Paris climate deal: a major step towards a sustainable economy
Eric Borremans our sustainability expert discusses the investment implications of the historic deal.
Written by
Eric Borremans
Head of Environmental Social & Governance
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How significant is the Paris climate deal?
EB. The Paris Agreement marks a turning point in what has been a 20-year effort to tackle global warming.
PARIS AGREEMENT - KEY POINTS FOR INVESTORS
Source: Pictet Asset Management, 2015
While a deeply divisive and top-down system led to the failure of the last major climate deal (the 1997 Kyoto Protocol), the Paris Agreement for the first time saw both developed and developing nations commit to curb emissions and limit global warming to “well below 2°C” from pre-industrial times.
In the run up to the agreement, more than 180 nations, responsible for more than 90 per cent of global emissions, had submitted detailed plans to reduce CO2 emissions. Companies have already pledged billions of dollars to spend on energy research and development according to Breakthrough Energy Coalition. They are looking for market-based mechanisms to reduce emissions, notably through global carbon pricing. The agreement’s provision to mobilise public finance should encourage these companies to invest even more in the fight against climate change.
To sum up, the road to Paris has been as significant as the accord itself and this universal deal is sure to accelerate the transition to a low carbon economy.
Which industries are likely to be most affected by this agreement?
EB. Electric utilities, which account for almost 50 per cent of global energy-related emissions, are likely to be most affected, as well as carbon-intensive sectors such as oil, coal mining, transportation, construction and certain heavy industries. Within these industries, companies which can develop cleaner and more efficient technologies and products will be able to differentiate themselves and attract investment.
Companies which can develop cleaner and more efficient technologies and products will be able to differentiate themselves and attract investment.
Companies operating in alternative energy are also sure to benefit. The transition to a low-carbon economy did not begin in Paris, but the agreement will no doubt help accelerate this shift by signalling strong political will and a coherent framework. The decoupling of GDP growth from energy demand and CO2 emissions began in Europe 10 years ago and is starting in China. Renewable energy sources, which include hydro power, wind and solar, accounted for half of new capacity installations in 2015, and are expected to overtake coal by 2030 to become the largest source of power generation1. The cost of renewable energy generation has declined in many parts of the world, thanks to economies of scale, technological breakthroughs and improved financing conditions.
How can investors integrate climate change into their portfolios?
EB. Climate change is no longer confined to ethical investments. It has become an issue for all investors, especially those whose horizon is long term, because climate change represents both a material investment risk and a potential source of returns.
CLIMATE CHANGE, BY NUMBERS
Source: *UK Met Office **HSBC
There are a number of ways for investors to take advantage of the transition to a low-carbon economy. Clean energy funds, of course, are a good source of diversification. Investors can also reduce the exposure of core portfolios to carbon-intensive sectors such as coal mining, oil and coal-fired power generation.
Some investors prefer to take a more radical view and exclude fossil fuels completely. Fixed income investors can also reduce exposure to countries or regions that are most dependent on fossil fuels, and turn instead to green bonds.
The transition to a low-carbon economy is also generating demand for metrics designed to measure investors’ exposure to carbon intensive and cleaner assets. Carbon footprinting, which quantifies an investment portfolio's carbon intensity and its carbon emissions, is gaining importance. It remains a work-in-progress, however, and further methodological improvements should make results comparable over time and between different investment strategies.
France’s new legislation requiring institutional investors to disclose the carbon footprint of their portfolios is a step in the right direction.
Research providers such as MSCI ESG, Trucost, InRate and South Pole Carbon have developed different metrics for institutional investors looking to understand, measure and manage carbon risks in their portfolios2.
Credit rating agencies such as Standard & Poor’s are beginning to explore the potential impacts of climate change on sovereign risk. A more stringent regulatory environment should also help standardise the process. In this context, France’s new legislation requiring institutional investors to disclose the carbon footprint of their portfolios is a step in the right direction.
Climate change also forces investors to think about how vulnerable their portfolio might be to extreme weather events – be it a heat wave, a flash flood or drought. In the medium to long term, more volatile climate may continue to weigh on the insurance industry, which has already been hit hard by extreme weather events. Investors should also investigate the potential for increasing exposure to climate-resilient infrastructure, such as flood dykes and specialised real estate.
About
Eric Borremans
Eric Borremans leads ESG integration across Pictet Asset Management including investment policies, proxy voting and engagement practices and is a member of Pictet Group Stewardship & Sustainability Board.
Before joining Pictet Asset Management in 2013, he spent eleven years with BNP Paribas Investment Partners in Paris where he was successively in charge of Environmental, Social and Governance research and proxy voting, SRI product development, and Corporate Social Responsibility. He was previously Head of Research Services with Sustainable Asset Management (Zurich) until 2002. Eric started his career in 1992 at Environmental Resources Management (ERM) as Consultant in Brussels and Technical Director in Oxford advising multinational companies and public sector entities on environmental, health and safety issues.
Eric holds a degree in Finance from Solvay Business School (Brussels University) and an MBA in environmental management from Columbia Business School (New York). He was vice-Chair of the Institutional Investors Group on Climate Change (IIGCC) from 2010 to 2018 and board member of Swiss Sustainable Finance from 2014 to 2020. Eric sits on the Climate Bonds Initiative (CBI) Standards Board and FTSE Russell Advisory Committees on Sustainable Investments and Green Industries.
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