Climate change has long been a challenge that requires globally coordinated answers. In the year ahead, where do we stand on the central issues, such as limiting the rise in temperature and shifting to net zero emissions? Furthermore, are investors and companies ready for the economy of the future?
Missed the Summit? Watch the replay
The European Union (EU) is making solid progress in its efforts to tackle climate change. In 2010, for example, it put forward a 10-year proposal – dubbed Europe 2020 – that targeted a reduction in greenhouse gas emissions, energy-efficiency gains, and the introduction of renewables to the energy mix. Even though its 27 member states are steadily working towards these targets, speaking at Fidelity’s global virtual summit, José Manuel Barroso, former President of the European Commission, believes there is still a long way to go, admitting that “we have not yet solved the problem.” More positively, he believes that there is now a wider recognition of the issues we face.
Unlocking a solution
Although the EU can lead by example, Barroso points out that the bloc is “responsible for less than 8 per cent of global emissions.”[1] Ultimately, the key to a successful transition to a low-carbon world is held by the US and China. He notes that without the active engagement of these two countries, there is no possible way of solving the climate change challenge.
All said, there has been an evolution in US policy since the election of Joe Biden in November 2020. Meanwhile, Barroso observes that China was not initially enthusiastic about the transition agenda when, as the EU Commission’s newly appointed president, he first highlighted the matter in 2004. However, attitudes have since changed and “China now accepts it has to do much more,” he says.
Barroso also describes the diplomacy of climate change as “one of the most difficult and complex issues”. Even countries that are sincere in their willingness to push for decarbonisation do so in a way that protects specific sectors, like coal. “That’s why I believe it will be difficult to get either China or the United States to commit to legally binding agreements on these matters,” he explains.
Commitments at COP26
On a more upbeat note, Barroso highlights progress made at the COP26 climate change conference in Glasgow. Yet, he qualifies this by pointing out that although most leaders were sincere, “they wanted to keep some margin for discretion.” Here he specifies India’s support for coal and its request to change the language of the summit’s final agreement from a “phasing out” of coal to a “phasing down.” At the same time, Barroso acknowledges that, as a rapidly growing economy, India has a greater dependence on fossil fuels than more developed economies.
He also observes that some countries are still “going their own way,” comparing this to the emerging markets’ crisis in the late 1990s. Out of that event sprung the G20 intergovernmental forum. “The G20 was important, as it gave a coordinated response,” says Barroso. Not only was there the creation of international bodies like the Financial Stability Board, but “some good steps” were also made in terms of global convergence. Currently, he doesn’t see quite the same level of international collaboration or cooperation. Indeed, he highlights growing tensions and geopolitical friction.
Corporate focus on ESG
Turning to environmental, social, and governance (ESG) factors and these are described by Barroso as “amazing.” In particular, he highlights the rapid adoption of net zero emissions targets across all industry segments. For instance, S&P 500 companies increasingly cite ESG issues on their earnings calls. “It’s difficult to have a conversation that doesn’t begin with ESG!” says Barroso. Pension funds, sovereign wealth funds – including those of countries that still produce fossil fuels – institutional investors, and larger corporates are “very interested in this issue.”
So, with the trend towards ESG now seemingly unstoppable, a new challenge subsequently appears – how to proceed from this point onwards?
Winners and losers
What is not disputed is that any shift to net zero will come at a cost. Barroso estimates that the price of a global transition will be in the region of US$60 trillion over the next two decades[2].
Financing this colossal amount will require capital from public and private markets. Help should also come from cost efficiencies that arise from technological advancements. Topping this off will be effective policy regulation to create what Barroso calls “the right incentives.”
He again cites China as an initial laggard that has discovered the benefits of a greener economy, observing that the country “is now the number one producer of solar panels.” He returns to the technology theme, stating that carbon capture and hydrogen are two areas to watch closely. Consumer-oriented sectors will also do well as people will drive market preferences.
“If you want to be among the winners, then you’d better adapt and align your investment priorities to meet the economy of the future,” he concludes.
[1] Source: BBC/Rhodium Group
[2] Source: RIC World Built Environment Forum; Fidelity International, Dec 2021
