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COP26: Why net-zero is key to meeting the Paris Agreement

As COP26, the UN climate change conference, starts, Alex Bernhardt, global head of sustainability research, outlines some of this year’s hard-hitting reports on the push for net zero emissions and what they mean for investors.

As the world (with a few notable exceptions) descends on Glasgow from 31 October to 12 November for COP26, companies and non-governmental organisations will be keeping a close eye on two main areas: 

  • The negotiated outcomes relating to the outstanding issues in the Paris Agreement’s rulebook – most notably on carbon markets
  • Whether adequate finance flows to developing countries are agreed.

Eyes will also be on any further developments in the Nationally Determined Contributions (NDCs), i.e. countries’ pledges to reduce emissions in line with the Paris Agreement’s goal to limit the rise in global temperatures to 2C, and preferably 1.5C, above pre-industrial levels.

Either as part of or on top of the NDCs, which are centred on 2030 targets, more than 135 nations worldwide have now set some form of net-zero emissions target; 13 have been transposed to national law.

The timelines of these pledges, which would see emissions reduced by as much as possible and hard-to-abate residual emissions cancelled out by carbon removal efforts, differ.

Some European countries are aiming for 2045 (or earlier), most are targeting 2050 and others, including the world’s largest emitter, China, have set a deadline of 2060. It’s worth pointing out that some countries’ net-zero pledges are not yet matched by the ambition shown in their submitted NDCs.

IPCC: 1.5C possible if global CO2 emissions at least reach net zero

This August, the IPCC (Intergovernmental Panel on Climate Change) released the first part of its Sixth Assessment Report, or AR6, on the physical science of climate change. This is to be followed in 2022 by separate reports on climate change impacts and mitigation, and then an overall synthesis report.

Part 1 of AR6 finds that although some temperature rises are inevitable, they could be limited to 1.5C if global CO2 emissions at least reach net zero. Rapid and sustained reductions in methane emissions are advocated. The IPCC estimates a remaining global carbon budget of 300 gigatonnes to retain an 83% chance of staying below 1.5C. This equates to around seven years of emissions at current levels.

AR6 is based on a number of illustrative scenarios, and follows the IPCC’s special report on 1.5C, published in 2018. SR1.5 states that to reach 1.5C with a limited ‘overshoot’ – i.e. where temperatures temporarily exceed this threshold and then fall – global CO2 emissions must decline by 45% on 2010 levels by 2030 and reach net zero by 2050.

SR1.5 outlines a number of scenarios with differing portfolios of mitigation measures to get there. All these depend to some degree on CO2 removal or negative emissions technologies to draw CO2 from the atmosphere.

IEA: There should be no investment in new fossil fuel projects

It’s clear the science says that to reach 1.5C, we need to collectively aim for carbon neutrality by mid-century, but the IPCC is not the only body to release a landmark report on net-zero this year.

In May, the International Energy Agency (IEA) released its inaugural net zero report and its Net Zero by 2050 Scenario. The IEA said that to reach net zero, there should be no investment in new fossil fuel extraction projects – a stark message from an organisation that was created to support nations’ efforts to secure oil supplies.

The report is accompanied by 400 key milestones to reach net zero that together represent what the IEA calls “a complete transformation of the global energy system”.

It contains some heroic assumptions on how the future will look. The scenario sees GDP increased by 40% in 2030, while at the same time, the world is using 7% less energy. In 2030, around 630 GW of solar panels are being installed annually. That’s the total amount that exists today.

The IEA expects around 60% of cars bought in 2030 to be fully electric, compared to 4.6% now. This means around 20 battery production ‘gigafactories’ need to be built every year for the next 10 years.
 
In addition, around half of the emissions reductions needed by 2050 in the IEA’s scenario are assigned to technology that doesn’t exist yet, meaning investments need to increase significantly in carbon capture and negative emissions technologies that take CO2 out of the atmosphere.

What are the implications?

While the scenarios differ, the net-zero pathways outlined by the IPCC and IEA have some commonalities:

  • Renewable electricity capacity is ramped up significantly  
  • This is twinned with a push towards electrification in mobility and industry  
  • Investment in fossil fuels decreases significantly  
  • Concurrent investment in carbon removal and negative emissions technologies is critical.

The financial sector is seeing its own net-zero collectives evolve to support this shift – most notably this year in the form of the Glasgow Financial Alliance for Net Zero (GFANZ). This was formed to bring existing net-zero initiatives, including the Net Zero Asset Managers Initiative and the Net-Zero Asset Owner Alliance, under one umbrella.

A requirement to join GFANZ is accreditation from the UN’s Race to Zero campaign, alongside the use of science-based guidelines to set net-zero targets.

It’s worth pointing out that the Science Based Targets initiative (SBTi) has recently said it will now only accept 1.5C-aligned targets. It has just released the first global standard for net-zero business. This provides a credible and independent assessment of corporate net-zero target setting and enables companies to align their near- and long-term climate action with limiting global warming to 1.5°C.

As the IEA outlined in this year’s edition of its World Energy Outlook, the world is not yet on track for its net-zero journey.

Discussions in Glasgow are vitally important, as are the actions of investors who can support the required future technologies, steward the organisational changes needed, and advocate for effective policy changes that also facilitate a just low-carbon transition. Most importantly, its key these actions all foster real change in the real economy, so the emissions cuts needed to get to net-zero are truly delivered.

This blog will be followed by further deeper dives in both the IPCC’s and IEA’s analyses, and what they mean for investors.

[1] Daniel Huppmann, Elmar Kriegler, Volker Krey, Keywan Riahi, Joeri Rogelj, Katherine Calvin, Florian Humpenoeder, Alexander Popp, Steven K. Rose, John Weyant, Nico Bauer, Christoph Bertram, Valentina Bosetti, Jonathan Doelman, Laurent Drouet, Johannes Emmerling, Stefan Frank, Shinichiro Fujimori, David Gernaat, Arnulf Grubler, Celine Guivarch, Martin Haigh, Christian Holz, Gokul Iyer, Etsushi Kato, Kimon Keramidas, Alban Kitous, Florian Leblanc, Jing-Yu Liu, Konstantin Löffler, Gunnar Luderer, Adriana Marcucci, David McCollum, Silvana Mima, Ronald D. Sands, Fuminori Sano, Jessica Strefler, Junichi Tsutsui, Detlef Van Vuuren, Zoi Vrontisi, Marshall Wise, and Runsen Zhang; IAMC 1.5°C Scenario Explorer and Data hosted by IIASA; Integrated Assessment Modeling Consortium & International Institute for Applied Systems Analysis, 2019. 10.5281/zenodo.3363345 | data.ene.iiasa.ac.at/iamc-1.5c-explorer


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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