Finding common ground on how to act is one of the biggest challenges in tackling climate change. Acknowledging that we all have a role to play and then agreeing to act collectively are critical to creating real-world impact.
Robeco’s climate strategist, Lucian Peppelenbos, argues that investment capital is absolutely critical in this, but that the real economy needs to be guided by the right incentives for finance to be able to move too.
These incentives need to be far-reaching. “For the real economy to decarbonize, you need policy frameworks, and you need consumers and technology to be onside. All of these pieces have to come together. It’s crucial for us as investors to reallocate capital towards the green, circular, low-carbon economy. But we depend critically on other pieces of the puzzle falling into place as well. I think that's the real challenge.”
Governments have a critical role in putting effective incentives in place. This begins with establishing appropriate carbon pricing schemes and ensuring they are incorporated into economic decisions, so that investors and consumers can factor in the true cost of their actions.
There’s still a long way to go in getting the incentives right. At present, only around a fifth of global emissions are priced, through a variety of carbon schemes. And most of these schemes are underpricing emissions – which means the incentives are not effective in changing behavior. Across various carbon pricing schemes, the weighted average price of carbon emissions per ton is an estimated USD 2 (World Bank data). Calculations show that pricing needs to reach USD 50 by the end of 2021 and USD 100 by 2030 to get us on the 1.5°C trajectory.
In regions where pricing does appear to be more realistic, it has clearly changed behavior. Take Europe, where carbon is now priced at around EUR 30 to 35. “This is really accelerating the phase-out of coal. It’s driving innovation in industry, because low-carbon options begin to make business sense,” Peppelenbos says.
Lighting the path towards change
He believes that the other crucial role for governments is to create long-term clarity. “They need to set clear boundaries, whether for emissions or technical standards, at a certain point in the future so that the market can do its job”.
He cites the example of the Dutch government signaling years in advance that, as of January 2023, all commercial real estate must have an energy label of at least ‘C’ if the owners wish to let or sell the property. “As a result, all property is now being refurbished or taken off the market. The industry has had years to adapt itself, and the process has worked well.”
Another example is the decision by multiple European countries to ban the sale of non-electric vehicles by 2030, a move that is driving huge innovation in the automobile industry.
“So, the incentives combined with clarity on the long-term timeline force a phase-out and a transition in industry. There is time to adapt, and the requirements are reasonable and aligned with where we need to go. They also help people focus and spur innovation.” So, the incentives combined with clarity on the long-term timeline force a phase-out and a transition in industry.
Changing our thinking – and our consumption
A vital aspect of ensuring we’re all moving towards transition is to recognize how our individual choices and actions shape global outcomes. 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, too.
“We’ve focused for a long time on the oil and gas industry, blaming it for climate issues. And, while it does have a huge role as well as a responsibility, what we often forget is that the industry looks for oil on our behalf. As long as we think it’s normal to fly five times a year for a holiday trip, to eat large quantities of meat, and to discard clothes after a few months on wear, our behavior will be a big part of the problem.”
For all of this to change, both supply and demand must change. “But I don’t buy into the narrative that consumers alone determine their behavior. It takes two to tango. Companies play a big role in determining what consumers want as well.”
Legal drivers of change
Developments in the judicial system are helping to accelerate this process. There are a growing number of cases of governments and companies being taken to court and challenged on the impact of their actions on the climate. Successful lawsuits have already been brought against the Dutch and French governments, for instance, for failing to fulfil their duty of care towards citizens to act on climate change. “As these cases build up, it creates jurisprudence that will support and accelerate the transition to a low-carbon economy.”
Investment opportunities move in step with progress in the real economy
The extent and pace of progress in the real economy will determine the investment opportunities and risks. “Although as investors we are future oriented and take a leadership role by signaling to the market which direction it needs to go, the real economy does set limits as to where these investment opportunities develop. We can’t work on a net zero portfolio without the real economy moving in the same direction,” Peppelenbos says.
Meeting the challenge of getting all the elements lined up requires everybody to take responsibility. “While attributing blame to the oil industry, governments or the financial system may be justified, it is entirely the wrong approach right now – because we are all facing the same challenge and responsibility.”
What’s more, we can’t wait for all the elements to come together before we step up to the plate. “Right now, each and every one of us must assume that role. What the world needs right now is distributed leadership.”