Policymakers, companies and investors have been kicking the can down the road when it comes to applying tough policies and action plans to mitigate global warming, as well as accurately pricing climate risks in asset markets, said Nick Stansbury, head of climate solutions at asset manager Legal & General Investment Management (LGIM).
Aside from the climate impacts of this lack of urgency, governments are risking much greater disruption later, and companies are missing an opportunity to be rewarded for being ahead of the curve, Stansbury said.
“The world is not on track for [limiting warming to] 1.5 degrees [Celsius] and probably not for 2 degrees, unless we see very significant policy responses,” he told the Post.
“What we should have been seeing over the past decade is for emissions from listed companies to be falling between 4 and 7 per cent each year, for them to be on pathways for the world to limit global warming to 2 degrees or 1.5 degrees, respectively. But data showed that their emissions were flat.”
The combined carbon emissions of 3,665 companies, which contributed some 75 per cent of the emissions of all listed firms globally in 2021, show no convincing downward trend, instead fluctuating between 21 billion tonnes in 2012 and 25 billion tonnes in 2019, according to a study by LGIM, which has US$1.47 trillion of assets under management.
Those companies’ combined emissions fell to 22 billion tonnes in 2020 and 2021 amid the Covid-19 pandemic. Together, listed companies contributed around half of global carbon emissions, the UK-based firm estimated.
As more frequent extreme climate events cause bigger economic losses and mass migration, policymakers will be forced to make a course correction towards faster decarbonisation in the 2030s, Stansbury said.
Although companies that take climate transition actions today may face negative short-term financial impacts, their longer-term competitiveness will improve through higher revenue growth, product prices and profitability, as well as lower financing costs, he said.
01:40
‘Climate time bomb ticking’: UN chief says carbon emissions must be urgently cut
‘Climate time bomb ticking’: UN chief says carbon emissions must be urgently cut
“There will come a time when financial markets will reward those companies that are better positioned at the expense of those which are not,” he said.
However, profiting from the global energy transition is not always possible through a straightforward strategy like excluding fossil fuel producers, or amassing a portfolio of clean energy stocks.
The war in Ukraine and the resulting inflationary energy crisis highlighted the risk of using an investment approach that excludes fossil fuel companies, said Jennifer Wu, global head of sustainable investing at JPMorgan Asset Management.
Hong Kong power firms unveil offshore LNG terminal, activists raise concerns
Hong Kong power firms unveil offshore LNG terminal, activists raise concerns
“The war was a wake-up call to many investors, to the fact that the world still needs oil and gas, no matter how fast or slow we are moving to a low-carbon world,” she told the Post. “The ability of companies within the energy sector to decarbonise varies significantly.
“For us, integrated oil companies that focus on improving operational efficiency to produce the best quality oil at a reasonable cost, while investing part of their profits into carbon capture, utilisation and storage appear to be more attractive.”
Meanwhile, surging growth in the solar and wind industries failed to give shareholders a good return in the past year due to escalating financing costs for project developers, while equipment makers suffered from sharply falling product prices amid stiff competition.
Lack of infrastructure ‘hindering projects to cut ships’ carbon emissions’
Lack of infrastructure ‘hindering projects to cut ships’ carbon emissions’
“Just because the solar industry has been growing very quickly, that does not mean that throwing money blindly at every solar company in the world will deliver you attractive returns,” Stansbury said.
The S&P Global Clean Energy Index, which tracks 99 stocks in the clean energy supply chain, including many in the solar and wind segments, has fallen 49 per cent over the past two years.
It has underperformed a 16.2 per cent decline by the MSCI All-Country World Equity Index, which tracks nearly 3,000 stocks across many industries in 48 developed and emerging markets.
It also trailed 13.5 per cent gain of the S&P Global Oil Index, which tracks 120 oil and gas stocks, in the same period.