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Newton: The high price of a global recovery

Lloyd McAllister is head of ESG research at Newton Investment Management.

Why we believe governments must lead amid the stark realities of climate change in the post-Covid recovery.

The need for economic expansion to sup- port the post-Covid recovery collides with the scientific findings of the latest United Nations Intergovernmental Panel on Climate Change (IPCC) report that calls for an immediate reduction in carbon emissions. August 2021 saw the publication of the UN’s sixth IPCC report, which provides clear evidence that human intervention is driving climate change. It warns that, without immediate and rapid reductions in carbon emissions, we are likely to see devastating and potentially irreversible consequences as soon as the next decade. The question governments, policymakers, corporations and individuals will now be asking themselves is what can be done to avert catastrophe.

Fossil-fuel demand bounces back

The findings of the report come at a time when the need for post-Covid economic recovery has led governments and central banks to support recovering economic activity to the tune of trillions of dollars in liquidity globally. This abundance of capi- tal has encouraged an acceleration in eco- nomic growth and consumption, which has, in turn, already increased the demand for coal. US gas consumption reached a record high in July, indicating that the pause in emissions experienced through- out the pandemic was temporary, buying us only a small amount of time before activity and emissions began accelerating again.

Despite the International Energy Agen- cy’s Net Zero by 2050 report1 finding that there is no need for further investment in new fossil-fuel supplies, governments globally continue to approve thousands of oil and gas drilling permits, and numer- ous new coal mines are set to be built around the world. While these invest- ments will certainly bring short-term eco- nomic gain, they are unaligned with what has now become an undeniable science presented in the IPCC report.

Government action key to success

With an estimated 80% of global fossil fuels owned or controlled by sovereign nations, net-zero emissions can only be achieved if governments fully play their part. It is clearer than ever that rhetoric must be matched by action, and we believe government behaviour is the key to tackling climate change. Although we have seen some bold commitments in recent years, it seems clear that many gov- ernment pledges have so far remained unfulfilled.

We believe it is up to governments to pro- gressively incentivise the transition because we are currently not aligned to the 1.5 – or even 2 – degree goal, by any stretch. Systemic change is required, and the ideal outcome of the forthcoming UN Climate Change Conference (COP26) in November is policy that is binding. This means mandated government-enabled incentives and disincentives.

Renewable energy incentives required

Governments will also need to put strong incentives into the system to encourage and accelerate the development of renewa- bles and clean energy. Extrapolating current levels, emissions ambitions set out for 2030 will not be met, so development needs to be accelerated if we are to effect change.

Undoubtedly, this needs to be a global effort, although it will be challenging for some. Currently, some major emerging- market economies are not even projected to reach their peak emissions until 2030. Although a handful of western economies appear to have done a good job at reduc- ing emissions, many rely on offshore manufacturing, so it is a different picture when we look at emissions on a global con- sumption basis. Living standards for many in such manufacturing hubs need to be addressed, and there needs to be a dramatic change in the way that goods and services are conceived, created and delivered. Clearly, there is no single solution that can fix the climate crisis and enable recov- ery from the effects of the Covid pandemic. Environmental, social and governance (ESG), green and sustainable investing alone will not halt climate change, despite the powerful signal that it sends.

Alignment with sovereigns essential

For us as responsible investors, engage- ment and aggressive voting policies will remain crucial, but, without the align- ment with sovereign bodies, we risk fail- ing to meet climate-change goals – and the effects could be irreversible.

Few threats are more pressing for the world than those posed by unmitigated climate change. While it represents a major systemic risk to financial markets, the consequences run far beyond mere economic impacts and potentially threaten life on the planet as we know it. Alone, individuals and companies are unlikely to be able to achieve the scale of change that is required, nor can they achieve it in isolation from wider civil society if the governance structures that dominate policy decisions provide the wrong or insufficient incentives.

1) https://www.iea.org/reports/net-zero-by-2050

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