Tackling the Climate Crisis: Mobilizing the Transition

As we mark the 50^th Anniversary of Earth Day, we highlight the need for a collective effort in order to combat the impacts of climate change. In this blog, we explore the important role that investors play in mobilizing the transition to reduce emissions and how sustainable solutions can support this.

The Impacts of Climate Change

The first Earth Day, held in 1970, was a unified response to an environment in crisis. Holding significance for the past 50 years, this has resulted in an evolution in sustainable development, and a heightened response to the dramatic imagery of the impacts of climate change.

Since then the world’s economy has grown by almost 45 times[i] which has added to the challenges. In response to irreversible climate damage, The Paris Agreement was signed into force on Earth Day 2016. Regardless of the technological, political and societal momentum demonstrated in the past 50 years, increased action, collaboration and bold innovation are needed more now, than ever before.

Despite the current reduction in emissions due to a drop-in economic activity, demonstrating the impact that we have on carbon and climate, global temperatures remain higher than previously seen as warming records continue to be surpassed year on year[ii].  The period between January and March 2020 was the hottest recorded in Europe and Asia, the second globally.

As wildfires raged, the ferocity of hurricanes intensified, Arctic sea ice reduced, and devasting flooding increased, we contributed 40.5 billion tonnes of carbon dioxide into the atmosphere over the past five years, potentially leaving the planet 4 degrees warmer by 2050 if we continue along this pathway.

Of the extreme weather events experienced over the past 10 years, 76% are proven to be due to human influence[iii].

Throughout the last year, climate-related events caused more than $100 billion of damage, across multiple economies, with seven events costing more than $10 billion each[iv].

Mitigating these impacts is not only about reducing warming and carbon emissions but protecting the natural cycles that are fundamental to our health and well-being, and our economy. The links between people, planet and prosperity have never been more evident.

Time for Change

Over the past ten years, there has been an uptake in adaptive and mitigative measures to combat the physical impacts of climate change in order to protect communities and supply chains. Additionally, there are transitional responses that are pivotal to keep temperatures below a level to reduce the intensification of current impacts.

The results of Paris kickstarted a global response to climate change introducing tighter reduction targets at a national level, and a societal level response demanding governments do more and catalyzing a demand for more environmentally friendly goods and services. As a result, companies have altered or changed their business models, offering consumers products which reduce emissions impact and contribute towards transition pathways. Increases in electric vehicles, consumer goods & green buildings (LED lights consume 16% of the energy of an incandescent bulb[v]) and renewable energy (with over 100 major cities using at least 70% renewable energy[vi]), has resulted in positive change.

The banking and investment community has accepted the pivotable role that they must play in allowing for a more rapid transition – action aligned to climate science is required. January 2020 saw Larry Fink, CEO of BlackRock, note that climate change has become a defining factor in companies’ long-term prospects and the climate crisis would change the shape of finance. So far, we have seen over 1,100 institutions pull $10 trillion from oil, coal and natural gas[vii].

Assessing the Shift

As the impacts of climate change have become more visible, both physically and financially, more companies have adopted and enhanced the measures they take in order to reduce their own, and their customer’s impacts and protect themselves from all aspects of climate risk. This ultimately has led to business model shifts, enhanced opportunities to support the low carbon economy, and increased supply and demand for low carbon goods and services.

Sustainalytics Sustainable Product Research (SPR), demonstrates a company’s involvement in renewable energy, green buildings, energy efficiency and green transportation, essentially allowing us to understand a company’s SDG aligned revenue streams.

From our research, we can see that industries most exposed to carbon and climate are acting in order to add robustness to their business models through increased adoption of SDG aligned products and services. Utility companies, especially Electric Utilities, have the highest exposure to carbon and climate-related risk across the Sustainalytics universe yet demonstrate the most willingness to manage these risks well and take steps to reduce this exposure.[viii]

Companies within the Electric Utilities sub-sector not only manage this risk but also actively take steps to contribute towards climate action, through their renewable energy investment. Our research indicates that those companies generating higher revenue from SDG alignment, have stronger, more tangible transition business models.

Unsurprisingly, these companies have some of the strongest carbon reduction targets that often meet or surpass a 1.5^oC scenario. This means that the companies are not only taking such steps supporting the climate action required through decarbonization, they are also less reliant on fossil fuels and less susceptible to carbon instruments such as national and regional carbon targets and pricing.

We are presented with an opportunity for a cleaner, healthier, less volatile future. It’s times like these that we start to understand how our systems are intrinsically linked, and how weaknesses in one, can lead to a systematic collapse in others.

Reducing exposure to carbon and climate risk, provides resilience, not only aiding in the climate transition, but contributing to a healthier, and more resilient economy and society.

Sources:

[i] World Bank
[ii] NOAA
[iii] Carbon Brief
[iv] Christian Aid, Counting the cost 2019: a year of climate breakdown, December 2019,
[v] IEA
[vi] Carbon Disclosure Project
[vii] 350.org
[viii] Sustainalytics