Responsible investment

Climate change: Nine reasons why COP26 needs to work

 

Climate change is the greatest threat facing the world today and the urgency for action has increased dramatically. The sixth assessment report from the Intergovernmental Panel on Climate Change (IPCC) delivered a stark message on the pace and extent of global warming and its effects. The analysis, which drew on the expertise of more than 200 authors, labelled humanity’s effect on climate change “unequivocal” and revealed that global warming is already greater than had been thought.

Its findings form the backdrop to this year’s COP26 climate change conference in Glasgow, where leaders from all over the world are convening to discuss how they can make good on the Paris Agreement goal to limit global warming to +2°C but ideally +1.5°C above pre-industrial levels. According to the IPCC this goal is still achievable, albeit only just.[i]

We need to bolster and accelerate our efforts to tackle climate change. We need to drastically cut our greenhouse gas emissions and move the global energy sector away from fossil-based fuels, towards greener, renewable alternatives. If we don’t, we risk the global economy and a prosperous future.  

Here are nine reasons why COP26 needs to be a game-changer in the battle against climate change.  

The climate crisis is escalating

1.       Despite global lockdowns, the concentration of carbon dioxide in 2020 was 149% above the pre-industrial level, whereafter the planet began its mass reliance on fossil fuels, according to a report from the World Meteorological Organization – the United Nation’s weather agency. It found that all major greenhouse gases – methane and nitrous oxide, alongside carbon dioxide - increased at a quicker pace in 2020 than the average for the previous decade, a pattern which has spilled over into 2021.[ii]

2.       Earth Overshoot Day marks the day each year when humanity’s demand for ecological resources exceeds what the planet can regenerate in that 12-month period. Aside from 2020, as the climate crisis escalates, the date has been moving earlier – this year, it fell on Thursday 29 July. From this point, for the remainder of the year, the earth is essentially operating in a deficit, consuming more natural resources than it generates.[iii]

We’re not doing enough

3.       The International Energy Agency (IEA) has called for faster progress in the energy transition as it predicted warming would hit 2.1°C by 2100 under the current scenario. According to its latest World Energy Outlook, current pledges would achieve just 20% of the emissions cuts needed by 2030, to keep the goal of net zero by 2050 a possibility.[iv]

4.       A new study from the Systems Change Lab - of the World Resources Institute - highlighted that across some 40 different sectors including energy, heavy industry, agriculture, transportation, finance and technology, not a single industry is moving at a sufficient speed to avoid 1.5˚C in global heating beyond pre-industrial times.[v]

Global GDP will be hit by climate change

5.       The Network for Greening the Financial System (NGFS), a network of central banks and financial supervisors, estimates that if we achieve net zero, it will likely reduce global GDP by around 2% by 2050 through to 2100. However, it also expects that a ‘delayed transition’, which gets off to a later start, could be markedly higher - reducing GDP by around 5% by 2050, before losses are reduced to around 2.5% by 2100.[vi]

6.       In the case of uninterrupted climate change, the NGFS forecasts that losses would exceed 6% of global GDP by 2050 while the Organisation for Economic Co-operation and Development anticipates that by 2100, total losses would total 10% - 12% of GDP. The International Monetary Fund’s current worst-case scenario forecasts an output loss of some 25%.[vii]

The world needs to spend and invest more

7.    Only 2% of the $16trn of global government spending, used as economic support during the pandemic, has been allocated to the clean energy transition. According to the IEA this falls “well short of what is needed to reach international climate goals”. The IEA predicts that carbon dioxide emissions will reach record levels in 2023 and will continue to rise in the following years, under governments’ current recovery spending plans. It recommends $1trn of spending globally on clean energy measures. It said to reach the net zero goal, up to $4trn in annual investment was needed over the next 10 years to close the gap.[viii]

8.       Princeton University estimates the US would need to invest $2.5trn (11% of GDP) by 2030 to deliver its net-zero-by-2050 goal. The European Commission forecast an even larger €3.5trn over the coming decade (25% of GDP) while Tsinghua University predicts that China’s plan would cost RMB 138trn (circa $21.6trn) and 122% of GDP over the coming four decades.[ix]  

Researchers have suggested the true cost of the climate crisis may be far greater than thought. The work by experts at Cambridge University, University College London and Imperial College London puts the cost at $3,000 for each tonne of carbon emitted, roughly equivalent to a return flight to New York from London. The authors said their research reflects “mounting evidence” that the economic impacts of fires, floods, droughts and other effects of the climate crisis are not as transitory as had been thought. Current carbon pricing regimes in the US and Europe put the cost at less than $100 per tonne.[x]

Looking at the state of play, AXA IM CIO Core Investments Chris Iggo says: “The vast majority of companies in the world are not yet aligned with the Paris Agreement. To stand a chance of restricting the rise in global temperatures, investors need to mobilise finance to support the transition to net zero.

Investing in new technologies, in the transition leaders and engaging more forcefully with companies to meet climate objectives are all central to net zero carbon investing. There is a path open to a more prosperous and sustainable future but investors, alongside governments, need to be bolder today to ensure we are on that path.

[i] Sixth Assessment Report (ipcc.ch)

[ii] WMO Greenhouse Gas Bulletin (GHG Bulletin) - No.17 | E-Library / ‘No time to lose’ curbing greenhouse gases: WMO | | UN News

[iii] Earth Overshoot Day: How investors can help move the date | AXA IM Corporate (axa-im.com)

[iv] World Energy Outlook 2021 – Analysis - IEA

[v] State of Climate Action 2021: Systems Transformations Required to Limit Global Warming to 1.5°C | World Resources Institute (wri.org) / World is failing to make changes needed to avoid climate breakdown, report finds | Climate crisis | The Guardian

[vi] NGFS / AXA IM The cost of climate change: Action versus inaction | AXA IM Corporate (axa-im.com)

[vii] NGFS / IMF / AXA IM September 2021

[viii] International Agency Association / Carbon emissions could hit record levels in 2023, IEA says | TheHill

[ix] European Commission, Princeton University, Tsinghua University and AXA IM Research, September 2021

[x] Climate impact of a transatlantic flight could cost global economy $3,000 | Airline emissions | The Guardian / Cambridge University, University College London and Imperial College London