Climate Change Tracker hits record low as progress gathers pace
The current pace of progress will result in temperatures rising by 3.6°C above pre-industrial levels, events of the first quarter of 2021 suggest. The implied temperature rise last summer was 3.9°C. In this update Schroders’ Global Head of Sustainable Investment comments on changes in oil and gas investment and carbon pricing.
What is the Climate Progress Dashboard?
Climate change is becoming a defining theme of the global economy. We developed our Climate Progress Dashboard (CPD) in 2017 to provide an objective measure of the long-term temperature rises implied by changes to the levers global policymakers and companies can pull to tackle it.
The CPD tracks the rate of progress toward the commitments global leaders made in Paris in 2015 through examining areas from political ambition to renewable capacity. Today, 189 countries have joined the Paris Agreement, which aims to limit the global temperature increase in this century to 2 degrees Celsius while pursuing means to limit the increase even further to 1.5 degrees.
Summary of Climate Progress Dashboard changes between the fourth quarter of 2020 and first quarter of 2021
What does the latest Climate Progress Dashboard reading show?
The latest reading points to a long-run temperature rise of around 3.6 degrees above pre-industrial levels, down from the 3.7 degree rise recorded last quarter. Both this and the previous quarter's readings have marked new lows in the temperature rises implied by the dashboard.
Although there is much further to go before the pace of change the dashboard implies comes into line with the “below 2 degrees” range, the signs of momentum are clear and encouraging.
What next? COP26 and the 50% increase in Science Based Targets pledged by companies in the last year
2021 is likely to prove a pivotal year. The 26th Conference of the Parties (COP26) will be held in November, marking the fifth anniversary of the landmark meeting in Paris. COP26 was originally planned for 2020 but has been delayed due to Covid-related disruptions.
The conference aims to coordinate concrete action across countries to deal with the climate emergency, building on the commitments made in Paris and since. If successful, it can kickstart the sustained declines in global greenhouse gas emissions that will be needed to cut global emissions to zero over the next few decades.
As ever, the tone will be set in the run-up to the event over the next few months. We have already seen governments representing around 70% of global emissions or GDP commit to fully decarbonising their economies. The number of companies making similar Paris-aligned commitments through the Science Based Targets initiative has grown by around 50% over the last year and corporate focus on target-setting continues to gather pace.
That momentum is reflected in the moves we have seen in the Climate Progress Dashboard. For the last two quarters, the only movements in dashboard components have been toward lower temperature rises. Some measures rely on annual data that has not recently been updated and if these follow the direction of trends seen in more dynamic indicators the temperature implied will continue to fall.
Two impacts from the last quarter: falling oil and gas investment and carbon price increases
Over the last quarter, two areas have dominated the improving dashboard picture.
First, oil and gas investment has continued to drop relative to the industry’s assets. We examine the industry’s investment by comparing the capital investment of listed companies to their existing assets for an indication of the future growth implied by their spending. That ratio has declined consistently since early 2020, even as oil prices have staged recoveries.
Second, carbon pricing in the key European Union Emissions Trading System (ETS) market, as well as the smaller US Regional Greenhouse Gas Initiative auctions, continues to rise.
The EU ETS, a cornerstone of the EU’s policy to combat climate change and the world’s first and biggest emissions trading scheme, has reached new highs, with prices of more than EUR40 per tonne of CO2 in recent weeks.
We believe higher prices will be needed – and across a larger share of emissions – to drive change on the scale and breadth needed to meet climate goals. The sustained rise in prices over recent years, despite plummeting industrial output, has demonstrated the resilience of the trend and the benefits of political action.
Crude Oil BFO M1 Europe FOB $/BBI
Source: Refinitiv, Schroders estimates
European Carbon European Emission Allowance December Roll 1-15 Window
Source: Refinitiv, Schroders estimates
We are looking forward to the rest of 2021 and the months leading up to COP26 with excitement. Policymakers in most major economies have now spelt out their commitment to action. This has set the scene for co-ordinated global action that could underpin the sustained greenhouse gas emission reductions needed to put the global economy on track for decarbonisation.
Summary of changes
The chart below plots the changes in each indicator relative to the last update (Q1 2021).
Climate Dashboard
Source: Schroders calculations using inputs from various sources.
The chart below plots changes in each indicator since we launched the Climate Progress Dashboard in mid-2017.
Climate Dashboard
Source: Schroders calculations using inputs from various sources.
Note: Schroders have also recently released their sustainable investment quarterly report that includes updates on how they’ve been exercising their voting rights, which companies they’ve engaged with and their voting season 2021 outlook.
To download the report - click below...
ENDS
Climate change has come into even sharper focus for us so far this year, as our quarterly sustainability investment report shows.
22/04/2021
The sustainable investment team’s quarterly report includes updates on how we’ve been exercising our voting rights, which companies we’ve engaged with and our voting season 2021 outlook.
With the delayed 26th Conference of the Parties climate summit (COP26) scheduled to take place in November, climate action is top of the sustainable investing agenda this year.
The report delves into our activity over the period. This includes our chief executive’s letter to the UK’s largest companies asking them to publish detailed and fully costed transition plans on climate change. It also discusses our membership of the Net Zero Asset Managers Initiative.
As part of a broader Schroders campaign on sustainability and impact investing, we will be sharing relevant content over the next few weeks to demonstrate why “impact” should be considered as a fundamental investments dimension alongside Risk and Return.
BEYOND PROFIT
Profit is only the beginning. When we invest, we should expect more than financial returns.
MAKE AN IMPACT THROUGH SUSTAINABLE INVESTING
The way we direct capital not only shapes the financial returns we may achieve but also the type of impact we have on the world.
Sustainable companies not only have a positive impact on society and the environment but their business models have the potential to be more resilient and better placed to support long-term growth. So sustainable investing makes both investment and social sense.
WHY IS SUSTAINABLE INVESTING IMPORTANT?
Sustainable investing looks not only at what profits a company generates but how it generates them. This involves a fundamental shift in how companies are viewed and valued. Understanding the impact they have on society and the planet is crucial in determining their true costs. This is because negative activities are risks that can translate into a financial cost to a company. Identifying these risks means we can calculate their impact-adjusted profits.
This is the foundation of how we invest. Alongside risk and return, we consider a third dimension – impact risk – which is embedded into the investment process. Only by considering these three pillars together can we uncover a company’s real investment potential.
Your capital is at risk with investing.
HOW DO YOU MEASURE IMPACT?
impactIQ is our set of tools that measure the impact that companies have on society and the environment. Used as part of our investment process, impactIQ examines the externalities of companies, the risks that unsustainable practices pose to their business, as well as their overall alignment with the UN SDGs (Sustainable Development Goals).
WHAT IS ACTIVE OWNERSHIP?
Active ownership is a core part of sustainable investing. A regular and active dialogue with business leaders provides us with an extra dimension of understanding of how a company operates and its intentions. This is something that financial data alone cannot identify. We engage with the companies we invest in to help them transition towards a more sustainable business model.
Comments