Week 46: While Biden gives hope, we're heading for 4°C

Dear all,

I hope everyone is well and ready for a new round of ‘ESG on a Sunday’.

Is now a time for climate hope?

This week we start with that global boost of energy and excitement for the climate agenda due to the election of Joe Biden as U.S. president. There are huge expectations on the president-elect with regards to revitalising the country’s climate actions.

In this piece from Carbon Brief, a range of climate experts react to the U.S. election. It’s well worth a read.

However, we must bear in mind that approximately 71 million people voted against any progressive climate action, by voting for the current president and his now historic in-action on the climate emergency.

The new resident in the White House and his administration will – when they finally get the keys – have to manage a domestic climate reconciliation process that could take several years. This is complex – nasty in many ways – and a very time-consuming process. It may take more time than we have.

Big oil won’t give up without a fight

In this article you get an idea of what Biden’s administration is up against. 

As part of its services to the oil and gas industry, FTI Consulting has been monitoring environmental activists online, and in one instance an employee created a fake Facebook persona — an imaginary, middle-aged Texas woman with a dog — to help keep tabs on protesters.

Former FTI employees say they studied other online influence campaigns and compiled strategies for affecting public discourse. They helped run a campaign that sought a securities rule change, described as protecting the interests of mom-and-pop investors, that aimed to protect oil and gas companies from shareholder pressure to address climate and other concerns.

One of FTI’s largest shareholders, the investment firm BlackRock, won kudos this year for saying it would put environmental sustainability at the centre of its investment approach. It’s not too much to say that the ties to FTI is in conflict with BlackRock’s messaging.

Trump and the damage done

The stakes for the U.S. in relation to consequences of the climate emergency have never been so financially tangible as they are now.

The president-elect will use the next four years to try to restore the environmental policies that his predecessor has methodically blown up. The damage done by the greenhouse gas pollution unleashed by Trump’s rollbacks may prove to be one of the most profound legacies of his single term.

Over the past four years, the global level of greenhouse gases in the atmosphere crossed a long-feared threshold of atmospheric concentration. Now, many of the most damaging effects of climate change, including rising sea levels, deadlier storms, and more devastating heat, droughts and wildfires, are irreversible and all of them are present in the U.S.

Most of Trump’s environmental policies, which erased or loosened nearly 100 rules and regulations on pollution in the air, water and atmosphere, can be reversed, though not immediately and that is what we really need.

Read more in this article.

The damage continues, but the Fed knows better

Trump’s toxic legacy is in many ways still in the making. The Trump administration is advancing plans to auction drilling rights in the U.S. Arctic National Wildlife Refuge before the inauguration of Biden, who has vowed to block oil exploration in the rugged Alaska wilderness. Read more here.

Meanwhile, Fed Chairman Jerome Powell said the U.S. central bank has been cooperating with its counterparts around the world to address risks presented by climate change. According to the man running the most important central bank in the world, climate emergency has potential implications for monetary policy, bank regulations and financial stability.

One reason why Jerome Powell and his compatriots see this so clearly might be because the climate impact on the housing market is already here. A new paper from the National Bureau of Economic Research explores the dynamic changes in the capitalisation of sea level rise risk (SLR) in housing and mortgage markets.

Their results suggest a disconnect in coastal Florida real estate: From 2013-2018, home sales volumes in the most-SLR-exposed communities declined 16-20% relative to less-SLR-exposed areas, even as their sale prices grew in lockstep. Between 2018-2020, however, relative prices in these at-risk markets finally declined by roughly 5% from their peak.

One thing is clear, the U.S. will no longer be seen as the single, individual leader in the global fight for a sustainable future. Instead they are – or will soon be – a competitive partner with the EU and China.

And that is not so bad for the world after all. 

CO2 emissions and global warming in 2020

Where are we at the moment in this continuous struggle to transform our societies to a better tomorrow? 

Well, CO2 emissions have bounced back after the initial COVID-19 lockdowns put things to a halt.

Chinese and Asian rebounds in industry and fossil fuel power generation is most likely the main reason for this.  

Additionally, we are also on track for hottest year on record.

According to a Carbon Brief analysis it is now more likely than not that 2020 will also be the warmest year for the Earth’s surface since reliable records began in the mid-1800s. This is all the more remarkable because it will lack any major El Ni?o event – a factor that has contributed to most prior record warm years. 

Reducing emissions in the global food system

To have any hope of meeting the central goal of the Paris Agreement, which is to limit global warming to 2°C or less, our carbon emissions must be reduced considerably, including those coming from agriculture.

Although reducing emissions from fossil fuels is essential for meeting this goal, other sources of emissions may also preclude its attainment.

This report shows that even if fossil fuel emissions were immediately halted, current trends in global food systems would prevent the achievement of the 1.5°C target and, by the end of the century, threaten the achievement of the 2°C target.

Meeting the 1.5°C target requires rapid and ambitious changes to food systems as well as to all non-food sectors. The 2°C target could be achieved with less-ambitious changes to food systems, but only if fossil fuel and other non-food emissions are eliminated soon. 

Drowning in pledges while heading for 4°C

So how does the financial market and the underlying listed equities across the world reflect this? Are the business models we invest in changing?

In this interview with myself in Financial Times, you will learn that the world of listed equities is on a 4°C path. If we only look at Europe, the equities land on an average of 3.5°C.

We are drowning in pledges, commitments and statements on what we will do many years from now. Initiatives are many and diverse within the world of finance. But the reality is that words are choking us. Net-zero this and net-zero that. For people outside the financial industry it looks like a big “New Year’s resolution fiesta”.

The truth is that the valuation model for listed equities and the price of equities in relation to climate change is still not where it should be. Some attempts have been made – here’s one example – but my guess this is that this field within the financial industry will grow immensely in coming years. 

Alert readers of ‘ESG on a Sunday’ will remember that I addressed the problems with ESG ratings in previous editions (here and here). Well, in this paper (click will download PDF) from MIT investigating the divergence of ESG ratings they have it all sorted out.

Companies are not hitting Paris climate goals

As mentioned above, listed equities are on a 4°C path globally. So it’s almost business as usual among corporates, despite pledges and an awful lot of talk. Companies have only scratched the surface so far. There’s no real impact, no real change.

To be more specific about the temperature paths of listed equities, we did a breakdown per country. There are many interesting stories hidden in it, if you think about it. Here it is:

Above: Country temperature paths (°C) based on CO2 emissions generated by listed equities. Scope 1, 2 and 3. Year 2100 projections for select countries. Source: J. Safra Sarasin AM research.

That’s all for this newsletter. Stay safe!

Best regards, Sasja