Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Charlie Thomas, manager of the Jupiter Ecology Fund, discusses the investment implications for the UN Climate Change conference running this week.
As the UN Climate Change Conference gets underway this week in Paris, a key question for investors remains whether the conference can produce a meaningful result, and therefore the impact it might have on capital markets over the long term. We haven’t forgotten the hope and expectation on show ahead of a largely calamitous Copenhagen conference in 2009. Rather, it’s because of the previous disappointments – and moreover the strategic lessons that have been learned – that we believe there may be a more constructive outcome.
China’s recent commitments have gone a long way to placating “us and them” doubters
There are three key areas that have given us cause for optimism ahead of the conference. The first of these is the fact the US now appears to be on board. There has never been a climate conference ahead of which the US has come to the table with a definitive commitment to cut emissions. Now, the Obama administration has pledged to cut carbon emissions by 26-28% by 2025 compared to 2005 levels, and deliver an 80% cut by 2050. Equally important have been China’s recent policy commitments that have gone a long way to placating “us and them” doubters in the West.
The second reason for optimism is the introduction of the Intended Nationally Determined Contributions (INDC) programme and the prospect that these will be reviewed and potentially tightened every five years; while being careful to avoid ‘backsliding’. We believe this ‘bottom up’ approach may prove to be a masterstroke of diplomacy as it replaces the idea – shown to be futile in Copenhagen – that an overarching global deal could be struck by imposing a ‘top down’ cap on global emissions. Almost 150 countries have made emissions cuts pledges under the INDC scheme in recent months and we believe this scheme will help avert some of the squabbles and backroom deals that featured in Copenhagen.
The third reason for hope about a constructive outcome to the conference is the proliferation of local-level INDC-style commitments from a range of cities, regions, counties and investors under the NAZCA (Non-State Actor Zone for Climate Action) scheme. This programme was established as part of the Lima Paris action agenda in 2014, with an aim of helping to provide confidence to governments ahead of the Paris talks. These pledges have included large economic zones, such as California, the 8th largest economy in the world, which has made a significant pledge to reduce carbon emissions by 50% by 2020 versus 1990 levels, and 80% by 2050.
What Are the Obstacles to Change?
There will no doubt be sticking points, including the moot point about the legal framework that has featured in the press recently. However, the most significant of these is likely to be around the gap between what has been pledged and the aim to prevent a rise in global average temperatures of greater than 2°C above pre-industrial levels. While individual country pledges for emission cuts have generally gone further than had been widely expected, analysis by Climate Action Tracker and Grantham Research Institute on Climate Change and the Environment suggest that a gap remains; estimates from the former indicate the INDC pledges will lead to a 2.7 degree centigrade increase in global temperatures.
How the gap between what is needed and what is pledged is construed will set the tenor of negotiations, especially from countries like Bolivia, for example, which is a high risk country when it comes to climate change. While these countries understandably are likely to be vocal about the short comings of the INDC pledges, we believe tensions may be mitigated by firm plans to review the INDCs every five years.
Overall, we remain pragmatic. UN climate conferences tend to be fraught events. Seeking agreement at the supranational levels is bound to be challenging, especially given the economics and myriad vested interests involved. However we remain optimistic and believe that now key emitting countries such as the US and China have shown willing, the stage is set for constructive talks. And while there will invariably be shortcomings for now in terms of how aggressively the scientific community says the world economy needs to decarbonise, the potential introduction of a five yearly review of INDCs presents cause for optimism that the goal of limiting global warming to 2 degrees may ultimately be achieved, and has the potential to underpin the longer term growth of our investment area.
If agreed, this review process could have significant implications for our investment area and bolster investment in rapidly developing, disruptive technologies – the development of which will be a shaping force behind future policy commitments, in our view.
