For much of the last few years, tackling climate change appeared to be just a European priority. European policymakers have certainly led the charge: even before the US’s withdrawal from the Paris Agreement, the EU had set more ambitious reduction targets and had made more progress towards meeting them. Moreover, their efforts have intensified in 2020 with the Commission’s commitment to step up its green investments as part of its Green Deal and spend 30% of the EU’s flagship recovery fund on green initiatives.
As we look to 2021, we see an increase in global momentum on tackling climate change which could be formalised during the 26th United Nations Climate Change Conference, also known as COP26, which will take place in Glasgow on November 2021. This could have far reaching implications for the way we live, produce and consume, which will affect the investment landscape.
The election of Joe Biden in the US is an important contributor to our expectations of increased momentum. The president-elect has stated that rejoining the Paris Agreement will be a day one priority. In addition to adopting and leading a multilateral approach on climate change abroad, Biden has ambitions to address climate change at home with the signature of a series of executive orders to ensure that ‘the US achieves a 100% clean energy economy and reaches net-zero emissions no later than 2050’. However as Joe Biden will more than probably have to govern the country with a divided congress he will need to focus on fiscal ‘carrots’ to achieve its climate objectives goal instead of ‘sticks’ (such as use of relevant taxes) in order to win Republicans’ support.
China has also stepped up its intent this year as it prioritised sustainable growth as part of its new five-year plan, and has set out a target to become carbon-neutral by 2060. While this may seem less ambitious than the EU’s and Biden’s 2050 target it would imply a significant step change relative to the trajectory China has been on so far. More focus will be placed on the quality over quantity of economic growth – with increasing measures to address carbon emissions and environmental protections.
Exhibit 1: All regions will have to intensify efforts to meet their climate objectives
Emissions targets
MtCO2e/year
Source: ClimateActionTracker, J.P. Morgan Asset Management. MtC02e is metric tons of carbon dioxide equivalent. Data as of 31 October 2020.
Exhibit 1 shows how far the EU, US and China currently are from these emissions objectives they have set themselves. Efforts will have to intensify meaningfully in the coming years. For governments, this provides an opportunity to kill two birds with one stone – to both green and revive their economies. High levels of public debt may restrain spending ambitions, but that is likely to mean policymakers use regulatory levers to ensure private capital is a core part of the solution. Again, this is something investors need to understand.
The expected flood of green infrastructure projects in the next few years, to the tune of several trillion dollars, presents significant opportunities for investors in equity, fixed income and real assets. The relatively young green bond market and its rapidly growing issuance globally provide a useful indicator of how this opportunity may evolve (Exhibit 2). Demand for green bonds is likely to remain supported by regulatory levers. Central banks, such as the ECB, which increasingly see climate change as part of their mandate, are also discussing the role of green bonds in their broad monetary policy operations, which may give a relative price advantage to green bonds over other bonds with similar ratings and maturities.
Exhibit 2: Green bond issuance is expected to continue growing strongly
Green bond issuance by region
USD billions
Source: Climate Bonds Initiative, J.P. Morgan Asset Management. Data as of 17 November 2020.