The world is in the midst of a shift towards a low carbon economy. Scientists almost unanimously agree that this shift must take place, and the stakes seem to be getting higher. Rising sea levels, more extreme weather events, flooding, population displacement, drought, food shortages; some of these effects related to climate change are already being seen around the world, and they are expected to worsen substantially over the next few decades. The economic, environmental, and social risks that climate change poses are unprecedented which is why it has grown increasingly important that the world sets targets to mitigate those risks in a very serious way.
The United Nations has an official target that global temperatures should not exceed pre-industrial average global temperatures by 2 degrees Celsius if we are to avoid serious climate change. This requires a cap on the amount of carbon emissions over the next several decades, including targets within each decade to determine whether we are on track to meet the 2 degree (or less) goal.
The consensus so far?
We aren’t looking too good. According to the UN Environmental Programme Report, global greenhouse gas emissions are expected to be 8-12 billion metric tonnes higher in 2020 than the target goal. In fact, scientists are saying that in order to avoid the 2 degree Celsius limit, emissions must be cut by 14% by 2020. To put this into perspective, this would require a 2% reduction in emissions each year, when the reality is that global CO2 emissions rose in 2012 by 1.4% to the highest level in history.
What have all of the investments in cleaner technology lead to, if not a reduction in emissions? Well, although absolute emissions have been increasing, global carbon intensity has been decreasing. Carbon intensity is the amount of carbon that’s released into the atmosphere for each dollar of GDP. Since 2007, global carbon intensity has been decreasing at a rate of 0.7% per year. Although this is headed in the right direction, global average GDP has been increasing at a rate that more than offsets that reduction, which is why 2012 set a new record for the highest level of emissions in any one year. If our carbon goals are to be expressed in terms of carbon intensity, they would look like this: we have to reduce our carbon intensity by 50% in the next decade, 90% by 2050, and almost 100% by 2100.
The 2 degree Celsius target is becoming increasingly difficult to meet, however it is still within our reach if we can accelerate investments in low carbon solutions. A shift to a low carbon economy is taking place, although the shift is, clearly, far too slow. On a positive note, there is increasing public awareness about these issues and, therefore, increasing political pressure to take action. If nothing else, the increasing public awareness has led to more widespread (and increasingly genuine) changes in the private sector to address sustainability-related issues. For example, the Carbon Disclosure Project (CDP) is a body that scores companies on their ability to disclose their carbon emissions each year. There has been a growing number of responses each year, with over 4100 companies responding to the CDP in 2012. Shown below is a chart of the growth rate in submissions over the past several years:
- Carbon Disclosure Project Reporting
Many of these private organizations include banks and other large investing bodies. However, a bank’s emissions are a drop in the bucket compared to the emissions of organizations that may be found in its portfolios. For example, if a bank owns a significant proportion of an oil and gas company, the same proportion of those emissions may be much higher than the total emissions of the bank. The takeaway from this is that although transparency around carbon emissions is improving, there is still a long way to go.
Our ability to hold the average global temperature increase to below 2 degrees Celsius over the next century may largely hinge upon one large task: large financial bodies must be more directly rewarded for channeling capital towards sustainable investments. Part of this may be financial rewards and another part may be reputational rewards. An example of financial rewards could be by linking insurance-related investments with more sustainable investments so that the value of reduced risks from a more sustainable investment are captured by the investing body. Similarly, improved carbon accounting metrics in the context of portfolio management may lead to reputational advantages if a bank is largely invested in sustainable organizations or low-carbon technologies. However, before this can take place, these methods and tools must be developed, standardized, and adopted.
Accelerating the movement towards a low carbon economy can only take place if there is a growing flow of capital being channeled towards that goal. In order for this to happen, the right tools and standards have to be implemented by the financial sector. With each year that passes, the reductions that must be made to stay under the 2 degrees Celsius limit become more and more challenging, however I remain optimistic that we can reach 2 degree target. Why? Because the tools that make the link between sustainability and real financial value are on the horizon, and I know that when the right tools are implemented and shown to create real value, they will catch like wildfire.