Does climate change still matter?

Until the coronavirus pandemic hit, climate change was central to the agenda for most governments, companies, and the public – and increasingly for investors. Rightly, attention is now focused on the human and economic effects of COVID-19.

Given market volatility and forthcoming economic hardship facing many, investors may understandably question the importance and influence of climate change on their portfolios. However, the climate breakdown continues to worsen in the background; and, whenever we emerge from the pandemic, will again be a critical, global challenge.

For investors, shifting focus to the longer time horizon of climate change may help them to endure short-term volatility. It may also help them to find valuable opportunities to support rebuilding the economy in a lower carbon and more sustainable way.

A global environmental experiment

An unexpected beneficiary of the mass quarantining and industrial “shut-down” this year is the environment. Though unintended, it hints about a world with fewer emissions. For many, air is tangibly fresher. Even in cities, birdsong fills the skies and the atmosphere visibly cleaner.

From a multitude of satellite images, we have been shown the reduction in carbon emissions over our cities and countries. A tentative, and already revised, estimate calculates a potential 5.5% drop in carbon dioxide (CO2) emissions compared with 2019¹.

Continuing on trend would make 2020 the year with the largest ever annual fall in CO2 emissions, larger than any prior economic crisis or period of war.

Climate change marches on

While the current dip in emissions is having positive effects, unfortunately these are both limited and transient. After decades of increasing emissions, the average global temperature has already risen by one degree celsius. Last year, the physical consequences had begun to be more prominent with acute events such as wildfires, hurricanes, flooding, or droughts and as well as chronic changes to local climate or sea levels.

Even with a dip in global fossil CO2 emissions this year, our trajectory is the same and the concentration of CO2 in the atmosphere will continue to rise. In fact, the first quarter of 2020 has been verified as the second warmest on record which stretch back to the 1850s.

Only when total annual emissions are net zero will CO2 concentrations no longer rise – and global warming stabilise. To get on track for the Paris Agreement’s 1.5C target, it is estimated that these emissions would need to fall by 7.6% every year during this decade.

Decoupling growth and emissions

As seen in recent months, economic output and greenhouse gas emissions are closely, and positively, correlated. A more useful relationship though is the ratio of these two. Carbon intensity (at the factory, company, country or global level) illustrates the emissions per unit of activity.

Addressing climate change doesn’t require a smaller economy, or a decade-long depression. Instead, transition to a low-carbon economy means primarily less emission-intensive growth. Decoupling growth and emissions, though, is obligatory to make this possible.

Economic recovery with less carbon

The United Nation’s Conference of Parties (COP) 26, originally planned for November, will see governments report on progress, and new plans, towards this decoupling. While the conference has been postponed until next year, its commitments have not.

For example, having announced the European Green Deal last December, during April the European Commission has been reviewing the list of 2020 priorities. A few elements deemed less essential (e.g. sustainable aviation fuels, empowering the consumer) are expected to be delayed into 2021. While others may be added to this list, the core aspects of climate policies and key initiatives have been maintained.

As countries consider how to restart their economies, many governments see an opportunity to integrate climate change measures into stimulus efforts. The range of potential options is impressive – e.g. carbon targets for industries receiving bailouts, dedicated green infrastructure funding, “clean” energy tax credits or transition support for fossil-fuel workers to the green economy.

Adjusted risks and opportunities

Globally if the aim is to emerge from the pandemic ready to resume a concentrated effort against climate change, it makes sense to steer the recovery towards sustainable companies and green industries. For investors then considerations of risk and opportunities broadly remain consistent – though with some adjustments.

In the February Market Perspectives we highlighted evidence of the rising frequency and intensity of extreme weather events and their potential implications for investors. Unfortunately, any near-term natural disasters could be made worse by social distancing and already strained governmental budgets.

At the same time, the crisis provides evidence of the reduction in, or estimated, CO2 emissions of organisations for the secondary effects of such disasters, such as disrupted global supply chains. Investors may want to track the businesses that are adapting, and those who aren’t, to the impact of the pandemic.

Same opportunities, new priorities

For investors who actively want to support decarbonisation of the economy, the aims, and solutions, to address the climate crisis are similar as they were before the pandemic. In our Outlook 2020, we highlighted five growth markets in a transition to a low-carbon economy - renewable energy, electric mobility, energy efficiency, water and waste management or agriculture.

However, the priority and attractiveness of these themes, and associated the sub-sectors, has shifted and only in the coming months will become clear. In the interim, investors can start by understanding the baseline opportunities of these sectors, and keep a watchful eye on where governmental stimulus and policies, public sentiment, and economic recovery take hold.

Building a better future

Before the COVID-19, we knew much of the next decade would need to focus on how to decarbonise the energy system and reverse the trend of rising CO2 emissions.

Shortly before publication, we celebrated the fiftieth year of Earth Day, which aims to raise our awareness and action towards the natural environment. During the human tragedy of the pandemic, this year’s cleaner skies will be a small, but noteworthy, consolation.

The greater challenge, and opportunity, for investors is to connect their short-term response with long-term portfolio positioning to support a low-carbon economy, which can make us all wealthier and healthier for it.

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