Trump withdraws from Paris Agreement, so what now?

Trump withdraws from Paris Agreement, so what now?

06-06-2017 | インサイト

It seems to me – and I don’t seem to be alone in this – that Trump is taking rearguard action. However, the US withdrawal from the Paris Agreement is significant, as this country is the second-largest global producer of greenhouse gases, accounting for 15% of all global emissions.

  • Masja Zandbergen
    Masja
    Zandbergen
    Head of ESG integration
  • Cristina Cedillo Torres
    Cristina
    Cedillo Torres
    Engagement Specialist

Other countries and regions such as China and Europe will take the lead in fighting climate change, and states and cities in the US will continue their support for a transition to clean energy. As a clear long-term commitment by governments and corporates reduces uncertainty (and therefore risk), investors are urging them to take action. Robeco recently co-signed a letter to urge all G7 and G20 nations to stand by their commitments to the Paris Agreement. As an investor, we also have long-standing conversations with carbon-intensive companies to get more insight in their climate strategies. This provides insightful information on business risks and opportunities for those companies, while giving our support as shareholders to their transition. We will continue to do so.

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What did the US sign up to with the Paris Agreement?

World leaders agreed at the COP21 conference in Paris in 2015 to take action to limit global warming to 1.5 degrees Celsius above pre-industrial levels. Ratifying nations have committed to put in place measures to achieve their reduction goals, known as Nationally Determined Contributions (NDCs).

On 3 September 2016, under President Obama, the US ratified the Paris Agreement. The US aims to reduce net greenhouse gas emissions by 26-28% below 2005 levels by 2025, including land use, land use change and forestry (LULUCF), according to www.ClimateActionTracker.org. NDCs can be revised, though the general idea is that they should only be changed for the better.

Can they withdraw?

It does not seem easy for the US to withdraw from these commitments, or at least it will take time: officially three years. A faster route would be to withdraw from the UN Framework Convention on Climate Change (UNFCCC). However, this might require Senate approval and have bigger consequences, as the US would withdraw from the UN climate change program completely. This is not a likely route.

What will be the effect?

Current US policies, including the Clean Power Plan, would reduce emissions to 10% below 2005 levels by 2025. Implementing the Obama Administration’s full Climate Action Plan would help reach the pledged targets (see graph). The Trump Administration’s climate policies are projected to flatten US emissions instead of them continuing on a downward trend. This is significant in a global context.

Another potential effect from the US exit is that the lack of regulatory incentives to a low-carbon transition might slow down technology development in the country. The US might miss out on the drive to innovation.

Furthermore, there is a financial angle to it, as the US is contributing a lot, providing USD 2.6 billion in 2015 in support to developing markets through initiatives such as the Green Climate Fund (GCF), and about a quarter of the budget of the UNFCCC, while also giving USD 3.1 million to the Intergovernmental Panel on Climate Change (IPCC). In the Paris accord, rich countries pledged to provide USD 100 billion a year to poorer countries to fight climate change. The US would have taken a big part in this; now other countries need to up their game.

The investor perspective

For better or worse, government policies can have a significant impact on businesses and the investment environment. The investment environment is influenced by the extent to which governments express their long-term commitment to support or incentivize their national industries in adopting measures to reduce carbon emissions and develop innovative green technologies Investors will need to know what to invest in – and what to avoid – in the decades to come as global warming is tackled. This ranges from multi-billion-dollar projects harnessing renewable energy, to changing business models at traditional industries such as carmakers, utilities and energy.

As we see the national commitments made under the Paris Agreement as a significant driver of the low-carbon transition, Robeco has co-signed a letter to urge all G7 and G20 nations to stand by their commitments to the accord. The letter calls on them to implement the relevant financial reporting frameworks such as the Financial Stability Board Task Force on Climate-Related Financial Disclosures. Increased disclosure on how companies factor climate risks and opportunities into their strategy and investment decisions is essential for investors to be able to make well-informed investment decisions, particularly in being able to identify the leaders and laggards in the low-carbon energy transition.

What was also quite striking was that a day before President Trump pulled the US out of the Paris Agreement, a majority of Exxon shareholders approved a shareholder resolution calling for alignment with the 2-degree Celsius warming scenario. The climate proposal was supported by many institutional investors, including state pension funds and large asset managers, which helped to push the vote beyond the 50% threshold.

What now?

Climate change is not the only reason there is clear support for clean energy. Living standards and clean air are important as well, as is the fact that we will eventually run out of fossil fuels. Even climate change sceptics acknowledge this, and this has led to cleaner power generation.

Source: Bloomberg new energy finance

Therefore, even though the US withdrawing from the Paris Agreement is significant, the remaining 85% of countries are sticking to the plan, and I remain positive by nature. I believe that the future is already here and it is shaping up to be a clean one. Investors had better be prepared.

This is our monthly column on sustainability investing by Head of ESG integration Masja Zandbergen, writing this month with Cristina Cedillo Torres, Engagement Analyst with the Robeco Active Ownership team.

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