Friday 20/09/2019

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Sustainability: outlook for 2017

Responsible Investment Strategist

Just like 2016, in 2017 the focus will once again be on climate change, but also on corporate governance - which remains a key theme - and in particular on business ethics. Finally, the millennial generation will continue to power ahead, and exert a major influence on consumer behaviour.

In a nutshell:

  • Climate change is sure to remain the key theme in 2017, together with related topics such as the low carbon economy and green emissions.
  • Limiting the global increase in average temperature to 2 °C as is a scenario put forward by the International Energy Agency.
  • This scenario requires massive investments. Green bonds will be the fastest-growing financial instrument in the years to come and the size of the market is close to USD 170 billion today. Moreover, diversification in terms of sectors and issuers continues to increase.
  • By leaving the circle of thoughts of some ecologists or activist investors, the 2 degrees scenario becomes significant and leads to major reconsiderations on portfolio construction.
  • Although the environment and climate change in particular continue to dominate the debates, business ethics will become increasingly important.
     

The environment is a vulnerable element for societies and related problems can give rise to increased violence, political and social instability and extremist movements.

The fact that the Paris Agreement was ratified sooner than expected shows the growing commitment of countries and corporations at the global level. After all, climate change is a priority for most of them and, whether or not they are convinced by the sense of urgency and the moral obligations that ensue from it, they see potential business opportunities and economic profits in low-carbon production and increased energy efficiency. China is the first country to pick up the baton from the United States and the EU, which have other issues to deal with, as it is well aware of the link between social stability and pollution. The smog which has covered the Chinese capital and the northern part of the country in recent days has paralysed transportation and the economy and is making the Chinese think very hard about their future.

In its latest global outlook for 2016 (World Energy Outlook) the IEA puts forward its 450 Scenario, estimating a 50% chance of limiting the global increase in average temperature to 2 °C as per the Paris Agreement, and includes it as a plausible scenario. Even if it were opportune to consider a more ambitious scenario based on a success rate higher than 50%, this new scenario shows the revolution which has taken place and clears the way for renewable energy to be extended to the industrial sectors as well as construction and transportation.

The investments required to limit global warming to 2 degrees are estimated at USD 650 to 860 billion per year.

Green bonds therefore continued to grow strongly in 2016, the 4th consecutive year of record issuance levels estimated at USD 93 billion. They will be the fastest-growing financial instrument in the years to come and the size of the market is close to USD 170 billion today. Moreover, diversification in terms of sectors and issuers continues to increase.

In the light of the transition to a low-carbon economy and the responsibility that everyone needs to take up in that respect, investors must do their part as well to decarbonise their portfolios.

Decarbonisation consists of reducing carbon dioxide emissions in investment portfolios.

The risk is not so much related to being overly exposed to high-carbon technologies, but rather to being under-invested in the energy services and products of the future. However, the major indices are not aligned with the Paris Agreement. In addition to calculating the carbon footprint of portfolios, as well as various types of reporting, investors will first and foremost have to manage risks and opportunities in a pragmatic way. By challenging companies (and states) on the real risk of stranded assets  [i]or an appropriately-set carbon price, it will be possible to select the ones which are able to remain competitive in a shorter timeframe than some may think.

Although the environment, and climate change in particular, will continue to take pride of place, business ethics will become increasingly important. On the one hand, proactive regulation and court rulings are leading the way. On the other, civil society and investors are becoming increasingly aware of the issue as business ethics may influence shareholders and global inequality. Indeed, business ethics may be abused in three main domains: corruption, aggressive tax optimisation and anti-competitive practices.

Read the full report.

 


[i] Non-burnable fossil fuel reserves resulting from the limitation of greenhouse gas emissions in order to limit global warming to 2 degrees Celsius above pre-industrial levels.

 

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