Governments must incentivise the transition

Newton IM's Parry says individuals and companies can't achieve enough change alone

With an estimated 80% of global fossil fuels owned or controlled by sovereign nations, net zero can only be achieved if governments fully play their part. This year, more than 450 investors totalling $41trn in assets under management, including Newton, called on governments to raise ambition and accelerate action to tackle the climate crisis.

The sixth UN Intergovernmental Panel on Climate Change (IPCC) report gave clear evidence that manmade intervention is driving climate change. The findings of the report come at a time when the need for post-Covid economic recovery has already been fuelled by trillions of dollars in liquidity globally. This abundance of cheap debt has encouraged an acceleration in economic growth and consumption, which has in turn already increased the demand for coal.

US gasoline consumption reached a record high in July, indicating that the pause in emissions experienced throughout the pandemic was temporary, buying us only a small amount of time before activity and emissions began accelerating again.

Despite the International Energy Agency’s 2050 Path to Net Zero report finding that there is no need for further investment into new fossil fuel supplies, governments globally continue to approve thousands of oil and gas drilling permits with numerous new coal mines set to be built around the world. While these investments will certainly bring short-term economic gain, they are completely unaligned with what has now become an undeniable science presented in the IPCC report. They are also at acute risk of becoming future stranded assets.

Governments must act

It is clearer than ever that rhetoric must be aligned with setting the right incentives and government action is the key to tacking climate change. Though we have seen some bold commitments in recent years, they have not delivered on their promise.

It is up to governments to progressively incentivise the transition because we are currently not aligned to the 1.5 – or even 2 – degree goal, by any stretch. Systemic change is required, and the ideal outcome of the upcoming COP26 forum is policy that is binding. This means mandated government-enabled incentives and disincentives.

See also: – COP26 progress in ‘jeopardy’ from UK government failings

Governments must put strong incentives into the system to encourage and accelerate the development of renewables and clean energy. Under current levels, emissions ambitions set out for 2030 will not be met, so development needs to be accelerated if we are to effect change.  We are at a potential tipping point for renewable energy – on cost, increasing capacity, technological development, and societal demands – and rebalancing the playing field in their favour will yield enduring benefits.

Undoubtedly, this needs to be a global effort, although this will be challenging for some. Currently, some major emerging market economies aren’t even projected to reach their peak emissions until 2030. Although a handful of western economies appear to have done a good job at reducing emissions, many rely on offshore manufacturing, so it is a different picture when we look at emissions on a consumption basis. This is a collective challenge, and there needs to be a dramatic change in the way services and goods are conceived, created, and delivered.

Clearly there is no singular solution that can fix the climate crisis and grow us out of the Covid pandemic recession. ESG, green and sustainable investing alone will not halt climate change, despite the powerful signal that they send. Engagement and aggressive voting policies will remain crucial, but without the alignment to sovereign bodies, we risk continuing to fail to meet climate change goals – and the effects will be irreversible.

Few threats are more pressing for the world than those posed by unmitigated climate change. While it represents a major systemic risk to financial markets, the consequences run far beyond mere economic impacts and potentially threaten life on the planet as we know it.

Alone, individuals and companies are unlikely to be able to achieve the scale of change that is required, nor can they achieve it in isolation from wider civil society if the governance structures that dominate policy decisions provide the wrong and often perverse incentives.

Andrew Parry is head of sustainable investment at Newton Investment Management and an ESG Clarity editorial panellist.


Natasha Turner

Natasha was global editor at ESG Clarity, part of Mark Allen Financial, and a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the Year...