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Sustainability
Can we meet the Paris Agreement’s goal of limiting global warming to 1.5°C?
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Drastic action is required to limit global warming to 1.5°C above pre-industrial levels and the coming years will be crucial. This article considers key events that will impact the ability to meet this target.
There was much discussion at COP28 about whether the 1.5°C objective could be reached. The difference between 1.5°C and 2°C is incredibly important: a 1.5°C scenario represents a major threshold in terms of environmental tipping points and scientific uncertainty significantly increases once the threshold is passed (see figure SPM 2 in IPCC, 2021). In terms of feasibility, the latest science states, with 50% probability, that at the current pace, we will have emitted the entire carbon budget, to stay below 1.5°C, in the next 7 years (Global Carbon Budget, 2023). As a result, some activists and scientists are calling for a recognition of our collective failure to meet this target - given that a drastic reduction in emissions is needed. However, it is still possible - the models indicate clear pathways to reach the target.
The final Global Stocktake decision keeps the ambition alive - highlighting a rapid transition away from fossil fuel, the tripling of renewable energy and the doubling of energy efficiency: core components of the IEA’s 1.5°C compatible scenario (IEA, 2023). The next two years, however, will be critical. New financing goals must be established by the Parties at COP29 In Azerbaijan, while COP30 in Brazil will focus on updating nationally determined contributions (NDCs) that are economy-wide, cover all greenhouse gases and are fully aligned with the 1.5°C temperature limit.
Actions linked to a rapid and competitive transition and strengthened ambitions will have implications for investors, regardless of the asset class covered. Some of the climate financing-related events to monitor over 2024-2025 are:
Elections, more than ever: Countries and regions home to nearly half of the world's population will hold elections in 2024 and 2025, from the US, the UK and the EU to Indonesia, Russia and South Africa. These elections take place as several of these countries face a backlash against climate action while protectionism, particularly in relation to energy (security and GDP contribution), increases. Also, climate-related voter perceptions are considered by political parties when preparing for the elections and the resulting policy making process. The figures below provide an overview of: (1) attitudes towards climate policies across different countries, and (2) support for the main climate policies by category. Both figures provide an indication of how this might shape the upcoming political and regulatory landscape, across different industries and how policies are interlinked (for example, opposition to climate policies correlates with ‘carbon dependence’ due to lack of public transport, car use and gas expenditure). Hence, for climate proponents, it will be key to inform voters on the impact of proposals on emissions, individual costs, gains and losses, as well as linkages between policies and programs. Either way, we expect the final outcome of these elections to significantly impact climate-related investing, although the exact results remain uncertain.
Share of respondents who somewhat or strongly support climate change policies
![](https://images.ctfassets.net/t5k492kvfszq/65eiaFfyWorwa0NVZOL8np/c53bd17faad4f50113ad24c3070f0d5a/COP1_IMG1.png?w=585&h=320&q=50&fm=png)
Source: OECD (2022)
Support for main climate policies by categories
![](https://images.ctfassets.net/t5k492kvfszq/EAxRYaOSiH7NKxYVOvJXn/32a95c08bfa94ffcf84d81e9719c8f09/COP1_IMG2.png?w=461&h=388&q=50&fm=png)
Source: OECD (2022)
Developments in global conflicts: Conflicts including the Russia-Ukraine war, the Israel-Palestine conflict, and the US-China trade war will all have implications for climate-related supply chains, inflation, global commodities and energy prices. Bumpy roads lie ahead.
Developments at EU Level: Various developments at EU level will impact this goal. In particular the European Commission have recently announced their proposal for a commitment to reduce net greenhouse gas emissions by 90%, from 1990 levels, by 2040, although approval will depend on the outcome of the Parliamentary elections in June. The Net Zero Industry Act is progressing, as a provisional agreement on the final form of the Act has been reached between the Parliament and the Council, and formal adoption is expected. The proposed Act envisages major benefits for the solar manufacturing industry including: a reduction in permit delivery for large renewables projects, promotion of ‘Net Zero Acceleration Valleys’ and application of pre-qualification and award criteria which are not price-related. Furthermore, the European Wind Charter is facilitating the process, with WindEurope reporting an uptake in permitting and investments. Funding decisions by the EU Innovation Fund, allowing access to EUR 4.8 billion for the deployment of net zero technologies (including carbon capture and storage and hydrogen) will have important impacts as well as the deployment of 166 cross-border energy projects, to fuel the European Green Deal. It is worth watching how well the EU tackles the alignment of grid infrastructure investments with renewables deployment to avoid bottlenecks and how regions and corporates diversify supply chains. Lastly, several revisions of the EU Emissions Trading System in combination with market effects like the ramp-up of renewables, resulted in a sharp decline of the allowance price, with prices dropping to EUR55/ton in February 2024, reaching a 23-month low. Will one of the key pillars of the EU’s climate ambitions hold ground in coming years, to drive decarbonisation efforts?
Evolutions in Asia: These include an expected emissions peak in China, Japan emerging as the first issuer of USD 11 billion sovereign transition bonds, and changes in India’s coal versus renewables expansion rate.
US Developments: The US situation is very uncertain due to the following: the presidential election; the progressive implementation of the US Inflation Reduction Act and the long-awaited disclosure rules from the Securities and Exchange Commission, expected around mid-2024. And what about big oil’s profits? A staggering USD 313 billion in net income was reported by the top 10 US oil and gas companies during the first three years of Biden’s presidency, tripling the amount earned under Donald Trump. Will this provide a windfall for Biden’s campaign, while they still advocate for an ambitious climate agenda?
US-China Climate Talks: It is not clear whether there will be further cooperation or competition between the Greenhouse gas giants, after the departures of climate diplomats John Kerry and Xie Zhenhua, who paved the way for landmark agreements. How will climate economics and progress be impacted by supply chain talks in coming months?
The Aftermath of El Nino as well as Other Extreme Climate Events: This will impact citizens, corporates, and sovereigns and potentially fuel inflation. For corporate actors, physical events might result in operational impacts or supply chain disruptions, whereas for the latter, sovereign credit risk might increase. As a result, central banks awareness of physical risks, the ability to access rapid financing facilities and the option to take on extra debt and/or the multilateral availability of financing alternatives are elements to monitor. Note that over the past 20 years, the damage caused by climate change through 185 of the most significant extreme weather has cost an estimated USD 16 million per hour, according to a 2023 study published in the journal Nature Communications, while the World Economic Forum’s Global Risk Perception Survey still ranks extreme weather events second in estimated severity over a 2-year period, and 66% of correspondents selected extreme weather as the risk most likely to present a material crisis on a global scale in 2024.
Mandatory Corporate Climate Transition Plan Disclosure Requirements: Further developments across regions, including the EU, US, China and the UK, will impact corporates directly, but also indirectly through demand and supply dynamics. Insights in transition planning will facilitate the identification of well and less-well positioned companies, likely impacting investor perceptions and valuations.
Climate-related Scrutiny of Financial Industry Regulations: Climate-stress testing and capital requirements of the European Central Bank, the Bank of England and the Federal Reserve as well as the European Central Bank’s greening programme and insurance supervision will be important.Follow-up on the US FED’s pilot climate scenario analysis with six banks and the ECB’s economy-wide climate stress test is expected. Furthermore, the European Commission asked the European Banking Authority, the European Securities Marketing Authority, the European Insurance Occupational Pensions Authority in cooperation with the European Central Bank and the European Systemic Risk Boardto test the resilience of the financial sector during the transition towards the European Commission’s 2030 climate targets, while the US Treasury released Principles for Net Zero financing and investment.
Price Dynamics linked to Renewables and EV Competition alongside Technological Developments: Look out for advances in carbon removal, nuclear power and hydrogen as well as climate tech venture capital growth and developments in artificial intelligence to decarbonise the economy.A substantial amount of funding will be required with estimates ranging up to USD 4.5 trillion, annually, by 2030 - investment opportunities are on the rise. Furthermore, the European Central Bank also said it is ready to consider further adjustments to its monetary-policy approach to support the transition to a green economy.
Overall, due to the geopolitical and political uncertainty, protectionism and its impact on the (macro) economy, several research entities expect 2024 and 2025 to be bumpy years for financial institutions, resulting in head and tailwinds, especially for those pursuing climate financing targets.
The effect of these multiple interrelated events will significantly impact the success of COP29 and COP30 and our ability to meet the 1.5°C warming objective of the Paris Agreement with associated investment implications.
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