Supermajor Math

🌡️ Get used to broken records. Two days after EU climate change service Copernicus predicted that 2023 is “virtually certain” to be the warmest year on record, nonprofit Climate Central reported the same of the 12 months to October 2023. Given El Niño is only just beginning to manifest, adds Climate Central, expect more heat ahead. In addition to agricultural, economic, and trade disruption, the weather phenomenon carries a rising risk of resurgent viruses, the World Health Organization (WHO) has warned.

💸 Climate change is hard to price. Deutsche Bank executive Markus Müller is the latest to sound the alarm on underpriced climate risk, a growing worry for sovereign, corporate debt, and equity markets. In a client note seen by Bloomberg, he argues that conventional financial models struggle to account for “fat tail” or sudden and catastrophic risks of the type climate change could yield. “The temptation is to assume that the effects” of global heating “will accumulate only gradually,” he writes. “However, this isn’t guaranteed.” 

🎐 Macro headwinds batter wind projects. Tangled supply chains and high interest rates have tested capital-intensive renewables this year. In the US, slow permits and slim margins have made things worse. The S&P Global Clean Energy Index is down over 30% YTD. Crown jewel Ørsted is in the throes of a growing cost crisis, having axed two projects and booked multi-billion-dollar impairments in the US. Stateside dynamics have also led to writedowns by BP and Shell. Can the “fundamentally broken” US market be fixed? Yes, but it needs coordinated policy.

⚒️ Commodities are cool (again). In its 2023 Energy Outlook, the International Energy Agency (IEA) warns of ongoing material bottlenecks due to limited extraction, concentrated production, and booming demand. Bruising from clean-energy chaos, sustainable funds are pivoting to the more profitable end of the value chain. Speaking to Bloomberg recently, BlackRock thematics head Evy Hambro labelled metals and mining a “massively overlooked” opportunity for climate-centric investors — if they’re prepared to get their hands dirty and ride the commodity swings.

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In the spotlight: Supermajor Math

The United Nations (UN) Climate Change Conference is a great time for reflection. Every year, the warnings are starker. This time, they’re also more realistic. 

In the months since the IPCC published its Synthesis Report in March, it’s grown evident — particularly for anyone interested in Supermajor Math — that 1.5°C pathways are borderline fantastical. More recently, those suspicions have been effectively confirmed. Based on current climate policies worldwide, the IEA predicts a path to 2.4°C in its Energy Outlook 2023. Based on the same data, the UN revised that figure to 2.8°C. 

The UN’s calculations were made public in its Production Gap Report 2023, which tracks the discrepancy between planned fossil-fuel production and what would be consistent with a 1.5°C or 2°C outcome. This year, the top takeaway is that fossil-fuel producers are literally doubling down. Companies are planning to produce 110% more fossil fuels in 2030 (460% more coal, 83% more gas, 29% more oil) than would be consistent with 1.5°C and 69% more than would be consistent with 2°C. Those expansions will blow the remaining carbon budget twice over — a budget that will run out before 2030 even with absolutely no new net emissions, according to new research.

This year has been one of extremes. Positive fiscal policies have catalysed plenty of positive headlines about cheap renewable energy and booming electric vehicles, all of it true: Notwithstanding recent cyclical headwinds, the structural tailwinds supporting an energy transition are all blowing firmly in one direction. But the good news risks eclipsing the bad, and the bad news is that no green industry will supplant dirty in time, at least not organically. Particularly when net global energy consumption is ticking upwards. 

The recently released State of Climate Action 2023 illustrates what’s going on in clearer terms. Of the 42 indicators reflecting progress towards 2030 targets, the world is falling short on 41. Electric vehicles are superseding expectations, and renewable energy comes up not far behind, but neither is enough to negate emissions in other areas. To turn things around, coal must be phased out 7x faster, deforestation reduced 4x faster, and public transport built 6x faster. Even then, more new research suggests we’re past the point of net zero guaranteeing temperature stability at any threshold.

Moving the dial will require a gargantuan effort from policymakers. For now, all eyes are on COP 28 and any international fossil-fuel treaty that hangs in the balance.