Good news on climate change. After the success of the 21st Conference of the Parties (COP21) in Paris late last year, it now appears greenhouse gas emissions (GHGs) have come down and could be staying down and not just as a result of slower economic growth and the accompanying drop-off in manufacturing output, traffic, etc. Positive change looks to be moving the world closer to levels of GHGs that should help limit global warming to less than 2 degrees Celsius.
In 2015, energy-related CO2 emissions stabilised for the second year in a row (see chart below). In particular, the largest emitters (also the world’s largest economies) – China and the US – both registered a decline. In our view, the downtrend in carbon-dioxide emissions confirms the decoupling of greenhouse gas volumes from economic growth.
Renewable energy is likely to have played a critical role
In 2015, around 90% of new electricity generation involved renewable energy, of which wind-generated power alone accounted for half. Moreover, less coal was used in electricity generation. This can certainly be seen as a step in the right direction, but we believe it is not sufficient. To limit global warming to 2°C, emissions of heat-trapping CO2 should fall to zero in the second half of this century.
Data released ahead of COP21 indicated that October 2015 was the warmest month ever observed and that seven of the warmest months ever occurred in 2015. The numbers also indicated that half of the ‘controllable’ 2⁰C increase in global temperatures has already been realised.
Some scientists have argued that a focus on a 2⁰C cap is misleading in that such a target creates the impression that this is an attainable goal and that at this level, the effects of global warming could be contained. Whoever is right, it would appear there is an undoubtable need for action, going beyond any GHG reductions pledged by countries at COP21.
Climate action: money talks
In the financial industry, systemic risk from global warming is being assessed more and more, including the impact on (re)insurance companies, asset owners and financiers. Increasingly, investors are taking a stance, both those investors investing in assets for themselves and investors managing money on behalf of others including asset managers and pension funds.
The momentum picked up in the run-up to COP21, according to research by Novethic. Investors are gauging the impact of their investments on climate change – measuring the carbon footprint of their portfolios – and taking action. More than 130 investors with assets worth almost EUR 9.5 trillion have committed to determining this footprint and a growing number has attracted notable media exposure by announcing that they are divesting from fossil fuels, a major source of CO2. Among them, pension funds have featured, with announcements of pull-outs of millions of euros of investments in fossil fuels, notably coal, or of a deadline for their withdrawal.
Taking steps to make a difference
Divestment is one form of action, but not the only one. Often, investors opt for a combination of measures and some even implement all four forms of action: divestment, shareholder engagement, green investments and portfolio decarbonisation. A growing number have committed to publishing, or started to report, carbon footprints. Some scepticism about the value of such disclosures might be justified as long as the methodologies have not been standardised and comparisons are hard to make. On an upbeat note, despite the lack of harmonisation, there is at least more transparency.
Alternatives to fossil fuels can include investments in the low-carbon indices by providers ranging from big-name companies MSCI, S&P DJI and FTSE to specialists such as Solactive and Edhec Risk. Next to those options in passive investment management, investors can put their money in (mutual funds investing in) energy efficiency or adaptation projects, renewable energy, sustainable food, paper and pulp production, ‘human development’, green bonds and green infrastructure.
Sustainable and responsible investments (SRI) is one of the nine themes which we think reflect investors’ key priorities this year. Linked to those themes we have chosen funds which we believe represent the most relevant solutions to the challenges of the current market environment as well as the evolving needs of our clients.
BNP Paribas Asset Management’ offering includes a broad range of SRI products to meet the needs of clients who are keen to combine return potential with making a positive impact on the environment and society.
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