Scenarios developed by the Inevitable Policy Response (IPR) project help asset managers and owners understand what the net zero transition will look like. Specifically, how sectors and regions are affected and over what timelines. For investors, climate scenarios can be important navigational tools when considering climate action. [1]
This article is part of our Investment Symposium Series, in which we present thinking on the big issues. For this series, we draw on the annual Investment Symposium. This is a central event where investment professionals from BNP Paribas Asset Management zoom in on the themes shaping the future. It is also a venue for high-level external speakers to cast a new light on the challenges of our time, testing our convictions and diversifying our thinking.
Faster policy implementation needed
According to the IPR’s Required Policy Response – one of many scenarios that project a world on a potential 1.5°C pathway – OECD economies should reach net negative CO2 emissions by 2050 and non-OECD countries should reach net zero.
Many of the main industrial changes required to reach net zero by 2050 – and keep global temperatures from rising beyond 1.5°C – need to take place in emerging markets such as China and India, where emissions are generally higher. That said, much of the consumption of goods and services related to those emissions occurs in developed economies.
Climate action requires active investment in domestic and international climate mitigation and, importantly, in adaptation. The IPCC’s latest report underscores the growing urgency of adaptation finance in particular:
“Developed-country climate finance leveraged for developing countries for mitigation and adaptation has … fallen short of the 100 USD billion per year 2020 target of the Copenhagen commitment, and less than 20% has been for adaptation.”
Transforming industry from an investment perspective
A huge part of the decarbonisation challenge lies in industrial transformation. From an investment perspective, the more significant transitions include both industrial decline and growth.
Regarding on industrial decline, investors should expect the following in a net zero context:
- End of deforestation by 2025 (at the latest by 2030)
- No more unabated coal use by 2035 in most advanced economies, as well as China and India
- No internal combustion cars by 2040
- Peak meat consumption by 2030.
These phase-outs leave room for alternatives including:
- 100% clean power generation by 2045
- The growth in electric vehicles to market dominance
- The shift in heating technology for buildings, e.g. greater use of heat pumps
- The growing demand for green hydrogen across sectors
- Alternative proteins, which could represent 25% of meat production by 2050 .
- Growth in the use of nature-based solutions – reforestation, afforestation, marshland, etc. – to meet carbon commitments and unlock co-benefits.
Climate action as an investor
It is important that, out of COP26, there is a drive to bring in investors, companies, cities and civil society as the world works towards significant economic change. As investors, we have tools at our disposal [2] and we can put capital to work profitably in these dynamic and high-growth sectors.
in the context of risk management, we help clients understand and work towards bringing climate scenarios and decarbonisation pathways into their asset allocations. Here, our sector policies that set out the conditions for investing in sectors such as coal and unconventional oil and gas come into play. They are part of our efforts to align portfolios with net zero.
Our approach to sustainable investment includes a strong commitment to stewardship – active engagement with corporate and other issuers, and with public policymakers, on climate issues. Our commitment to climate action also includes a role in initiatives such as Climate Action 100+. We will look to enhance our engagement activity further in 2022.
References
[1] As one of the IPR project’s strategic partners, BNPP AM has been closely involved in its development. Also read No more decades for dithering: It is crunch time to push climate policy – Investors’ Corner (bnpparibas-am.com)
[2] Tools such as ESG integration across funds and strategies, stewardship action and a responsible business conduct and product-based exclusions policy; more at https://www.bnpparibas-am.com/en/sustainability/
