That is a sobering assessment, but one ray of hope is that it comes at a time when policy action on carbon emissions has extremely strong momentum. Just in the course of writing this article, we’ve had to make several revisions as major new announcements are made.
The other context within which to view climate policy action is through the lens of geopolitics. The humanitarian tragedy and geopolitical crisis wrought by the invasion of Ukraine has caused politicians, corporations and individuals in the West to radically rethink their relationship with energy security on every level.
One of the issues that has been thrust into the spotlight by this is the supply of fossil fuels. It is a systemic risk that has accumulated over many years and intersects with social factors –as prices soar in a way that the most vulnerable in society can scant afford.
We are acutely aware of the importance of incorporating the cost of carbon into our analysis of the global equity universe. We do that today using bespoke analysis that focuses on internalisation of cost and actionable climate strategy. We do not rely upon third party assessments, as the regulatory frameworks for reporting, pricing and managing the totality of carbon emissions across the supply chain are still evolving.
Across the pond, the European Union continues its march with an agenda that is progressive in its principles and aggressive in its timelines. As part of its previously announced plans to achieve climate neutrality by 2050, the EU has set itself a “Fit for 55” intermediate target to cut carbon emissions by at least 55% by 2030. Even assuming that such a target can be hit, however, it would have no material impact if those emissions were not reduced but simply ‘offshored’ by shifting carbon-intensive industrial processes to territories outside the EU with softer regulations. This process is known as ‘carbon leakage’, and it is what the EU’s carbon border adjustment mechanism (CBAM) is designed to address.
Recognising the global aspect of climate change the CBAM aims to equalise the price of carbon between domestic EU production and imported goods. Building upon the existing Emissions Trading System (ETS), importers will have an obligation to buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced under the EU’s carbon pricing rules (if carbon costs are paid at source, these can be fully deducted). Not only should this create a level playing field when it comes to carbon pricing for goods sold in the EU, it should also provide an incentive for countries outside the EU to reduce the carbon intensity of industries located in their territory in order to improve their global competitiveness.
These plans were first outlined in July 2021, with a phased implementation due to begin on 1 January 2023. Within nine months, the EU Council agreed a “general approach”. Given the urgent timelines, some important details are still being worked on, including the full scope of the sectors covered (although many highly carbon-intensive sectors such as iron, steel, cement and electricity generation are definitely in scope). We note that there has also been disappointment in some quarters as organisations such as the WWF have expressed concern that the regulations don’t go far enough. However, in the context of capital markets, it is notable how progressive the proposed rules are, and how committed the EU is to the timeline of 1 January 2023, indicating a determination to get on with action. This may well be an example of ‘do not let perfect be the enemy of good’. As with other recent policy progress, they can always go further, but our focus is on integrating the direction of travel into our investment thinking and capital allocation.
There is a dominant focus on carbon as the policy landscape and inevitability of financial adjustment to reflect emissions have converged and are imminent. As a specialist team that have dedicated our careers to sustainable investing, we are well versed in looking at the long term. We have been integrating decarbonisation since the inception of our strategy, and we also embed natural capital considerations into our analysis alongside social equality. It is our view that carbon policy has set the pathway for biodiversity to have a more direct journey. The recent release of the Taskforce on Nature-related Financial Disclosures (TNFD) beta for consultation highlights the impetus behind natural capital and biodiversity loss.
TNFD will follow a much more accelerated timeline than the multi decade long exploration of decarbonisation – it is due for implementation in 2023. This isn’t something for investors to think about tomorrow, but today. The opportunity of doing so, for investors and their clients, is likely to lead to better outcomes for planet, people and profit.
Environmental risks dominate the outlook for the next decade
Our hopes for people, planet and profit
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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.