In a UN report issued in late November¹, the UN Environment Programme (‘UNEP') did not hold back on the scale of the challenge facing governments aiming to meet commitments agreed by the Paris climate accord in 2015. In order to meet the target of limiting temperature rises to 1.5 degrees Celsius, global greenhouse gas emissions need to be cut by 7.6% per annum over the next decade.* At the same time, regulators and policy makers are now moving to implement a raft of new measures to deal with the implications of climate change.
These include, among others, new (‘TCFD') disclosure requirements for investment managers and the companies in which they invest, separate new disclosure requirements for pension funds in Europe, an entirely new Taxonomy from the EU which will legally define what type of business activity can be claimed to be mitigating or adapting to climate change, and new rules for disclosure of sustainability information for all benchmark indices used in Europe.
Investors should not ignore the path ahead laid by the UNEP and cannot ignore the new, legally binding, regulations in many regions - and particularly in the EU. However, most investors still seem to be unaware of the pretty dramatic regulatory changes that are on the way, and the implications that this will have for their investments. And, given that global emissions have never fallen before and continue to rise, despite the historic agreement reached four years ago², investors clearly remain sceptical that emissions will turn sharply lower from 2020.
Under-invested in the future
So, despite the obvious trend towards accelerated decarbonisation, money managers continue to be over-invested in the past and under-invested in the future.
There is a prevalent view among investors that a slow transition to decoupling from fossil fuels will not lead to significant market disruption over the near term. They think that we have time on our side.
But the UN report of late November highlights the immediacy of climate change and the gravity of taking no action³.
Investors need to question their exposure to fossil fuels. While coal has been an obvious casualty in investors' decisions in the battle over climate change, there are now signs that other industries are at risk.
Meanwhile central banks are now very much aware of the importance of this issue. The Bank of England has announced that it is looking at financial institution's preparations for climate change when assessing their long-term financial stability⁴, and the ECB's new president, Christine Lagarde, has said that how central banks can contribute to mitigating climate changes is at an early stage but should be seen as a priority⁵. In her previous role as head of the IMF, she was critical of fossil fuel subsidies and took an active role in promoting greater disclosure of climate change risks.
It is not just in the area of financing where we are witnessing real change. Rapid advances in technology in the solar and lithium battery space are helping to drive demand for solar energy and electric vehicles and leading to market disruption across both the energy and transport markets. Moreover, it is widely anticipated that costs will continue to decline with anticipated scale advantages and improvements in manufacturing.
Climate change is undoubtedly the most critical issue facing governments across the globe over the next twenty years. It is high time that asset managers take action on the risks surrounding this critical issue. Failure to act could be catastrophic for portfolios as well as the environment.
Colm O'Connor is senior portfolio manager, KBI Global Investors
KBI Global Investors Ltd. is regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority in the UK. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. The views expressed in this article are expressions of opinion only and should not be construed as investment advice.
²The Paris Agreement is an agreement with the UUN framework convention on climate change (UNFCCC).