Why the World Cannot Afford to Delay Climate Action

During a global energy crisis, many people view climate policy as a costly distraction. That is understandable: Energy represents the foundation of modern life, and price spikes or shortages can generate social upheaval. Today’s crisis has inflicted major hardships on countries around the world, prompting governments to embrace easy short-term fixes that could drive up carbon emissions. We cannot escape this reality.

At the same time, more and more public officials seem to recognize that our energy and climate challenges are inextricably connected. Not only because low-carbon solutions can reduce fossil-fuel dependence, but also because extreme weather threatens both energy security and economic prosperity.

All of this has come into sharp focus over the past year. Amid the tragic war in Ukraine and the disruption of energy supply chains, we have also seen the destructive consequences of rising global temperatures.

With three months still to go, 2022 has already witnessed record heat waves everywhere from China, India, Australia and Argentina to Europe, the United Kingdom and the United States; record drought conditions in China, East Africa, Europe, the U.K. and the U.S.; and record flooding in Pakistan, in Bangladesh, in Australia and across the U.S. — from Death Valley and Yellowstone National Park to Texas, Missouri, Kentucky and now Florida.

During the United Kingdom’s unprecedented July heat wave, no fewer than 46 recording stations exceeded what had previously been the highest temperature in U.K. history, according to the Met Office. A subsequent study from the World Weather Attribution (WWA) initiative found that human-induced climate change had made the U.K. heat wave “at least 10 times more likely.”

Similarly, WWA researchers examining the heat wave that engulfed India and Pakistan earlier this year concluded that anthropogenic climate change had made such an event around 30 times more likely.

Meanwhile, scientists from NASA, UCLA and Columbia have determined that the period from 2000 through 2021 was the driest 22-year stretch in the North American Southwest in at least 1,200 years, and that anthropogenic climate change was responsible for 42 percent of the drought’s severity.

Needless to say, extreme weather can have deadly effects, especially in developing countries. It can also bring devastating economic impacts and put a tremendous strain on energy supplies. In India and Pakistan, for example, the 2022 heat wave caused at least 90 deaths, while reducing crop yields and triggering widespread blackouts.

As for China, its record-setting drought has highlighted the pernicious cycle of extreme weather, power outages, economic slowdowns and supply-chain bottlenecks. As Kroll chief economist Megan Greene noted a few weeks ago in the Financial Times: “Nearly 90 per cent of China’s electricity supply requires extensive water resources and blackouts are causing temporary factory closures, further disrupting domestic and global supply chains. Since six of the areas struck by drought accounted for roughly half of China’s rice output last year, the impact on food supply will be significant.”

This gets to a critical point about low-carbon policies: The cost of climate action must always be weighed against the cost of inaction.

The Swiss Re Institute has projected that if global temperatures rose to 2–2.6 degrees Celsius above pre-industrial levels by mid-century, world economic output would be 11–14 percent smaller than it would be without any climate change. The projected impacts would be disproportionately concentrated in developing regions, including Southeast Asia, where economic output would be 17–29 percent smaller, and the Middle East and Africa, where it would be 14–22 percent smaller.

Even in the U.S., failing to address climate change could reduce GDP by $14.5 trillion over the next half-century, while destroying an average of nearly 900,000 jobs per year, according to the Deloitte Economics Institute.

Global leaders must keep these projections in mind when responding to the current energy crisis. Rather than look at energy and climate as two separate, competing challenges, governments should adopt policy solutions that seek to maximize energy and climate progress simultaneously.

That will require them to dispel certain popular misconceptions. For example, many people have blamed an overreliance on low-carbon energy for somehow precipitating the crisis. In a recent FT piece, International Energy Agency chief Fatih Birol sought to correct the record.

“I talk to energy policymakers all the time and none of them complains of relying too much on clean energy,” Birol explained. “On the contrary, they wish they had more. They regret not moving faster to build solar and wind plants, to improve the energy efficiency of buildings and vehicles or to extend the lifetime of nuclear plants. More low-carbon energy would have helped ease the crisis — and a faster transition from fossil fuels towards clean energy represents the best way out of it.”

To be sure, the climate problem transcends any one economic sector. Beyond energy and power, the world must also decarbonize transportation, production, real estate, and food and agriculture. Businesses across industries must reduce their carbon footprint if we hope to limit global temperature rise to 1.5 degrees Celsius, the level scientists say is necessary to avoid the worst climate impacts.

Unfortunately, as of May 31, only 11 percent of companies in the MSCI All Country World Investable Market Index were aligned with a 1.5-degree pathway, according to the MSCI Net-Zero Tracker. Indeed, most were not even aligned with a 2-degree pathway. Our Net-Zero Tracker estimates that “listed companies will burn through their share of the global carbon budget for keeping temperature rise below 1.5°C by February 2027.”

In other words, we cannot afford to delay climate action until after the present energy crisis has subsided. All industries must find a way to contribute, even ones that we do not normally associate with the climate problem.

Take finance and investment. Large-scale economic transformations involve a massive reallocation of capital. That is what drives game-changing innovation. When it comes to the net-zero revolution, financial and investment firms can provide essential backing for the companies, technologies and business models that will help decarbonize the global economy. But first they need high-quality data.

During the runup to COP26 in Scotland, my friend Mark Carney, the United Nations special envoy?on climate action and finance, launched the Glasgow Financial Alliance for Net Zero (GFANZ), which MSCI was honored to join. One of the broader initiatives that GFANZ, Bloomberg Philanthropies and MSCI now support is the Climate Data Steering Committee. Last month, the Committee recommended creating a new open-data utility — the “Net-Zero Data Public Utility” — that would democratize access to climate-related information. Making it easier for governments and market participants to understand climate risks and opportunities would help promote transparency, action and accountability — and thereby help the world reduce emissions more quickly.

These are the types of initiatives that every industry must embrace to put the world on a path for net-zero emissions by 2050. Right now, policymakers appear to have lost some of their post-COP26 momentum. With COP27 in Egypt fast approaching, global leaders must rediscover the sense of purpose they had in Glasgow. As the U.N. Intergovernmental Panel on Climate Change reminded us earlier this year, humanity has “a brief and rapidly closing window of opportunity to secure a liveable and sustainable future for all.”