As the world edges out of a pandemic, the focus will be on driving growth and the economic recovery in many countries and across the financial markets.
This will undoubtedly have a negative impact on global emissions unless ways can be found to drive sustainable growth through investment in decarbonising and low emission industries and projects.
It’s clear from the Global Risk Report, recently published by the World Economic Forum (WEF), that there is an urgent need to drive the economic recovery and continue tackling global Covid-19 infection rates. We must also remain aware and cognisant of the urgent and developing situation in Ukraine. While it is important that the global economy can get back on its feet, we cannot ignore the scale of the damage we continue to see on the climate which will leave lasting impacts if we do not take urgent action for the long-term.
Financial institutions and investors are waking up to the need to direct capital to support the transition to a low-carbon economy, but more needs to be done by governments to lay out a clear pathway to net-zero emissions to give investors greater clarity.
The impact of the climate transition
While there is a lot of focus on shifting towards a decarbonised economy through investment in renewables, as the report mentions, the transition will undoubtedly be disorderly given the current pace of change and differing government priorities. Tackling the climate crisis is an urgent issue and we should not underestimate the economic impact this will have on the global economy; researchers have estimated that the climate crisis could cost us as much as the 37% of the world’s GDP by the end of the century.
As we have seen in the past, the costs of climate change are unpredictable and will leave significant and irreversible impacts on the planet such as natural disasters, the loss of ecosystems and habitats, and socioeconomic disruption from the movement of people and closure of carbon-intensive industries. Covid-19, on the other hand, should be viewed as a relatively short-term cost as the world continues to emerge from the pandemic.
The journey towards carbon reduction remains uncertain, with not much visibility of how governments plan to execute current commitments, while also recognising that many countries will not achieve anywhere close to net zero by 2050. This will make it extremely difficult for investors to incorporate costs such as carbon pricing and taxes into their long-term investment strategies without sight of changing policy.
Environmental resources will also become an increasing pressure point in geopolitics. Countries which have the natural resources, for example water, to support their economies as climate change increasingly impacts our way of life will be in high demand and countries without these resources will be increasingly reliant on external funding and support.
Protecting and enhancing biodiversity is a crucial part of the solution to net zero, which was one of the key risks flagged in the WEF report and is a fast-growing area of focus for investors. Nature provides significant carbon capture benefits but if these ecosystems are destroyed, they will instead very quickly add to the world’s total carbon emissions. We are seeing increased interest in natural capital investment, but many investors are trying to establish a way to invest in biodiversity within their financial return objectives. This is an emerging market that will evolve over coming years.
There is a balance to be struck. While we cannot monetise the entirety of nature, companies and investors must seek to understand the impacts and dependencies their business operations and products, and investments have on nature. This then allows companies to understand how reliant their business strategy is on healthy well-functioning ecosystems and they, and investors, can then assess the risks to asset values should certain ecosystems be damaged.
Next steps for investors
There is a significant opportunity for the public and private markets to invest in the transition to a low carbon economy beyond renewables, such as energy storage, energy efficient housing and reduced impact agriculture. During COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) announced that over $130trn in private capital has been committed to carbon neutrality, currently understood as sufficient investment to achieve net zero by 2050.
Private finance will be key in supporting the existing commitments from governments. This will also create more competition for new decarbonisation solutions to be developed which are more prepared to scale smaller, innovative businesses and accept development risk.
In a fast-changing global landscape, in which we are facing political, economic and social challenges, and as we continue to emerge from the impacts of the Covid-19 pandemic, it is inevitable that climate change and our progress in reducing climate emissions will be compromised in the short-term future. However, we must strive towards a long-term goal of ensuring our ecosystems and environment are not sacrificed in the process. It will be impossible to achieve growth at the same scale as we currently do without healthy, well-functioning ecosystems, they therefore need to be protected and enhanced.
Instead, we should aim for sustainable growth that protects what we currently have but will also allow for the development of more efficient technologies that will pave the ways of living to avoid harming the opportunities for future generations. If we do not factor in the ‘Green Industrial Revolution‘ now, emissions will rise, temperatures will increase, climate damage will worsen and costs to our economies will intensify. This will cost us more in the long-run and lead to an increasingly disorderly transition and volatility across investment markets.
Investment, both public and private, needs to seize the opportunities to invest in vital infrastructure that will support the transition to a low carbon economy and protected planet.
