The future is already here: Looking ahead to COP27

Looking back to November’s COP26 in Glasgow, and the central goal of keeping the 1.5 degrees alive

To give a quick history lesson, 2009’s COP15 in Copenhagen was widely deemed a washout apart from introducing the broad target of keeping maximum temperature rises to below 2 degrees compared to pre-industrial levels.

At that point, when widespread acceptance of the science behind climate change was still some distance away, average global temperatures had increased around 0.8°C from the 1880 baseline and were on the way towards a 3.5°C rise by the end of the century. If anyone is thinking these are small numbers, a degree here and there can mean the difference between another ice age or not.

If we fast forward to 2015, COP21 in Paris is seen as the most successful so far, in that we finally saw a formally agreed goal to limit average rises to under 2 degrees, and ideally less than 1.5, by 2100. Countries were also asked to submit commitments on emissions reductions by 2030, called Nationally Determined Contributions (NDCs), to be reviewed five years later at COP26.

The world has now moved up to 1.2°C warming and if we consider the most optimistic scenario, which assumes full implementation of all announced targets including net zero, long-term strategies (LTS) and NDCs, we would be under the Paris target of 2 degrees, at 1.8°C, by 2100.  Taking a more pragmatic view, real-world action based on current policies would see us well above the Paris Agreement by that point at 2.7°C, which suggests growing urgency at the remaining climate change COPs running up to 2030 – starting at this year’s COP27 in Sharm El-Sheikh – and those tightening regulations to reduce emissions globally over the next few decades.

Energy transition

As with many of the figures underlying our sustainable investment themes, data on climate change – particularly that current 1.2°C increase in average global temperatures – are alarming and the trajectory of greenhouse gas (GHG) emissions does not look to be turning, with atmospheric carbon dioxide still rising. The world will continue to depend on plentiful, cheap energy for our modern way of life and we currently get 80% of primary energy from fossil fuels, which, tellingly, is still measured in terms of tonnes of oil equivalent.

Under the surface, however, there is evidence of an ongoing energy transition and we always stress that change is both non-linear and tends to happen quickly: once a better, cheaper alternative is found, it displaces the incumbent rapidly. GHG intensity has been falling across major economies over the last 30 years, with the greatest progress in China where emissions per unit of GDP have more than halved.

Meanwhile, innovation and scale have driven down the cost of renewable technology, from solar, to wind, to lithium-ion batteries, translating into exceptional demand growth. From being prohibitively expensive a decade ago, solar energy is now the lowest-cost option available in the US, cheaper even than fracked natural gas. Alongside this demand growth for renewables has come demand destruction for high CO2-emitting areas: coal-fired electricity generation in the US has fallen 61% since 2008, for example, and dropped below nuclear in 2020 in terms of energy share.

There is also an interlinked pyramid of actors driving structural shifts to consider, that combines science (bringing greater understanding of an issue), society calling for change and governments setting policy and regulation, and finally businesses developing and distributing solutions. From our perspective as investors, these companies tend to have two advantages that are misunderstood by the wider market: strong growth and less competition.

Our view is that all parts of the economy – government, companies and individuals – are ratcheting up their ambition in an iterative, interdependent process. As society demands greater action and businesses show what can be done, governments have the leeway to increase their decarbonisation targets. And so it goes.

Encouragingly, the path to zero carbon does not require amazing new inventions: we are on the way towards 25% more solar energy, 60% of global car sales being electric and all new buildings being zero carbon ready by 2030, for example. As US science fiction writer William Gibson said, ‘the future is already here, it’s just not evenly distributed’, and we feel companies on the right side of the energy transition and providing lower-carbon solutions should benefit as this distribution improves.

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Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...