MAY 2020 GLOBAL MACRO RESEARCH NEARING THE TIPPING … · CRITICAL DECADE THIS DECADE IS THE LAST...
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> Christiana Figueres, a Costa Rican diplomat and architect of the 2015 Paris climate agreement, explains why this decade is the tipping point for taking action before climate change becomes irreversible.
GLOBAL MACRO RESEARCH NEARING THE TIPPING POINTWHY THE TWENTIES REPRESENT THE CRITICAL DECADE IN HUMAN RESPONSE TO CLIMATE CHANGE
MAY 2020
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EXECUTIVE SUMMARY
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THIS DECADE IS THE LAST IN WHICH WE CAN MAKE A MEANINGFUL DIFFERENCE TO AVOID
THE WORST IMPACTS OF CLIMATE CHANGE. IN THIS PAPER, I EXPLORE THE REASONS WHY,
AND ASSESS THE GREEN SHOOTS OF PROGRESS THAT DEMONSTRATE HOW COUNTRIES
AND FINANCIAL INSTITUTIONS STILL HAVE A CHANCE TO RESPOND TO THIS CRISIS.
Science has been shedding light on the facts of climate change for decades, but the extent of our knowledge is more specific and granular now.
• Five years after the Paris Agreement, scientists now estimate that if the world were to heat by 2°C (as compared to 1.5°C), there would be three times as much infrastructure destruction, biodiversity destruction, human pain and death.
There is already evidence of what a future could look like if we do not attempt to change course.
• Within the last 12 to 18 months, we have seen damage being done to Earth in the form of extreme bushfires. In Australia, for example, fires devastated more than 8 million hectares of Australian territory (an area larger than countries like Scotland, Austria and Panama).
The direction of decarbonisation is irreversible, and businesses are preparing for this new future in a bid to remain competitive in the future landscape.
• A recent study found 65% of the US economy continues to decarbonise.
Asian countries are moving to renewables despite the challenges.
• The governments of these nations understand that in order to bring their populations out of poverty, they must continue producing energy; however, they also understand that fossil fuels are not as benign as we thought decades ago.
Climate change concerns are likely to drive advances.
• Progress will be driven by the standardisation of measurement of environmental, social and governance (ESG) metrics for governments and corporates alike. It is likely to be climate change that is going to be the most-focused-on aspect of ESG factors, for the simple reason that it is the easiest facet of ESG to understand and measure.
ESG is here to stay in the financial sector.
• This is evidenced by the Principles for Responsible Investment (PRI), which has 2,000 institutions as signatories and, more recently, the Principles of Responsible Banking, which includes 130 banks from 49 countries, equating to around USD$47 trillion in assets.
Financial institutions are waking up to new opportunities presented by ESG. • One such example is the UN-convened Net-Zero Asset Owner Alliance, a group of 20 asset owners, who
collectively hold around USD$5 trillion in assets.
WE ARE IN THE CRITICAL DECADE
THIS DECADE IS THE LAST IN WHICH WE CAN MAKE A MEANINGFUL DIFFERENCE
TO AVOID THE WORST IMPACTS OF CLIMATE CHANGE.
The science is now clear: if we continue on our current path, by 2030 we will have loaded the atmosphere so
much that irreparable damage will have been done, putting us on a path to unavoidably pass tipping points.
Basic ecosystems, including the Amazon, the Antarctic ice sheet and the Russian tundra would be on their
way to irreversible transformations. If we do not shift successfully from our current trajectory, many other
very sensitive ecosystems could quickly fail, resulting in a cascading and catastrophic domino effect.
In this paper, I explore the reasons why this decade could be our final opportunity to alter the current
trajectory of human impact on our planet. I will also assess the green shoots of progress which
demonstrate how countries and financial institutions still have a chance to respond to this crisis.
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CHRISTIANA FIGUERES
Christiana Figueres is a Costa Rican citizen and was the Executive Secretary of the
United Nations Framework Convention on Climate Change 2010 - 2016. During her
tenure at the UNFCCC, Ms. Figueres brought together national and sub-national
governments, corporations and activists, financial institutions and NGOs to jointly
deliver the historic Paris Agreement on climate change, in which 195 sovereign
nations agreed on a collaborative path forward to limit future global warming to
well below 2°C, and strive for 1.5°C in order to protect the most vulnerable. For
this achievement Ms. Figueres has been credited with forging a new brand of
collaborative diplomacy, for which she has received multiple awards.
Since then Ms. Figueres has continued to serve her one and only boss, the global
atmosphere. She sits on multiple boards and is a founding partner of Global
Optimism Ltd., a purpose driven enterprise focused on social and environmental
change. She convenes Mission 2020 and co-chairs the Global Covenant of Mayors.
In this cautionary but optimistic book, Figueres and Rivett-Carnac – the architects of
the 2015 Paris Climate Change Agreement – tackle arguably the most urgent and
consequential challenge humankind has ever faced: the world’s changing climate
and the fate of humanity.
In The Future We Choose, the authors outline two possible scenarios for the planet.
In one, they describe what life on Earth will be like by 2050 if we fail to meet the
Paris targets for carbon dioxide emission reduction. In the other, they describe
what it will take to create and live in a carbon neutral, regenerative world. They
argue for confronting the climate crisis head on, with determination and optimism.
How all of us address the climate crisis in the next thirty years will determine not only
the world we will live in but also the world we will bequeath to our children and theirs.
The Future We Choose presents our options and tells us, in no uncertain terms, what
governments, corporations, and each of us can and must do to fend off disaster.
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1SCIENCE ILLUMINATES THE PATH AHEAD
SCIENCE HAS BEEN SHEDDING LIGHT ON THE FACTS OF CLIMATE CHANGE
FOR DECADES, AND THE EXTENT OF OUR KNOWLEDGE IS MORE SPECIFIC AND
GRANULAR THAN EVER. IN 2018, WE HEARD THE UNEQUIVOCAL EVIDENCE FROM
THE INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, WHICH INVOLVES
HUNDREDS OF CLIMATE SCIENTISTS AROUND THE WORLD.
It is clear to us now that the margin set out in the Paris Agreement1, for the target temperature that
could keep us within manageable boundaries, was too broad. Five years after the agreement, scientists
now estimate that if the world were to heat by 2°C (as compared to 1.5°C), there would be three times
as much infrastructure destruction, biodiversity destruction, human pain and death.
As the science has improved, particularly on carbon measurement and effects, we now know that at an
average of 2°C of warming, some large landmasses would become uninhabitable, sea levels could rise
20 to 30 feet, and the world’s coral reefs could be completely lost2. A recent study predicted that a
billion people will either be displaced or forced to endure insufferable heat for every additional 1°C
rise in the global temperature3. That is over 10% of the global population for each degree.
Before 2020, the detailed data was not available to be clear on these facts, but now we have a high
level of certainty as to what our trajectory needs to be. There is no excuse. If we continue with current
levels of emissions, it is certain that by 2030 we will have closed the door to a path that takes us toward
a 1.5°C increase in global temperature. This represents an astonishing responsibility that our
generation bears on its shoulders: we now have the knowledge to understand the desperate need
for change. If we do nothing, by 2030 we will face a planet where our species is completely at the
mercy of natural disasters.
In order to deviate from our current trajectory, we will all need to make changes to how we live.
1 The Paris Agreement is the first-ever universal, legally binding global climate change agreement, adopted at the Paris climate conference (COP21) in December 2015. Among other things, governments agreed a long-term goal of keeping the increase in global average temperature to well below 2°C above pre-industrial levels and aiming to limit the increase to 1.5°C, since this would significantly reduce risks and the impacts of climate change. Read more here: https://ec.europa.eu/clima/policies/international/negotiations/paris_en 2 https://www.nationalgeographic.co.uk/environment-and-conservation/2019/11/climate-change-driving-entire-planet-to-dangerous-tipping 3 https://www.pnas.org/content/early/2020/04/28/1910114117
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ACTION POINTS FROM ‘THE FUTURE WE CHOOSE’
Let go of the old world. Make profound shifts
in how we live, work and relate to each other
Face your grief but hold a vision of the future.
Accept the realities of climate change but look
to what we can still create
Defend the truth. Learn to distinguish between
real science and pseudoscience3
See yourself as a citizen, not a consumer
Move beyond fossil fuels
Reforest the Earth
Invest in a clean economy
Use technology responsibly. Artificial intelligence,
robotics and the internet of things may be great allies
Build gender equality
Engage in politics. Democracies are threatened by the
climate crisis and must evolve to meet the challenge
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3 Pseudoscience consists of statements, beliefs, or practices that are claimed to be both scientific and factual but are incompatible with the scientific method.
THE EVIDENCE OF RECENT HISTORY
WHILE DRASTIC CHANGES ARE EXPECTED
TO EMERGE IN DECADES, ALREADY TODAY
THERE ARE SOME STARK GLIMPSES INTO
WHAT A FUTURE COULD LOOK LIKE IF WE
DO NOT ATTEMPT TO CHANGE COURSE.
INDEED, THERE IS ABUNDANT EVIDENCE
OF THE DAMAGE BEING DONE TO EARTH.
Even within the last 12 to 18 months, we have seen
fires far more destructive than average burning
swathes of the Amazon, California, Siberia and
Australia. Taking the latter as an example, the recent
Australian bushfires devastated more than 8 million
hectares of Australian territory, (an area larger than
countries like Scotland, Austria and Panama) burning
a billion animals, taking human lives and displacing
hundreds of thousands of people.
These recent events serve as evidence of the impact
that climate change can have on our planet and the
destruction it could wreak on people’s lives. Such
events are a stark reminder of why attempting to
lower global warming to within 1.5°C range now
is so important.
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SLOW BUT DEFINITE DECARBONISATION IN THE US TO REMAIN COMPETITIVE IN THE FUTURE LANDSCAPE
As decarbonisation continues to come to the fore, many companies in the US are busy
preparing for this new environment – even though the incumbent government has
deemed decarbonisation less of a focus. In November 2019, US President Donald
Trump initiated the formal process to pull the US out of the Paris Agreement.
Nevertheless, 65% of the US economy continues to decarbonise in a bid to remain
competitive in the future landscape. This is based on the understanding that the
direction of decarbonisation is irreversible; the only question mark is the speed and
scale of transition, but there is increasingly broad acceptance that decarbonisation
is the direction in which we are headed.
EUROPEAN UNION RAISES DECARBONISATION TARGET
Meanwhile, the European Union earlier this year moved its decarbonisation target from
80% decarbonisation to 100% by 20504, which clearly shows the Union’s commitment
to tackling climate change, despite resistance from some member countries. There
are further discussions scheduled to review other emissions targets.
CHINA AND INDIA LOOK SET TO MOVE AWAY FROM COAL EMISSIONS IN YEARS TO COME
Somewhere between the US and Europe, China continues to burn coal, but I expect the
levels of coal burned in the country to max out in the coming two to three years, before
trending downwards. Meanwhile, India is in an interesting position as one of the many
countries where solar energy is dramatically cheaper than coal. This fact, compounded
by public pressure on the Indian government about air pollution and its damaging effect
on health, means that the country is also beginning to reduce its coal burning, especially
around cities.
ASIAN COUNTRIES ARE MOVING TO RENEWABLES DESPITE THE CHALLENGES
Some other developing nations, and particularly those in Asia, like Vietnam and Indonesia,
will affect the overall growth of emissions. These countries are unfortunately in a difficult
situation, as their governments understand that in order to bring their populations out of
poverty, they must continue producing energy, just as the many of their developed
counterparts have done before them. However, these developing countries now
understand that fossil fuels are not as benign as we thought they were decades ago. They
need to provide quick, dependable and plentiful energy to their people. And they need
financing from abroad. Fortunately, development banks and private financial institutions
have turned away from coal and toward renewable energy financing.
However, that does not mean that coal is not being financed at all in Asia. In fact, almost
all the coal in Asia is currently being financed publicly by government institutions of
China, Japan, and Korea. This is because these countries are aware that coal is a strong
domestic industry, but that there is dwindling social and policy tolerance for burning
those fuels at home.
THE GLOBAL RESPONSE TO DECARBONISATION
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4 For more information please see https://ec.europa.eu/clima/policies/strategies/2050_en
GREEN SHOOTS OF PROGRESS
DIGITISATION AND ARTIFICIAL INTELLIGENCE MAY HELP TRANSITION
Technological advances, like digitisation and developments in
artificial intelligence, have enabled some sectors, like energy and
transport, to electrify and become cleaner, ubiquitous and less
expensive. The textile industry could also stand to benefit from
technological advances, with increased use of innovations like on-site
3D printing offering the potential to bring down CO2 emissions
caused by manufacturing products that are then flown to a
different location. That said, there remain plenty of sectors where
technological advances still have some way to go, particularly in
areas like agriculture and food technology, which is a key laggard and
a large contributor to climate change. Advancing technologies that
could improve these areas could go a long way to driving change.
CLIMATE CHANGE CONCERNS ARE LIKELY TO DRIVE ADVANCES
Another development which could drive significant progress would
be the standardisation of measurement of ESG metrics for
governments and corporates alike. However, the difficulty here is
that broad measurement of ESG metrics is complex and varied,
and difficult to build a consensus on as there are many facets and
stakeholders involved.
While ESG concerns will continue to mature as a core investment
tenet, it is likely to be climate change that is going to be the
most-focused-on aspect of ESG factors, for the simple reason that
it is the easiest facet of ESG to understand and measure. For this
reason, I expect that carbon concerns and climate change will be
the areas to advance most quickly, and they will pioneer the
direction for our tackling of other ESG issues.
ESG IS HERE TO STAY FOR THE FINANCIAL SECTOR
In recent years, we have seen increasing numbers of financial
institutions bring ESG concerns to the foreground. Fortunately, this
trend looks set to continue. ESG risks are being integrated into
core strategies and truly embedded into investment decisions. This
is evidenced by the Principles for Responsible Investment (PRI),
which has 2,000 institutions as signatories and, more recently, the
Principles of Responsible Banking, which includes 130 banks from
49 countries, equating to around USD$47 trillion in assets.
The focus of financial institutions on these initiatives is for a good
reason. From a business perspective, these institutions are aware
that their typical clientele is increasingly demanding social and
environmental purpose be a core tenet.
The current generation of adults in their thirties and forties that are
likely to inherit wealth (around USD$40 trillion is set to be inherited
around the world over the next two to three years) have a different
worldview to the generations before them. Increased focus on
climate change has meant that these adults are demanding their
asset managers invest their portfolios in a responsible way, perhaps
owing in part to the fact that their average life expectancy could see
them live for a further 60-plus years, and therefore the impact of their
investments on climate change may well affect them in later life.
The increased focus by institutions is also driven by regulation
globally. For example, the EU’s IORP II Directive requires pension
funds above a certain size to consider ESG issues and disclose how
their risks are considered in the Investment Policy Statement. In
the US, the Department of Labor has clarified that ESG factors can
be part of primary analysis of prudent investment decision making
and pension funds in Ontario are required to disclose in their
investment policies information about whether ESG factors are
incorporated into the plan’s investment policies and procedures.
In Australia, the Financial Services Council requires its members
to develop an investment policy stating how ESG issues are
addressed, and while there is no pensions regulation covering ESG
issues across Asia yet, there are a number of stewardship codes
– such as in Japan – that have helped to put ESG issues firmly on
the map for institutions in these local markets.
Central banks are also tuning in to the importance of considering
ESG risk. The Central Banks and Supervisors Network for Greening
the Financial System is composed of central banks concerned
about the risk to the economic system posed by climate change5.
The group, which began with eight banks three years ago, now
comprises 42 central banks globally, including the Central Bank
of China, although the US Federal Reserve is not a member. A
comprehensive report released by the group in 2019 gives a very
clear sense of how crucial they believe the role of the financial
sector is in achieving and protecting the Paris Agreement6.
FINANCIAL INSTITUTIONS WAKING UP TO THE OPPORTUNITIES
In light of this, while financial institutions are becoming aware of the
risk of climate change, they are equally beginning to understand
the opportunities that addressing it head-on represents. One such
example is the UN-convened Net-Zero Asset Owner Alliance, a group
of 20 asset owners, who collectively hold around USD$5 trillion in
assets7. The alliance was formed in September 2019, with the asset
owners committing to transition their investment portfolios to
net-zero GHG emissions by 2050. The group members are
mandating their asset managers and the companies that they
partially own to also align their portfolios, in order to attempt to
capitalise on the opportunities that exist in the clean technologies
space. We can see now a new trend emerging in which those with
long-term investment horizons that have long-term liabilities are
intentionally catalysing the de-carbonization of the global economy
because of the embedded opportunities and rewards.
5 https://www.ngfs.net/en 6 https://www.ngfs.net/sites/default/files/medias/documents/ngfs-a-sustainable-and-responsible-investment-guide.pdf 7 https://www.unepfi.org/net-zero-alliance/
A 10-YEAR WINDOW: FROM DENY, DELUDE AND DELAY TO PRODUCE, PROFIT AND PROSPER
Low carbon is not an enemy to economic growth.
We have a 10-year window and it is in this narrow window that we
are going to decide collectively whether we continue to deny, delude
and delay on climate change, or whether we wake up to the rewards
of taking ESG risks seriously.
If we act within the coming decade, we have an opportunity to move
to producing, profiting and prospering. Each of the paths open to us
will result in a very different world.
After this decade, the window of opportunity will close. This means
we all bear an enormous responsibility to act, particularly the
institutions – be they financial, governmental or others – still sitting
at the decision-makers’ table.
Let us not pray to be sheltered from dangers,
but to be fearless when facing them.
RAVINDRANATH TAGORE Poet, musician, artist, Ayurveda-researcher and first
non-European to win the Nobel Prize in Literature
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This is the final hour. It can be our finest.
But we must act now.CHRISTIANA FIGUERES
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