Turning over a new leaf
Posted 04 Apr 16
A global agreement on environment action finally exists
Kyoto. Copenhagen. Paris. Scenes of major environmental discussions and yet, Paris holds a key difference to its predecessors.
The recent Paris agreement signals the first time 195 nations have reached and signed an agreement. Adrian Trollor, Head of Portfolio Construction and Sustainability, looks at the key components of the Paris agreement and what it means for investments.
A fresh start
The Paris climate change agreement was reached on 12 December 2015 and includes:
- A long-term goal to limit global warming to 1.5 degrees Celsius above pre-industrial levels.
- Commitment to be carbon neutral between 2050 and 2100.
- Pledges on emissions by individual nations to be reviewed and strengthened every five years. (Pledges can be market, regulatory and other measures.)
The hallmarks of change
Previous agreements struggled for success and this agreement has some key differences compared to the past.
- The inclusion of developing countries and specific emission targets for them.
- Each nation submitted individual pledges prior to the agreement rather than negotiating these during discussions.
- Support from the UN and the US.
- The involvement and pledges of 1200 parties outside countries like companies such as Westpac Group.
What does the agreement mean for Australian policymakers?
Australia has pledged a reduction of 26-28% from the 2005 level of greenhouse gas emissions by 2030. The current policy and regulation is the Direct Action Plan and Safeguard Mechanism which consists of an Emissions Reduction Fund – where companies purchase emissions reductions through a reverse auction by optional involvement and the safeguard mechanism where companies are penalised for exceeding an emissions reduction baseline or ceiling from past emissions.
Chart 1: Power shifts to emerging markets
Outside of companies, other opportunities for investments are the introduction of new products and services. An example of this in the finance industry is the rise of Green Bonds which allow investors to fund projects with positive environmental benefits. The issuance of Green Bonds in 2015 totalled $41.8bn according to the Climate Bond Initiative. Clearly technologies that play a role in supporting the transition that has been signed up to as part of the Paris agreement are going to be attractive.
There is no question the Paris Agreement is a historic moment for the world. It is an agreement that spells hope for the environment but means a variety of changes, and opportunities, for investors and companies alike.
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