LOGO Agef.bmp.bmp

Good COP Bad COP : a critical view on governments’ environmental commitments

Imagine you go to sleep and forget to blow a candle in your house. You wake up in the middle of the night and discover with astonishment that the candle set fire to the curtains. The crackling of the fire awakens your first friend who witnesses the fire and makes the following statement : “This is a risky situation, we should act before it is too late”. You agree, but instead of acting you wait for five hours. Your whole living room is now on fire and it is pretty hot, so you decide to throw a glass of water on the flames. The blaze keeps growing, so much so that your second friend wakes up and declares “Let’s agree that we should all put out the fire before next year or we will die. Besides, I suggest we stop lighting candles”. This sounds like a reasonable statement, you cheer the speaker and sit down to set the commitment in stone.
Maybe you wonder why no one ever called the fire department or maybe you wonder where I am going with this story. Consider the first protagonist being the Paris Agreement and the second one being the COP26. Now you should realize the ludicrousness of the climate change handling. Institutions should put words into action or soon enough the critical target of keeping a global temperature rise well below 2°C will be out of reach. This discourse could sound alarmist, but it reflects the magnitude of the changes every people on Earth needs to make to live, consume and invest more sustainably.

Pic-B.jpg

Sources: Energy and Climate Intelligence Unit, Aljazeera.


COP26 was concluded in November and achieved to gather around hundreds of countries around a common goal : Fighting Climate Change. This is a great news to see governments who usually disagree on geopolitical rhetoric finally align on their mutual enemy. However, writing “net-zero by 2050” on a piece of paper is just not enough. The world needs shorter milestones and concrete measures to cut emissions today, not in ten, twenty or thirty years’ time. Money is king, so governments should give prominence to financial incentives to punish polluters and reward change makers.

In September 2021, the weighted carbon price was around $40 per ton of CO2. At this level, carbon credits are not accurately pricing the negative externalities of global warming and therefore they do not constitute a deal breaker for companies conducting due diligence on projects that are environmentally harmful, but still very profitable. The price of the right to pollute should be prohibitive to dissuade companies from financing any carbon intensive projects.
However, the issue is not only about the price, but also about the scope of the carbon Emission Trading System (ETS). According to the World Bank State of Carbon Markets, in 2019, ETS and carbon taxes covered only a fifth of global greenhouse gas emissions. The silver lining to the toxic cloud is that China, one the largest polluters in the world, launched its carbon allowance market in 2021, but a global market for carbon allowances remains to be seen. One way to spur sustainability commitments would be to tie executives’ performance reviews to ESG KPIs.

 

Pic-A.png

Sources: KranesharesTM, Climate Finance Partners.


To end on a positive note, it is not all doom and gloom, because more than 450 major financial institutions, controlling assets of over $130 trillion, agreed to finance the investment in a net-zero economy. Besides, 80 countries adopted the “Green Grids Initiative” that aims to create a more interconnected global grid in order to enhance the development of renewable energy. This year’s Nobel Prize in Physics was even awarded to climate scientists for their contribution to the IPCC (Intergovernmental Panel on Climate Change). All this demonstrates awareness, but achieving the target will require unprecedented and immediate action involving redeployment of global finance to support the United Nations’ Sustainable Development Goals. Ultimately, large green inflows should be beneficial to equities and bonds participating to Clean Energy, Sustainable Cities, Circular Economy, Climate Action and Life Below Water among others (SDG 7, 8, 11, 12, 13, 14).
At FARAD I.M., we structurally favour those investments for our clients by including financial and extra-financial criteria in our due diligence process, thanks to our proprietary GreenEthica Sustainable Scoring System. We genuinely believe, to paraphrase the “TINA” equity effect, that “there is no alternative”, but acting now and focusing our attention on the real drivers of the sustainable transition while avoiding the wolf in “sustainable” sheep’s clothing.


Mathias TALMANT
Junior Portfolio Manager
FARAD I.M.

Sources: United Nations, Active Solar, Financial Networking Group, East Capital, Degroof Petercam.