Inevitable Policy Response shows accelerated action on climate change

Forceful policy implementation on climate ‘will create substantial shifts in global investment needs and drive opportunity in the coming years’

The UN PRI-supported Inevitable Policy Response (IPR) has published an updated forecast, predicting new net-zero commitments and higher environmental policy ambition in tackling climate change.

The IPR aims to prepare financial markets for climate-related policy risks likely to emerge in the short and medium term. It comprises views from academics, NGOs, think-tanks and consultants around the world. This report updates the IPR2019 Policy Forecast, and covers 21 major economies accounting for the majority of global economic activity (78%) and emissions.

It said forceful policy implementation on climate “will create substantial shifts in global investment needs and drive opportunity and risk across and within sectors in the coming years”.

Increasing net-zero commitments have led the forecasters to deem accelerated policy response to climate change even more likely than before the pandemic. The report finds net-zero commitments by countries now representing 70% of GDP and 65% of emissions have doubled, and an eight-fold increase in net zero commitment by cities, with 823 more in 2020 from 100 recorded in 2019.

See also: – Jupiter commits £55.7bn investment range to net zero

“Following a wave of announcements in 2020, we forecast the US, India and Australia will announce their net zero emissions targets by 2023,” it said.

Key areas

As a result it expects to see increased ambition in eight key areas: carbon pricing, coal phase out, clean power, ICE sales bans, low-carbon buildings, clean industry, low-emissions agriculture and forestry.

In carbon pricing, the IPR expects a four-fold increase in economies with these schemes covering emissions in power and industry by 2030 – from 20% of CO2 emissions in 2020 to all major economies and over 75% of CO2 emissions by 2030.

It added Carbon Border Adjustments Mechanisms will increasingly drive convergence with leading countries over time and could lead the US to announce a national carbon pricing scheme as early as 2023.

Coal phase out will ramp up, what with China forecasted to end construction of new coal-fired power production after 2025 and the US by 2030.

In clean power, the report said strong policy framework is expected to “end all unabated fossil generation in leading countries by 2040″, with other major countries following by 2050.

It said 51% of markets will be covered by policies banning sale of fossil fuel cars and vans – with China, France, Germany, Italy and Korea ending the sale of fossil fuel cars and vans in 2035, accelerating the global auto industry’s transition to electric drive, and leading to more policy action internationally.

All major industrial economies including the US, Germany, Japan and China will require all new industrial capex, led by steel and cement, to be low carbon by 2040, through a combination of emissions performance standards and carbon pricing.

In terms of forestry, the report forecasts land use reforms are expected to put an end to deforestation globally within the decade, with countries with minimal deforestation ending it completely by 2025 and major agricultural producers such as the US, Canada and Australia forecasted to have comprehensive mitigation policies in place by then. It said major tropical forest countries including Brazil are expected to end deforestation by 2030, as domestic policy responds to international climate finance and rising corporate supply chain pressures.

Jason Eis, executive director of Vivid Economics, said this update will be of particular interest to investors: “It lays out the practical detail of how growing momentum, especially post Biden election, will shift the market conditions through specific and forceful policy implementation. We’ve heard investors asking two key questions, namely: What’s the policy landscape going to look like post-Covid? And, what does net zero actually mean and how will it impact me in the near term?

“Markets have been highly volatile in the past year and determining what has been priced in or not sector by sector is complex. The policy trajectory set out in the this update is a critical input to market analysis and portfolio construction, and investors can use the update to protect and enhance value by assessing the implications of the forecasted policies for their asset allocation decisions.”

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Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...