Is it too late to halt climate change?
With the Intergovernmental Panel on Climate Change (IPCC) this year warning it is “now or never” to act decisively on climate change1 , how much progress is really being made and what impact will the Russia/Ukraine conflict have on our fight against global warming? Managers from BNY Mellon Investment Management weigh what this could mean for investors.
No sooner had the global impact of the Covid-19 pandemic started to ease and the latest global United Nations (UN)-backed climate conference, COP26, concluded than the Ukraine/Russia conflict cast fresh doubt over the timing and efficacy of any major reset on sustainability and our stewardship of the planet.
Russia’s role as pivotal energy supplier to much of western Europe – and the sheer physical destruction wreaked by the war itself – have cast fresh doubts over already stringent carbon emission targets and deadlines designed to tackle climate change.
According to a report by leading climate change researchers Climate Action Tracker (CAT) the world is currently witnessing a “gold rush” for new fossil fuel projects buoyed by the European energy squeeze and says it risks being locked into “irreversible warming” 2 .
Yet for all the potential hurdles ahead, there is some positive news. COP26 saw a new programme designed to define global goals on adaptation to climate change, a recognition that greater financial support is needed to help developing economies tackle the climate threat. Collective agreement on increasing action to bring down emissions was also matched by the finalisation of guidelines for the full implementation of the Paris Agreement3 .
Beyond the UN, a record number of big polluters have also committed to cutting Co2 emissions according to a UN-backed report by the Science-Based Targets Initiative. The report says targets have now been embraced by over 2,000 companies worth US$38 trillion across 70 countries4 .
While the Russia/Ukraine war presents fresh challenges to tackling climate change, some analysts are hopeful these hurdles can be successfully negotiated given other global commitments and cooperation.
Newton senior research analyst Richard Bullock says: “A key question will be how the world tackles climate change without cooperation between the democratic and autocratic alliances. Does this make a 1.5-2.0 degrees Celsius limit to global warming scenario unattainable?”
“Without access to some of the raw-material inputs required for energy transition from Russia or other Eurasian countries, it will make the achievement of climate targets both more costly and more challenging. However, the democratic alliance includes countries with large clean-energy resource endowments such as Australia and Canada, and there are several strategically important countries that are also likely to remain unaligned, including Argentina and Chile.”
While Bullock is optimistic some climate targets can remain on track, he does feel some markets may look to fossil fuels such as coal in the short term while the Russia/Ukraine conflict plays out.
“Ultimately, energy transition – the shift from hydrocarbons to electrons – is consistent with higher levels of national security, and therefore we remain optimistic that policy is headed in this direction. In the short term, the current energy-supply shortage will put the emphasis back on the importance of fossil fuels in meeting economic needs. The key lesson is that governments will need to factor geopolitics into a more pragmatic energy-transition policy and investors are likely generally to want to accommodate both fossil fuels and clean energies in portfolios,” he adds.
BNY Mellon Investment Management head of rensponsible strategy Kristina Church agrees a short-term swing back to fossil fuels is likely but she is hopeful renewables can take up some of the slack.
“In terms of the climate crisis, it really is a ‘now or never’ that we need to reduce emissions by 50% by 2030 – which is an incredibly short space of time in which to do so – and we are not on track to do that.”
“Against the backdrop of the Ukraine crisis, we might even see a step up in emissions larger than any achievable short-term step down. While we might see a short-lived spike in demand for coal and gas the good news for the medium term is if that there is going to be a significant ramp up in renewables. That said, all ramp ups take time and unfortunately there are no short-term fixes,” she says.
Even before the Ukraine crisis concerns about ‘greenflation’ – with new spending on green technologies leading to a rise in commodity prices and wider inflation – were becoming more vocal5 .
Some analysts estimate about US$100 trillion in global investment will be required to achieve net zero by 20250. They believe large scale spending on climate-friendly infrastructure and generation facilities could create a virtuous circle, boosting economic growth to compensate for any rise in prices.
According to BNY Mellon Investment Management chief economist, Shamik Dhar: “The standard view is that costly investment over the next 20–30 years will help avert an even costlier climate crisis in the second half of the 21st century. That’s probably right, but there’s a rosier world view that suggests our investments up front may not be as costly as most think if vast spending on clean, technologically advanced capital has spill over effects to the rest of the economy. It’s not impossible clean investment could boost productivity economy-wide, while raising living standards and reducing overall inflationary pressure.”
“Even if green investment is costly, it’s not clear who will bear those costs over the longer term. It may be the consumer, if firms can pass costs on into prices. But if competitive forces prevent that, then firms and shareholders may have to shoulder some of the cost in the form of a lower return on capital, or workers in the form of lower real wages. Finally, taxpayers may share the burden too if many of these investments have to be subsidised. In truth, those costs will probably be shared, so once again ‘greenflation’ doesn’t necessarily imply higher inflationary pressure, let alone actual inflation.”
In fact, the huge scale of investment needed to tackle the climate crisis could present a range of potentially attractive opportunities to longer term investors.
According to the International Energy Agency, new capacity for generating electricity from solar, wind and other renewables rose by a record amount in 2021 and is likely to do the same this year as governments increasingly take advantage of renewables’ energy security and climate benefits6 .
NET RENEWABLE CAPACITY ADDITIONS BY TECHNOLOGY, 2017-2023
Source: IEA, Renewable Energy Market Update – Outlook for 2022 and 2023. May 2022
Against this backdrop, areas such as wind and solar power, hydrogen, battery technology and mobility are just some areas which could benefit strongly from the global focus on net zero.
Newton multi-asset fund manager Paul Flood believes all of this could offer some major opportunity for investors.
“With Russia’s invasion of Ukraine, rising energy costs and widespread market volatility, alternatives – including renewables – could offer potential sources of return. On the renewables side, battery storage manufacturers that help with the transition to renewable power could be seen as having seen strong upgrades in revenue generation,” he says.
“These companies can gain additional revenues from providing capacity availability to the power supply grid. Furthermore, renewable energy companies in general have contributed strongly to the high-power price environment following Russia’s invasion of Ukraine. Power prices remain elevated and while this could partially reverse in the short-term, we expect long-term power price assumptions will have to rise as Europe tries to reduce its power dependency away from Russia. This should, we believe, benefit many of the renewable energy companies.”
Beyond renewables, Church says emerging markets (EMs) are another area in urgent need of support in tackling climate change.
“Developing economies face some of the most immediate threat from climate damage and urgent need for climate adaptation financing. We would expect policymakers to concentrate more work there to try and encourage more private money and investment across these markets and towards climate mitigation solutions too – not just in the energy space but also in all the sectors where they need to decarbonise, such as transport. It may be possible for some less developed markets to ‘leapfrog’ more developed ones in terms of implementing new technologies in areas such as mobility,” she says.
Simon Cooke, impact investment manager at Insight, adds: “Investing responsibly in the emerging markets is increasingly seen as a way to support meaningful positive environmental and social outcomes in developing markets. Initially the market was dominated by financials and sovereign issuers from China, Korea, and India. Since 2019 however, the asset class has rapidly evolved and grown, with more than US$250bn outstanding as at April 2022, issued by 49 countries overall7 . The hard currency emerging market impact bond universe now includes over 200 issuers8, across all major sectors.”
While Church welcomes such developments, she also hopes the fact this year’s COP27 event is to be hosted by Egypt may help focus minds on the needs of emerging economies and ways of helping them to adapt to a changing climate.
“What didn’t come across strongly enough at COP26 is the need to address adaptation – the idea that financing can’t just go on mitigation but will have to help adaptation and provide infrastructure spending to support those countries facing some of the deepest risks from climate damage” she concludes.
1 Lexology/Freshfields Bruckhaus Deringer. ‘It’s now or never’: IPCC publishes climate change mitigation report. 19 April 2022.
2 BBC. Climate change: Ukraine war prompts fossil fuel ‘gold rush’ – report. 09 June 2022.
3 UN Climate Change News. 4 key achievements of COP26. 24 November 2021.
4 BBC News. Record number of polluters set C0” emissions targets. 12 May 2022.
5 FT. ‘Greenflation’ threatens to derail climate change action. 02 August 2021.
6 IEA. Renewable Energy Market Update – May 2022.
7 Bloomberg as at end April 2022.
9 Nature. COVID curbed carbon emissions in 2020 – but not by much. 15 January 2021.
10 BBC Future. Covid-19 paused climate emissions – but they’re rising again. 15 March 2021.