G7 in Cornwall – white sands, blue ocean, and the green agenda
by Bastien Dublanc, Investment Director @ Clim8 Invest
As I was travelling on the train back to Paris last Sunday, I was torn between my two passions – great tennis (what an epic final at Roland Garros!) and sustainable finance, with expert commentary around the G7 communique dominating my newsfeed. Trying to unpick what really matters in high-level policy papers is not always easy, but it is a crucial part of our role as asset managers. This allows us to validate our assumptions and get a sense of where regulators might shift their attention.
“We emphasise the need to green the global financial system so that financial decisions take climate considerations into account”. (G7)
At the heart of Clim8’s mission is building a truly sustainable investing model. We believe that trillions have to be directed towards green finance to ensure that we comply with the Paris agreement (limiting global warming by 1.5C above pre-industrial levels by 2100).
The question is: Where do you start? Which solutions are practical enough to turn intentions into actions? And what tools are readily available to investors?
Today, not much is clear. But a couple of initiatives that were highlighted in the G7’s communique are in my mind helpful in bringing mandatory disclosures to help investors assess companies on their non-financial merits.
Firstly, climate-related disclosure is taking centre stage. Financial and non-financial companies will have to disclose how they are positioned to address climate-related risks (governance oversight, strategy) and the metrics that support a more informed vision about the potential carbon risks. The UK is expected to become the first G7 country to implement mandatory climate-related disclosure.
Secondly, but with far fewer details fleshed out, we’re pleased to see the G7 group endorsing the taskforce on natural disclosure (TNFD, created in 2020) to notably help investors to assess companies’ impact under the environmental and biodiversity angle.
Standard and common reporting rules should help investors to better compare companies’ impact on multiple fronts and direct capital towards companies that allocate capital accordingly. But at Clim8, we haven’t waited for these rules to be implemented and we thrive on finding ways to measure companies’ impact, although we acknowledge this is far from a perfect science.
What about climate?
“To be credible, ambitions need to be supported by tangible actions in all sectors of our economies and societies. We will lead a technology-driven transition to Net Zero, supported by relevant policies [….] and prioritising the most urgent and polluting sectors and activities” (G7)
Sectors that were highlighted as priorities were energy generation and distribution, transport, heavy industry, homes and buildings, agriculture, forestry and other land use.
At Clim8, our investment methodology focuses on these sectors, recognising that positive environmental impact comes from decarbonising them at a fast pace, and this should be a collective ambition.
Highlighted sectors are no different from the International Energy Agency (IEA) net-zero research paper released earlier this year and which contains much more detail about the roadmap to net zero by 2050. Here are some of the key milestones for each of the sectors discussed that provide much greater clarity relative to the G7’s statement:
- Power: no new coal plants from 2021, 1GW of wind and solar capacity addition p.a to 2030 with coal phase out in advanced economies aimed at reaching net zero in the power sector by 2035.
- Transport: 60% of car sales are electric by 2030, ICE ban in 2035, low carbon transportation fuels available for aviation and marine
- Buildings: all new buildings are net zero carbon ready by 2030
- Industry: 90% of by 2040, requiring an intense replacement cycle that is low carbon to happen between 2040 and 2050 (hydrogen development is instrumental in supporting this transition along with carbon capture and storage)
- No new coal mines or oil fields will be developed from now on.
Shifting to the pledges and numbers, G7 announced:
- The end of “inefficient” fossil fuel subsidies in G7 countries. In 2015 and 2016, up to $100 billion annually were allocated via tax breaks, public finance and direct spending.
- A $100 billion public-private contribution every year up to 2025 to help developing economies to transition towards net zero
- A $2.8 billion fund to stop using coal and support transition
- The launch of the $2 billion Climate Investment Fund that can attract in its first year up to $10 billion of financing
- A $500 million fund to protect oceans and marine life
To put these numbers into perspective, we need, according to the IEA, $4 trillion of annual investments in clean energy alone to reach net zero. In a nutshell, we’re not there yet.
Equally, countries might have kept their biggest initiatives for Glasgow (COP26, this November) to announce more granular targets and roadmaps to feel comfortable with the decarbonisation pathways of our economies (We hope…).
Accountability versus inevitable policy response
The leaders committed to the “green revolution” that would limit the rise in global temperatures to 1.5C – so far so good. They also promised to reach net-zero carbon emissions by 2050, halve emissions by 2030, and to conserve or protect at least 30% of land and oceans by 2030.
The most important word here is “promise”, however. There will be undoubtedly new net-zero pledges and targets communicated along COP26. But what if current world leaders and business leaders fail to deliver by 2025? 2030? There will be forceful, abrupt and disorderly measures aimed at rectifying our carbon emissions trajectory. And investors need to be ready for that. A task force backed by the UN – the UN Policy Response Initiative – aims at helping asset managers to anticipate what policies might come into force and how this could impact portfolios.
At Clim8, we try as much as possible to minimise these risks by following what abrupt measures could come and investing in sectors and industries that are the least likely to be exposed to these abrupt changes.
With investing, your capital is at risk. For illustrative purposes only and does not constitute investment advice.