In the world

🇺🇸 In a busy AGM season, the role and responsibilities of asset owners are in the spotlight. The biggest US pension fund, Calpers, is pushing for better data from portfolio companies in its fight against greenwash, with chief executive Marcie Frost telling the FT that the fund “had an obligation” to “price [climate risk] appropriately.” On the other hand, Republican legislators are seeking — once again — to thwart any attempts to price climate risk, period.

🇬🇧On the other side of the Pond, asset owners face similar pressures. The Pensions Regulator reminded UK trustees that ignoring ESG factors is no longer an option, adding that concerns about patchy data “shouldn’t be a barrier” or an “excuse.” But it isn’t always easy. Asset owners have warned their resources are “stretched to breaking point,” undermining their stewardship ambitions. Will the situation be helped by the FCA’s impending ‘code of conduct’ for data and ratings?

🗺️ Global warming is set to breach 1.5°C for the first time between now and 2027, scientists have warned. How do you get the planet back on track? Emissions offsetting is attracting Wall Street attention, after Microsoft and Ørsted inked a record carbon-removal deal and State Street and Schroders dipped a toe into the market. Representing the sceptical side of the debate, the UK advertising regulator just banned firms from claiming ‘carbon neutrality’ if offsets are involved.

🗺️ In the fight against climate change, technological innovation is also gathering steam. Investment is accelerating on the back of the Inflation Reduction Act, with high-profile progress made towards nuclear fusion, water treatment, and sustainable aviation fuel in recent months. In the US, fresh bipartisan support for carbon reduction incentives could accelerate R&D. Investment could also get a boost from the gradual and global democratisation of private markets.

In the headlines: D*growth is a dirty word

Well, that was fast.

In March, the IPCC warned the window was “rapidly closing” on a 1.5°C future. Two months later, scientists confirmed global temperatures will breach the threshold within the next five years. Of course, the difference between 1.4°C and 1.6°C is not one of order versus apocalypse. ‘1.5°C above pre-industrial levels’ is more symbol than outcome, particularly if only temporary. Its purpose, as a symbol or metric or indicator, is to grade the efficacy of current climate action.

And… it isn’t all bad. Look, 1.5°C isn’t an ‘F’. In 2016, scientific consensus was flirting with the possibility of a 4-5°C temperature rise within the century. That’s an F, which was avoided through the combined force of public policy and private markets. Unthinkable then, the world is now on track to build as much renewable capacity in the next four years as in the last two decades, leading the IEA to revise to 2025 its projection for peak energy emissions. 

But it isn’t all good, either, which is partly because there hasn’t been a clearcut tradeoff between ‘clean’ and ‘dirty’ energy. The emissions of all planned — as in not yet developed — fossil fuel projects amounts to 646 GtCO2, i.e. beyond the upper limit of prior IPCC estimates. Combined with existing projects, we’re on course to sail past the 1.5°C carbon budget of 400 GtCO2 and the 2°C carbon budget of 1,150 GtCO2. 

So, 1.5°C isn’t an ‘A’, and we may not even qualify for a ‘B’ or ‘C’. It follows that something hasn’t worked, and that something must change. Ever innovative, markets have promised no shortage of targeted solutions. Companies in high-emitting, hard-to-abate sectors have flocked to carbon removal and reduction technologies. Industry and building sectors have poured money into energy efficiency, the transport sector, on sustainable fuels. Meanwhile, nuclear fusion is still the holy grail for clean energy. 

None of these technologies really exists at scale — yet. Some, if not all, will eventually redefine high-emitting sectors, but not with enough time to circumvent many of the tipping points arriving this decade. So, what do you do instead? Divest from the ‘bad’ sectors? Even that won’t cut it. The concept of industry siloes is artificially imposed on an economy that really functions as a single organism, from which emissions are an inherent byproduct. Systemic problems need systemic solutions.

Just over a year ago, we published a report examining the relative impact of all US-domiciled sustainable and non-sustainable funds through the lens of Util data. Per the chart below, we found that both groups perform badly against the environmental Sustainable Development Goals in absolute terms (sustainable funds, as expected, have a relative edge). Our findings demonstrate that — while economic growth may support social and economic goals — there’s a consistent trade-off with environmental objectives: a dilemma at the heart of unbridled capitalism. 

The logical conclusion to the question “how do we fix the climate?” is anathema to markets, for which degrowth is a dirty word. There are signs that sentiment is shifting, not least in Europe, where leaders have started talking about “post-growth” finance and post-GDP prosperity. New technologies will be crucial in the century ahead, but no realistic amount of capex and offsets will negate the absolute impact of companies today — and that, alone, is what will determine which fast-approaching tipping points are written into history.