturally assumed there would be a significant loss of momentum on climate change action because of the immediate attention to the health threat and from the economic hardship that would surely follow. And then came the oil price rout, which led some to assume that it would draw curtains on more expensive alternative energies.
But instead, we saw a very different and growing discourse centred on sustainability, one typified by the response of the International Energy Agency (IEA) and its calls to build back better, with a much more modern, resilient and clean energy system. With the IEA recognising that if we are to follow a sustainable path for greenhouse gas emissions, we need policy makers to act, and in concert.
Investors, initially activists but more recently long-term institutional investors (e.g. superannuation funds), have required reporting of a company’s environmental, social and governance (ESG) performance to better understand and manage their investment risk. The timeframes over which pension and super funds invest make consideration of longer-term issues such as climate change relevant. It is also widely recognised that there is a correlation between ESG performance and the financial performance of businesses.
Historically, and still today business may be able to create a negative externality at little or no cost to their company. Increasingly however they are exposed to elevating societal expectations, reflected in evolving regulator expectations, changing consumer/customer preferences and outright competition from cleaner alternatives.
A case in point is international oil companies whose company valuations have historically been based on the individual reserves they held rights to produce, but when combined with National Oil Company reserves and collectively exploited, the science now tells us would result in a global temperature increase of over 3°C. Investors, responding to the ‘shadow’ of future political action to limit global temperature increase from greenhouse gas emissions to well below 2°C, consistent with the Paris Agreement, are now placing a risk premium on these stocks and oil companies have had to write down their own valuations.
The current decarbonisation investments of businesses and governments are being enabled by rapidly improving low-carbon technologies. In recent years, we have seen technologies like photovoltaic solar energy and offshore wind come down the cost curve. Solar PV is now a tenth and wind power a third of the cost of ten years ago.
Lithium-ion batteries are now less than a sixth of their prior cost due to advances in battery technology and manufacturing efficiency gains. The U.S. shale revolution (mostly occurring in the early 2010s) also saw gas prices in the USA fall to a third of their prior cost. Arguably, it was the switch to gas from coal in the US that enabled President Barrack Obama to sign up to the Paris Agreement in 2015.
Many business leaders are grasping the scale of the opportunity of action on climate change and sustainability more generally. It does not take a Rhodes scholar to contemplate how much investment is required to limit global temperature increases to anything like 1.5°C, with typical estimates ranging from 1 to 5 trillion dollars per year out to 2050.
Recent cost trends of clean energy, the growing community sentiment for change, and an expectation of political action are all feeding into the market speculation. Against this backdrop of so many countries and major companies now signed up to net zero by 2050, technologies motoring down cost curves, and financiers and investors driving capital flows to more sustainable assets, you might be asking, why does COP26 matter?
It matters, because many of the positive developments we are witnessing today are the result of past political action over recent decades, like government-supported solar in Germany or offshore wind in Scotland, but which will only get us so far. Many of the currently announced projects are just speculative studies yet to gain finance, based on a deemed likelihood of significant future political action.
The science, the energy industry and the governments of the largest economies are telling us that we need to halve emissions this decade if we are to limit temperature increases to 1.5°C. There is no inevitability to such immediate action, rather, it will require adept and sustained political leadership.
The sixth assessment report of the Intergovernmental Panel on Climate Change (the IPCC) which feeds into COP26 as the scientific advice for decision makers, stresses the need for urgent action. The IPCC report tells us that humanity is causing warming and that rapid changes have happened already and that global warming of 1.5 and 2°C will be exceeded during this century unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming few decades.
The IEA released its landmark Net Zero by 2050: A Roadmap for the Global Energy Sector report this year. It provides an example pathway to achieve net zero by 2050, which included no new coal, oil or gas developments to be approved; and even with that we would fail to limit temperature rise to below 2°C this century. That certainly points to the need for some profound changes, and quickly.
This year has seen increased shareholder activism and significant court verdicts, but I think much more significantly, we have seen the leaders of several major energy companies stepping up (with helpful pressure from long-term investors) to not simply disclose their climate related financial risks but also to make strong commitments for reducing emissions and starting to back these with credible plans.
The meeting of the G7 in June was also remarkable for its alignment of leaders, the further ratcheting of commitment to tackle climate change, and for its consideration of wider aspects of sustainable development. The communique from the meeting spoke of commitment to support a green revolution to create jobs, cutting emissions and seeking to limit the rise in global temperatures to 1.5 degrees, achieving net zero by 2050 (at the latest), halving 2010 emissions by 2030, and improving climate finance to 2025.
However, many of the world’s largest emitters missed the repeatedly extended deadline to submit improved plans for emissions reduction to the UN, in accordance with expectations under the Paris Agreement. China, India and Saudi Arabia are notable among them. Following the release of the IPCC report, all countries have been given a further deadline of the 12th of October this year to submit their update or a further update of their nationally determined contributions.
COP26 needs to be about keeping all countries committed to stay the course. If major emitters are not playing ball, then it is going to be extremely hard for political leaders across the rest of the world to maintain support for strong action and short-term sacrifices. The words of former President Donald Trump “it’s not a good deal” may yet come back to haunt us. COP26 also needs to move us forwards from symbolism to solutions, and that includes acting on the massive challenges of social equity that action on climate change presents.
We are now witnessing unprecedented alignment globally of political will, business leadership, and long-term clarity from investors, financiers and insurers of our need to deliver on the Paris Agreement. And we know there is no time left to kick this challenge down the road.
COP26 is therefore the once-in-a-generation opportunity to come together and commit to the changes that will give peoples of all countries the confidence to cooperatively go the distance. We need our leaders to grasp the gravity of the situation and to step up.