We discuss why governments must lead amid the stark realities of climate change in the post-Covid recovery.
Key Points:
- The sixth United Nations Intergovernmental Panel on Climate Change (IPCC) report provides clear evidence that human intervention is driving climate change.
- The report calls for an immediate reduction in carbon emissions to avert a climate catastrophe.
- Despite pledges to tackle carbon emissions,governments globally continue to approve thousands of oil and gas drilling permits, while numerous new coal mines are set to be built.
- Alone, individuals and companies are unlikely to be able to achieve the scale of change that is required if the governance structures that dominate policy decisions provide the wrong or insufficient incentives.
The need for economic expansion to support the post-Covid recovery collides with the scientific findings of the latest United Nations Intergovernmental Panel on Climate Change (IPCC) report that calls for an immediate reduction in carbon emissions.
August 2021 saw the publication of the UN’s sixth IPCC report, and the report provides clear evidence that human intervention is driving climate change. It warns that, without immediate and rapid reductions in carbon emissions, we are likely to see devastating and potentially irreversible consequences as soon as the next decade. The question governments, policymakers, corporations and individuals will now be asking themselves is what can be done to avert catastrophe.
Fossil-Fuel Demand Bounces Back
The findings of the report come at a time when the need for post-Covid economic recovery has led governments and central banks to support recovering economic activity to the tune of trillions of dollars in liquidity globally. This abundance of capital has encouraged an acceleration in both economic growth and consumption, which has, in turn, already increased the demand for coal. US gas consumption reached a record high in July, indicating that the pause in emissions experienced throughout the pandemic was temporary, buying us only a small amount of time before activity and emissions began accelerating again.
Despite the International Energy Agency’s Net Zero by 2050 report[1] finding that there is no need for further investment in new fossil-fuel supplies, governments globally continue to approve thousands of oil and gas drilling permits with, and numerous new coal mines are set to be built around the world. While these investments will certainly bring short-term economic gain, they are unaligned with what has now become an undeniable science presented in the IPCC report.
Government Action Key to Success
With an estimated 80% of global fossil fuels owned or controlled by sovereign nations, net-zero emissions can only be achieved if governments fully play their part. It is clearer than ever that rhetoric must be matched with action, and we believe government behavior is the key to tacking climate change. Although we have seen some bold commitments in recent years, it seems clear that many government pledges have so far remained unfulfilled.
We believe it is up to governments to progressively incentivize the transition because we are currently not aligned to the 1.5 – or even 2 – degree goal, by any stretch. Systemic change is required, and the ideal outcome of the forthcoming UN Climate Change Conference (COP26) in November is policy that is binding. This means mandated government-enabled incentives and disincentives.
Renewable Energy Incentives Required
Governments will also need to put strong incentives into the system to encourage and accelerate the development of renewables and clean energy. Extrapolating current levels, emissions ambitions set out for 2030 will not be met, so development needs to be accelerated if we are to effect change.
Undoubtedly, this needs to be a global effort, although it will be challenging for some. Currently, some major emerging-market economies are not even projected to reach their peak emissions until 2030. Although a handful of western economies appear to have done a good job at reducing emissions, many rely on offshore manufacturing, so it is a different picture when we look at emissions on a global consumption basis. Living standards for many in such manufacturing hubs need to be addressed, and there needs to be a dramatic change in the way that goods and services are conceived, created and delivered.
Clearly, there is no single solution that can fix the climate crisis and enable recovery from the effects of the covid pandemic.. Environmental, social and governance (ESG), green and sustainable investing alone will not halt climate change, despite the powerful signal that it sends.
Alignment with Sovereigns Essential
For us as responsible investors, engagement and aggressive voting policies will remain crucial, but without the alignment with sovereign bodies, we risk failing to meet climate-change goals – and the effects could be irreversible.
Few threats are more pressing for the world than those posed by unmitigated climate change. While it represents a major systemic risk to financial markets, the consequences run far beyond mere economic impacts and potentially threaten life on the planet as we know it. Alone, individuals and companies are unlikely to be able to achieve the scale of change that is required, nor can they achieve it in isolation from wider civil society if the governance structures that dominate policy decisions provide the wrong or insufficient incentives.
[1] https://www.iea.org/reports/net-zero-by-2050
Authors
Newton responsible investment team
Responsible investment team
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This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
