The PRI-commissioned Inevitable Policy Response (IPR) project aims to prepare institutional investors for the portfolio risks and opportunities associated with a forecast acceleration of policy responses to climate change. The IPR contends that governments will be forced to act more decisively than they have to date, exposing financial portfolios to significant transition risk.
The project is led by Vivid Economics and Energy Transition Advisors. Combined with research partners and investor strategic partners, the latter including BNP Paribas Asset Management, this forms a Climate Transition Forecasting Consortium.
A scenario developed by – and for - investors
The IPR foresees that a combination of investor, corporate and public pressure around net zero, climate impacts, volatile weather patterns and low-carbon technology developments will push government policymakers to make the changes necessary to reach a below 2C pathway by 2025.
As the scenario has been constructed for – and by – investors, its outputs are more easily used by this group, whether in risk/valuation modelling, portfolio construction or to support engagement activity.
Unlike other climate scenarios that are reverse-engineered from a pre-defined temperature goal, this one works on the basis of an in-depth and realistic probability assessment of policy and technology innovations, taking into account current institutional and behavioural limitations.
More power behind the energy transition…
Drawing on insights from 200 global policy experts, this analysis provides a first full regional breakdown that reveals a complex and divergent landscape for policymakers and investors.
It outlines how sweeping policy changes in the coming years will lead to transformative changes across the energy system, including:
- Zero-emission vehicles accounting for around 30% of all vehicles on the road by 2030. This will accelerate the phasing-out of oil; already near its all-time peak, production and consumption would decline significantly after 2026/27.
- Wind and solar power will generate over 30% of global electricity by 2030, which is more than three times today’s total.
…and a super-size change in diet
Unlike many climate models, the IPR overcomes a major blind spot by examining food and land-use systems and modelling how they interact with the energy system and real economy. This reveals that rapid changes in food and land-use systems will also play a crucial role in limiting global warming.
The IPR scenario foresees massive shifts in food production, with land use becoming a net carbon sink within 30 years. The world should reach ‘peak meat’ consumption in 2030, with Nature Based Solutions (NBS) already accelerating.
But that’s still not enough
Even if these forecast rapid transformations were achieved, they would still not limit further global warming to 1.5C, nor allow the world to reach net zero by 2050. That would require more concerted, far-reaching policy action, and sooner than currently envisaged.
To bolster policy advocacy around the world and help galvanise increased action with the USD 90 trillion from banks and investors committed to aligning with net zero by 2050, the IPR has developed a new Required Policy Scenario (RPS).
This is comparable to the IEA Net Zero Emissions (NZE) scenario. However, by deepening the analysis of the food and land systems, it offers the first roadmap of policies needed across both the energy and land use systems to hold temperature increases to 1.5C.
While rising carbon prices play a pivotal role in driving change, analysis suggests it would not be politically feasible to drive carbon markets and carbon pricing sufficiently rapidly to achieve the required shift.
Governments around the globe would thus need to intervene directly in markets to set performance standards, including strict bans, to drive a step change in the energy transition.
- An end to deforestation across the entire globe, ideally by 2025. If not, the energy system has to absorb greater CO2 reductions, potentially through bioenergy and carbon capture & storage systems.
- Crucially, unabated coal fully decommissioned in China by 2035.
- Phase-out of new fossil fuel-powered cars in almost all markets by 2040 and transition to 100% clean vehicular power globally by 2045.
2023-25: A policy tipping point
The IPR scenario indicates that the next few years will see a trigger moment, with two major pressure points converging to push governments to accelerate policy implementation:
- In 2025, countries that signed up to the Paris Agreement will submit their third round of climate pledges after the Global Stocktake in 2023. These will show how far the world is from meeting the Paris goals and act as a crucial impetus for governments to speed up policy action.
- At the same time, as technology costs fall and the realities and impacts of climate change become increasingly visible, civil society, business and investor pressure on national governments across the world will increase.
Roadmap data for investors
IPR is working with its strategic partners, including BNP Paribas Asset Management, to define which data is critical for asset owners and managers when considering their company and sector valuation models in the context of accelerated climate policy effects.
The policy scenarios provide a great endorsement of – and a much clearer roadmap for – sustainable thematic investments, such as the strategies BNP Paribas Asset Management offers around the energy transition and the environment.
The IPR outputs include a country-level detailed assessment of the climate policies that are under consideration and their relative likelihood/importance of enactment. This information should be useful for asset managers seeking to develop their sovereign engagement strategy in relation to sustainable investment themes.
In our view, forward-looking scenarios are critical in a changing world. This new analysis from IPR provides a wealth of information to support company and sector analysis, portfolio construction and guide stewardship initiatives as we navigate the economic transition.
The discrepancy between the forecast and required policy scenarios underscores the fact that we’re not going to get to 1.5C without serious action. Companies, investors and governments committed to achieving net zero by 2050 must accelerate their efforts, now more than ever. That is the key message for COP26.
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.
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