The Glasgow Climate Pact outlined several agreements, among them the recognition of the climate emergency at hand and reaffirmation of the Paris Agreement (COP21, 2015) goal of limiting the increase in the global average temperature to below 2°C above pre-industrial levels and pursuing efforts to limit it to 1.5°C. It was also agreed that action needs to step up, including the move away from fossil fuels (phase-down of coal power and phasing out of inefficient subsidies) and delivering on climate finance e.g. US$100 Bn a year from developed countries for developing countries.
One hundred and twenty world leaders and governments of nearly 200 countries negotiated hard and made these pledges towards the end of 2021.
Then came February 2022 which set in motion a crisis for the global energy balance.
And opportunities for governments to switch focus back to domestic energy security agendas and inflation, never mind their COP26 commitments.
In the UK alone, the National Grid has had to ask for coal-fired plants to be on standby, the government is offering up to 100 new oil and gas exploration licences for the North Sea, and citizens are being forewarned about possible blackouts. There have been other moves e.g. capping revenue for renewable energy generators, which, with a new PM now, is now reportedly to be scrapped in favour of a more straightforward windfall tax. Given the sizeable profits made by BP and Shell, there are now calls for larger windfall taxes to be levied on the traditional fossil fuel suppliers too. The push and pull continues.
Ahead of COP27, the UN published its report on nationally determined contributions which was sobering to say the least. “Countries are falling short on pledges” would be an understatement. The report notes that global CO2 emissions will go up 10.6% by 2030, on 2010 levels, which is not an improvement over the 16% increase expected on the eve of COP26. Further, current science suggests a 45% cut by 2030 will be needed to hit the 1.5C climate target.
That we need climate action urgently is not in doubt but it is increasingly clear that while governments make pledges in multilateral summits, it is a job for all of us to work so that those pledges could be delivered on.
And for that we have to boldly go where we have not been before.
(Late edit: Five days after I wrote this piece, Washington Post reports that the US government expects corporations to play an active role and take centre stage in climate action. And the Financial Times reported that the UK’s former PM Boris Johnson said that “net zero would have to be achieved through investment from the private sector in partnership with the international community rather than through taxpayers in western countries“.)
The Inflation Reduction Act (IRA) in the USA is one such bold policy proposal; it allocates more than $300 billion to energy and climate reform, and $60 billion for boosting renewable energy infrastructure, and manufacturing like wind turbines and solar panels. A Credit Suisse assessment asserts that for big corporations, the IRA “definitively changes the narrative from risk mitigation to opportunity capture”, that the ultimate public climate spending enabled by the IRA could exceed $800 billion, and the upside would come from solar, wind, battery deployment and manufacturing, clean hydrogen, and carbon capture. A broad set of opportunities indeed.
While two of the world’s largest investors, Blackrock and Vanguard, recently told the UK’s Environmental Audit Committee that “they will continue to invest in fossil fuels and do not subscribe to the view that climate change plans require an end to new coal, oil and gas investment“, venture investors such as Chris Sacca, believe that climate investing is “recession proof”.
Seeing just these two instances juxtaposed suggests that with a sharp focus on opportunity and profit, the private sector – both listed and unlisted entities – has a role to play in climate investing. Some will extract profits today, some will invest for tomorrow, some will do both. Financiers and insurers are also shaping the push-pull of the green transition urgently needed: insurers are pulling back offerings and policies from oil and gas companies, and a big UK bank has said it will no longer finance new oil and gas fields.
Where are the opportunities to invest?
The International Energy Agency (IEA) is hopeful that Russia will never regain its position as the world’s largest fossil fuel exporter and the energy crisis at hand could speed up the green transition we need.
The International Renewable Energy Agency (IRENA)’s World Energy Transitions Report 2022 presents “the fastest path to emissions reduction, consistent with the 1.5°C goal” and “prioritises existing solutions and those with the most chance of becoming viable in the coming years“. And here is a snapshot of the investment opportunity as assessed by IRENA.
And if mobilising capital to emerging and developing markets is more your thing, there is the GFANZ-commissioned Bloomberg New Energy Finance report to lend a helping hand, even if GFANZ itself appears to be going soft on Race To Zero.
What is the role of boards and board directors here?
Well, climate risk is real. As is cognitive dissonance. Over the last few years, I have heard many senior board directors in one breath speak lovingly of their grandchildren and in the next express scepticism about the need for or the effectiveness of climate action. This doublespeak is no longer appropriate or defensible. Recognising that dissonance would be the first and firmest thing boards could and should do.
The next urgent agenda item, if not already undertaken, would be to assess the climate risk in the businesses they oversee. Never mind the huge opportunities for innovation, as board directors we must not forget the first rule of risk: don’t die at the first step, live long to stay in the game. Thinking of and working for the sustainability of the business for the long term is our core job. Climate risk mitigation will require digging deep to ask questions, and creative thinking and strategic evaluation to find solutions. Since it is a moving target, it will require continual monitoring and oversight, and not just once-and-done kind of thinking.
And then there is the opportunity. Here the discourse gets to be fun and feisty but no less focused.
Is your investment policy climate-action positive? Does that mean that in the short run you may be leaving returns on the table e.g. from oil and gas? Can you afford that in the hyper inflationary environment currently prevailing? What do your stakeholders think about “green transition”? Do they focus on the “green” bit or the “transition” bit? Are there too many purity tests? How are you finding the balance for your business?
This is time for action. For all of us.
We are in a vortex, a churn – I wrote about the story of Samudra Manthan, a churning of the heavenly ocean of milk, in Hindu mythology once here – and what emerges and how we deal with it in our power and in our gift.
And the time for all of us is now.
(Disclaimer: These are my own views and do not reflect the views of the boards of JP Morgan US Smaller Co.s Investment Trust or Temple Bar Investment Trust or London Metropolitan University or Harmony Energy Income Trust, where I serve as a non-exec director, and chair various committees at the time of writing.)