Following our intensive dialogue on climate change in its run-up, we are now engaging with companies and regulators in the aftermath of the Paris Agreement.
Success or disappointment?
The Paris Agreement has been widely hailed a success – by developed as well as developing countries and many commentators. Given the parlous state of global negotiations in the immediate aftermath of the failed Copenhagen climate conference in 2009 and the de facto expiry of the 1997 Kyoto Protocol, this was in many ways an achievement in its own right. However, a number of commentators have justifiably questioned its value, given that it is based on a set of voluntarily submitted obligations which do not meet the aspiration of limiting climate change to the intended safer level of 2°C and which, although in part legally binding, are effectively unenforceable. For some, the raising of the aspiration to limit climate change to 1.5°C only adds to the sense of political detachment from reality, given the stretch necessary compared to current efforts.
We have some sympathy for this view. However, despite its obvious flaws, we believe the negotiation was a success, provided it is accepted for what it is, and not judged against a standard that the two-year negotiating process never set out to achieve. The Paris Agreement offers the prospect of being the first successful global platform for carbon reduction involving carbon reduction efforts by all nations, including the first recorded commitments by the world’s largest emitters, China and the US. Given the prior starting point, the negotiations were remarkable for obtaining the agreement of 196 countries to take specific pre-emptive actions to solve a global problem at the heart of our economies which will mainly benefit future generations at some cost today.
The right framework?
While the voluntary nature of the framework can be challenged, past precedent suggests that it is unrealistic to expect sovereign nations to devolve control over their permitted greenhouse gas emissions, which are at the heart of their energy systems and economies. This is primarily because it is not possible for nations to work out the full implications given the enormous uncertainties of future energy needs, available technology and costs and therefore the fairness of a more binding approach. Thus, we are forced to accept the logic of the Paris framework, which introduces a series of smaller steps, all bound together in a growing sense of trust and mutual dependency. It is perhaps the only way to resolve the fundamental paradox of climate change, which is that only collective action can solve the problem, yet no country is willing to yield sovereign control of its emissions through energy or land use.
The Paris Agreement exceeded all reasonable pre-conference expectations by committing countries to limit the rise in global temperature to 1.5-2°C. It also sets a long-term goal to entirely decarbonise the planet over the course of the second half of the century, sounding the ultimate death knell for fossil fuels, albeit over a long-term horizon.
Individual commitments submitted to the UN Framework Convention on Climate Change (UNFCCC) – the Nationally Determined Contributions (NDCs) – were made by 188 of 196 countries covering 95% of global emissions. While these currently lack the ambition of the Agreement itself, delivering an emissions reduction equivalent to limiting climate change to approximately 3°C, they are subject to a ratchet mechanism requiring review every five years from 2020.
The Paris deal is set to mobilise finance from developed countries of $100 billion a year, with the intention that this is delivered from 2020 and increases thereafter. However, unresolved disputes over the precise nature and timing of this funding mean that these commitments are contained in the non-binding Decision part of the deal.
Furthermore, the Agreement contains important references acknowledging the concept of loss and damage, the role of forests in reducing emissions, technology transfer and capacity building, all of which will help vulnerable and developing countries to survive and perhaps thrive in the transition.
Prior to the Paris Agreement, national and regional plans were ahead of global negotiations, with important commitments made in 2014 by leading economies including the US, China and the EU. Post-Paris, the ambition of global leaders is ahead of national plans as there is a clear difference between the likely 4°C outcome of current policies, the outcome of the submitted NDCs which, discounting certain nonbinding pledges, is likely to be around 3°C and the 1.5-2°C ambition of the Agreement.
Keeping global warming to 1.5°C would require the world’s economy to commence a dramatic decarbonisation pathway to zero emissions by 2050 across the globe, which is more than twice the pace of any national case study of decarbonisation to date. However, the aspiration can also be interpreted as indicative of a will to go faster than even the most ambitious levels articulated previously and that therefore any breakthroughs in technology and consumer preference will be embraced openly in pursuit of this goal.
Regardless of the viability of meeting the 1.5°C goal, national plans now need to catch up with global ambition which will lead to a tightening of national and regional policy. The pace of change will depend on the outworking and interplay of a range of factors. These include the level of trust between the parties, innovation leading to breakthroughs in technology, the costs of the transition and the frequency and intensity of severe weather-related events, such as droughts and storms, which serve as a necessary reminder of the need for further action.
A platform for further negotiations
The Paris Agreement is perhaps best seen as a framework for further international negotiations. In addition to reviewing progress every five years, there are some obvious areas of unresolved business. These include finalising the financing to developing countries, towards and beyond $100 billion per year and further developing a transparency framework for monitoring national emissions that is non-intrusive and non-punitive. Also needed are new approaches to the fraught issue of loss and damage to enable financial and non-financial assistance for countries already significantly harmed by climate change, without opening up the floodgates to broader claims for compensation which could ultimately threaten the whole Paris framework.
Investors played a significant role in the run-up to the Paris Agreement, forming a coherent and progressive long-term voice calling on governments to deliver a strong and effective deal on climate change, thereby unlocking further investment in clean energy and climate solutions. The Institutional Investors Group on Climate Change (IIGCC) says the Paris Agreement sends a strong signal that the transition to a low-carbon economy is irresistible and irreversible. The Agreement sets the stage for accelerating levels of investment in low-carbon solutions. Investors will need to continue to prepare for further policy on climate change through the integration of ESG factors in their investment portfolios, as well as through their engagement with companies. Investors also need to continue to explore alternative scenarios, recognising that the timetable for policy tightening is uncertain and that events could occur to speed it up or slow it down.
Our engagement with companies and policy-makers on climate change will continue with broadly the same intensity that we have applied in the run-up to the Paris Agreement.
In the lead-up to Paris, we supported the secretariat of the UN climate negotiations, meeting UNFCCC executive secretary Christiana Figueres to summarise investor concerns and attending roundtables to engage with the CEOs of the world’s largest companies as part of the CEO dialogue in New York in September 2015, at a smaller group meeting in London in October 2015 and in Paris in December 2015. We co-authored an investor letter to G7 leaders explaining the need for a long-term goal on climate change, which was successfully adopted and formed the basis for the decarbonisation goal in the Paris negotiations. Furthermore, we are core supporters of the IIGCC, acting as lead author of its publication summarising investor expectations of mining companies.
In the summer of 2015, we joined the Aiming for A coalition of investors which acts at the forefront of climate change engagement, taking a supportive but stretching approach to the dialogue with the boards of climate-exposed companies. We supported the shareholder resolutions seeking greater disclosure of the potential long-term impacts to their business portfolio from public climate change policies at oil and gas companies BP, Shell and Statoil in 2015. We have already seen progress at those and several other oil and gas companies and cofiled a further resolution at Chevron. Following our engagement with diversified mining companies Anglo American, Glencore and Rio Tinto on their disclosure of climate change-related risks, we are leading the co-filing of similar resolutions at their AGMs in 2016 as part of Aiming for A.
We will continue our dialogue with utilities to ensure they have a strategy in place for dealing with tighter climate policies and with the automotive sector and industrials on their emissions reduction ambitions and governance. In our engagement with banks, we seek to ensure that they manage effectively their exposure to high-carbon projects such as coal-fired power stations. Meanwhile, all companies will need to prepare for stricter climate policies to best protect and preserve value.
The adoption of the Paris Agreements signals that nations are taking the threat of climate change seriously. It is now the task of those who have signed the Paris Pledge for Action – the opportunity for non-state actors to welcome the Paris Agreement on climate change and commit to implementing it – which includes Hermes EOS and over 1,000 companies, to accelerate ways to limit global warming to 2°C or below
Setting the scene
After the de facto expiry of the Kyoto Protocol in 2012 and the lack of agreement reached at the 15th Conference of the Parties (COP) in Copenhagen in 2009, COP21 in Paris in December 2015 was the third big attempt at reaching a global deal on climate change. The deal was agreed by 196 countries which committed to keeping the increase in the global average temperature to below 2°C and to pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels. In addition, it was agreed that greenhouse gas emissions should peak as soon as possible and that the world economy should emit net zero emissions by a point in the second half of the century. The climate deal consists of two halves – a legally binding Agreement consisting of 29 articles and the non-binding Decision part, which contains among others, details on the financing of climate change mitigation and adaptation. The Agreement component will need to be ratified by 55 countries accounting for at least 55% of global greenhouse gas emissions before it can be enforced. This process will begin in April 2016 with implementation scheduled for 2020.