Saturday 28/03/2020

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Investing in the environment to boost growth

Responsible Investment Strategist

Given that environmental sustainability is essential to a country’s sustainable growth, we would like to take stock of the environmental pillar, which is an intrinsic element of our sustainability model for OECD and emerging countries.

Because in the meantime, it has become clear that the cost of inaction when it comes to climate change is greater than the cost of action. These days, experts are capable of assessing the costs of delay related to taking action and making decisions.

In fact, the OECD argues that the G20 stands a real chance of being confronted with a 2% loss of GDP over the next ten years following the energy transition, should action be postponed until after 2025. Countries that are net exporters of fossil fuels will face higher costs.

Given that environmental sustainability is essential to a country’s sustainable growth, we would like to take stock of the environmental pillar, which is an intrinsic element of our sustainability model for OECD and emerging countries.


1. Climate change is at the core of a country’s environmental and economic sustainability

It’s almost a given. Curtailing global warming to 2°C following the Paris Agreement is an objective that will not be achieved, certainly not against the backdrop of current policies.

According to the contributions of the various countries in terms of cutting emissions, it is likely we will end up with a 3°C increase instead, which entails a cost. For the United States, its gross domestic product is set to decline by an estimated 1.2% for every additional 1°C rise in temperature.

Much has been said about the role of the financial industry when it comes to financing low carbon energy. However, the policies adopted by the countries will determine the path they will follow. After all, they will need to choose whether they will continue to finance and subsidize polluting energy forms or finance the infrastructure required to tackle the challenge ahead instead. It may prove a unique opportunity, because the energy transition is a major global project that creates jobs and requires massive resources and financing. According to the OECD, nearly USD 95 trillion will be required to finance infrastructure works (energy, transportation, water and telecom) between 2016 and 2030.[1]

The ten industries which are the largest carbon emitters in the European Union account for almost 83% of total CO2 emissions, but represent just 28% of the labour market and an added value of 21%.[2]

Today, most carbon emissions are valued at zero, and when they do have a price, it is lower than €30 per ton. Subsidies for fossil fuels remain the norm and come with a significant tax costs for governments. Indeed, nearly USD one billion has been allocated to the coal industry by six EU member states since 2015, despite their having ratified the Paris Agreement.[3]

Raising the share of renewable energy in primary energy use to 65% by 2050 would enable reduction of CO2 emissions by nearly 70%. This share currently represents only 15%, with major differences between the various countries. Denmark is clearly leading the pack, and it should be an example for all of us as it shows that a full transition to renewable energy is feasible. Portugal, Germany and Belgium have also invested to further increase the share of renewable energy in their energy mix. However, countries like France, Japan, Australia and the United States will need to step up their efforts significantly.

Source: IEA Statistics © OECD/IEA 2014.

2. Poor air quality - the number-one cause of early deaths worldwide

Various forms of pollution took the lives of nine million people in 2015, which in financial terms amounts to 4.6 trillion USD. In China, almost one fifth of deaths can be attributed to pollution, while this is nearly a quarter in India and Bangladesh. The old continent is not much better off. Less than one OECD country out of three complies with the recommendations in terms of air quality by the World Health Organization. It is said that exposing the world population to fine particulate matter (2.5) and to ozone would cause nearly half a million premature deaths each year. This corresponds to a cost of nearly 3.8% of GDP.

Various indicators allow to assess the extent to which a country is vulnerable to pollution, be it air quality or the number of deaths which may be attributed to atmospheric pollution or the lack of air in homes.


Chronic exposure of OECD countries to pollution peaks

Source : OECD Green Growth Indicators.

3. Water stress at the root of social conflicts

Natural capital is essential in assessing economic sustainability. When nearly a quarter of Russian growth since 1994 derives from extracting its fossil assets, we do need to question the country’s dependence on the exploitation of natural resources, and its need to tap into new growth opportunities in the long term.

Increased urbanisation leads to an increase in land development, which means less agricultural land.

Currently nearly 30% of the earth’s remaining surface is built on, compared to 1990. This erodes away at arable and agricultural land and forests.

Identifying the countries which are most exposed and the means they employ to solve this issue is also part of the risk mapping that goes with an investment in sovereign bonds.

[1] OECD, investing in climate, investing in Growth – a synthesis 

[2] OECD highlights on green growth indicators 2017

[3]Source: Overseas Development Institute