Many fear even the modest targets of the Paris climate agreement – holding the global temperature increase to “below 2 degrees Celsius” – will not be met.
Is it time to throw in the towel? We think not. That’s because for each of the “big four” greenhouse gas (GHG) emitters – China, India, the US and EU – we are seeing positive examples of what clear-eyed policy can do in the fight against climate change; investors just need to know where to look. Importantly, these developments also show the vital role investors have to play in tackling this most pressing of issues.
Different approach, similar outcome
Politicians are both a help and a hindrance when it comes to addressing climate change. In the US, President Donald Trump has backtracked on many environmental issues, including officially withdrawing from the Paris agreement. The polarised nature of the debate, coupled with the four-year investment cycle, has created uncertainty about future US climate change policy.
However, there are many encouraging developments at state level. Importantly, local authorities have significant power to regulate the energy industry and pass environmental law. As a result, the likes of California, New York, Massachusetts and New Jersey have passed substantial legislation targeting emissions. This includes California’s Regional Greenhouse Gas Initiative, an emissions trading scheme restricting carbon dioxide output from fossil fuel power plants. This, and other measures, account for a 5-6 per cent reduction of total US GHG emissions.
China’s political landscape is markedly different from the US, but this can be a positive for climate action. Here, the Communist party has centralised control, allowing for a long-term, consistent approach to climate change. At a time when Beijing views carbon dioxide mitigation as a real-time crisis because of the link between emissions, pollution and lower life expectancy, policy and actions can therefore adapt quickly.
Eur-up
As political structures go, the EU falls somewhere in the middle. It is a patchwork of parties from across the ideological spectrum, each with national interests. However, there exists commonality when it comes to climate change. Politicians set overarching policy framework at the European level via a series of directives, with member states required to translate these directives into domestic legislation. This includes the most ambitious emissions trading system in the world, covering approximately 45 per cent of member states’ total greenhouse gas emissions. There are concrete signs these measures are working. In 2017, emissions were 22 per cent lower compared with 1990 levels. The EU has pledged to achieve a 40 per cent reduction in greenhouse gas emissions (relative to 1990) by 2030.
And then there is India. Climate change is not a large priority for either the political class or voters. That said, we have recently witnessed some progress. Since Prime Minister Narendra Modi’s rise to power in 2014, India has announced several climate change targets. Falling prices have helped green energy capacity more than double since then, from 32 gigawatt to 79 gigawatt The government is targeting 100 gigawatt of solar capacity by 2022.
Investing for the future
Irrespective of the political landscape, the battle against climate change is creating new opportunities for investors. Take bonds. In the US, investors increasingly have the opportunity to invest directly in the states and localities that implement climate action through municipal bonds. Cities, states, and agencies use these to finance many of their infrastructure needs. This includes responding to, and preparing for, the effects of climate change.
Meanwhile, the EU is one of the easiest places to invest. Its renewables market is well developed relative to other regions. EU utilities companies are among the world’s largest issuers of green bonds.
In China, corporate green bond issuance is growing (albeit from a low base) and attracting investors. Meanwhile, capital markets have become more open. There are also more relaxed caps on foreign investment, while investor eligibility and channels into the bond market have increased.
As for India, the recently amended Electricity Act now permits 100 per cent foreign direct investments in renewable energy projects. In July, the ruling BJP Party launched a scheme to encourage global companies to establish plants that produce solar cells, solar electric charging infrastructure, and lithium storage batteries.
Despite these measures, there’s still a long way to go. Indian fossil fuel subsidies remain around six times those available to renewables. Many of the central government’s post-2020 targets are not yet backed up by binding legislation. In China, the main electricity grids still predominantly use coal. Meanwhile, a second term for President Trump could result in the US further withdrawing from its environmental obligations. This could put pressure on even the most autonomous of states.
Nonetheless, we believe that the fight against climate change is not lost. We only need to look at the EU and many US states to see what determined policy can achieve. Investors also have an important role to play, assigning capital to where it can do the most good. The foundations for more ambitious action are in place. We must ensure that we build on them before it’s too late.
