Whilst the COVID pandemic has been challenging, there have been some positive outcomes from it. One of these has been the increased focus on the even greater challenge that is climate change.
The goal of the 21st United Nations (UN) Climate Change Conference of the Parties (COP21) in Paris was to limit global warming to well below 2°C, preferably 1.5°C, compared to pre-industrial levels. To achieve this long-term temperature goal, countries need to reach a global peak of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century.
The Paris Agreement works on a five-year cycle of increasingly ambitious climate commitments by each country. COVID has extended the current cycle by a year, with countries due to submit their next set of plans for climate action, known as nationally determined contributions (NDCs), at the 26th UN Climate Change Conference of the Parties (COP26), which will be held in Glasgow in November.
The current trajectory for the climate is a life-threatening 3°C to 4°C of warming meaning that action needs to be significantly increased to achieve the goals of the Paris Agreement. However, zero-carbon solutions are already becoming competitive across sectors representing 25% of emissions. This trend is most noticeable in the power and transport sectors. By 2030, zero-carbon solutions could be competitive in sectors representing over 70% of global emissions.
Most of our client base are still involved in the extraction of hydrocarbons, clearly an unsustainable long-term business model. We can assist our clients through the necessary transition by ensuring they are on track to meet any goals set at COP26.
We will require our clients to describe their processes for identifying and assessing climate-related risk as well as their processes for managing this risk. Confirmation that our clients can empirically measure their Environmental Protection Agency (EPA) Scope 1, 2 and 3 emissions and that their transition strategy has board level support will become standard underwriting information. We will also require their proposed transition timeline to net zero along with noteworthy milestones along the way.
In asking these questions we will be nudging our clients down the road to net zero and ultimately pushing our own portfolios in the same direction.
Many of the skillsets of our client base are transferable to renewable sources of energy such as biofuels, geothermal wells and offshore wind farms. We can assist our client base by offering the products to cover these asset classes as they transition away from hydrocarbons.
