In combating climate change, governments have an important role in putting effective incentives in place, so that consumers and investors can factor in the true cost of their actions. In addition, they need to provide long-term clarity on emissions or technical standards. This will allow the market to do its job: incentives and clarity will force a phase-out and a transition in industry.
But the responsibility does not lie solely with governments. Recognizing how our individual choices and actions shape global outcomes is vital in ensuring a collective move towards transition. While it’s easy to point the finger at companies that produce carbon-emitting products, we need to think about the role of consumer behavior as it takes two to tango. Investors and other stakeholders also need to play their part in shaping corporate strategies.
Moreover, investment opportunities move in step with progress in the real economy. Investors are future oriented and can take a leadership role by signaling to the market which direction it needs to go. But the extent and pace of progress in the real economy will determine the investment opportunities and risks. Therefore, we all have a role to play and acting together is critical to creating a real-world impact.
Curbing global warming requires a reduction in greenhouse gas emissions from human activity. However, investors face a challenge in acquiring the data needed to track the levels of emissions and the rate at which they are being reduced.
A fundamental problem of carbon footprint data is that it is backward looking, with an average time lapse of around two years. What we really need is more forward-looking metrics that will tell us whether a company is going to decarbonize in the future.
The second concern is that data comes from multiple and overlapping sources that are often contradictory. But we need to be careful not to frame the entire issue as a data challenge, because it’s more of an analytical challenge caused by the data itself.
The third issue is related to choosing which metrics to use. For example, should you look at companies in terms of their carbon footprint per sales, or per enterprise value? These factors make huge differences when EU law stipulates one thing and laws in other regions and countries stipulate something else. There needs to be a more coherent approach.
Carbon pricing is often seen as a solution to curbing emissions. However, it is far from being adopted on the global scale needed to make a difference. Current carbon prices are also much too low. Indeed, most countries have neither a carbon tax nor a trading scheme, or operate these at such a low level that they don’t act as a deterrent to emissions.
But there are some signs that the issue is finally being taken more seriously in some regions. For example, the price of carbon in Europe is now EUR 33/t CO2e. At this level, it starts to impact economic behavior – as we see the shift from coal-fired to gas-fired power production – while also stimulating low-carbon innovation in industries.
To learn more about the challenge in tackling climate change, please visit the dedicated section in our climate investing hub.
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