Young protesters participate in a rally near the U.S. Capitol as part of the D.C. Climate Strike March to demand action on climate change in Washington, September 20, 2019 - Erin Scott/Reuters
Keynote presented at the Central Bank and Sovereign Wealth Fund Forum, hosted by the Deutsche Börse Group
First of all, many thanks to the organisers of the Central Bank and Sovereign Wealth Fund Forum for having me; it's a great honor speaking with you today.
My name is Renat and I am the CEO and a co-founder of the company South Pole. South Pole is a global climate solutions provider and project developer, with a presence on six continents. We have worked with more than 2,800 clients in the public and private sectors to establish ambitious climate targets, and to unlock climate finance at scale.
South Pole is also the world's largest developer of projects that generate carbon credits. Through carbon finance, we have co-financed more than 700 projects in more than 50 countries, across sectors such as renewable energy, waste management, forest conservation and climate-smart agriculture, leveraging over USD 10 billion worth of investments.
Today, I'd like to share some of my thoughts on the current status of climate action and ambition, bring you up to speed on the latest climate-related developments around the world, help you understand climate risks and opportunities, and finally, welcome you to the club of climate warriors, which is steadily growing.
First, I wanted to share with you a quote by President Joe Biden, which I found very telling. Just last week, he said: “When I think about climate change, I think about jobs".
Why is this so powerful? Let me go back a couple of decades. When I studied environmental sciences in Zurich in the 1990s, one topic I learned about was the Gro Harlem Brundtland Sustainability Triangle. I am sure some of you remember it.
The triangle introduces the three dimensions of sustainability: social, economic and environmental sustainability. The message back then was: We need to balance the social, economic and environmental interests of our planet.
The problem with this concept is that, while it was well-intended, it planted the wrong idea in our minds. People saw this balancing act as a trade-off. We learnt that if you want a thriving environment, it will come at a cost. Protecting the environment means reducing profits. A better environment means a lower-quality lifestyle.
And the challenge was that, in the past 30 years, it was impossible to win over a majority of people to this narrative. We finally realised that, despite people being increasingly aware of the environmental crisis, as soon as they feared effects on their profits or lifestyle , their enthusiasm for environmental action died down.
Ladies and gentlemen, let us be very clear: climate change is one of the largest and most complex global challenges of our century. We have all seen the impacts of floods, droughts and forest fires; we are all fully aware that the ten hottest years on record have occurred in the past 15 years. The scientific debate is over. Climate change will not happen in 30 or 100 years, it is happening right now. According to the IPCC, global net emissions of CO2 caused by humans need to fall by about 45 percent from 2010 levels by 2030, reaching 'net zero' around 2050, for us to keep global warming well below 2°C. If the world is to achieve this target, we need to cut 30 billion tonnes of CO2 from our global carbon footprint. Every year, and until 2030 at the latest.
Does this sound like Mission Impossible? It certainly is a huge challenge. However, in the past years, extraordinary and exciting things have happened, and this gives us hope.
Let's look at solar power: in 1975, the cost per watt of solar power was over USD 100. By 2020, it was USD 0.20 per watt! And in that same period, the installed capacity doubled 18 times, i.e. doubling every 2.5 years!
Another great example is battery storage: in the last decade, a surge in lithium-ion battery production has led to an 85% decline in prices, making electric vehicles and energy storage commercially viable for the first time in history.
The cost of generating renewable energy is now below that of fossil fuel in most countries, even in Germany, which is not a very sunny country. As for the EU, for the first time in 2020, renewables generated more electricity than fossil fuels.
Finally, devices are becoming more and more efficient, at lower costs. The price of an LED bulb, for example, collapsed by five times in the past 10 years, while more than doubling its average lifetime.
The next big quest is agriculture and forestry. Compared to solar or wind power, the business case for engaging in sustainable agriculture and forest conservation might not look as obvious at first sight. However, in this sector, massive opportunities are also close to hand. Take, for example, the cocoa industry in Ghana, a place where my company South Pole develops a number of projects. At the moment, cocoa is typically farmed in monocultures. However, over time, these monocultures deplete the soil, making it less and less suitable for farming. Climate change further aggravates water shortages by causing droughts. By intercropping, meaning the plantation of different shade trees inside a cocoa field, you stabilise the ecosystem, create more humidity and healthier plants, and absorb significant amounts of carbon.
In addition to costs decreasing around the world, employment opportunities are growing. Green jobs are overtaking jobs in the fossil fuel industry. I listened to the Mayor of Pittspurgh William Peduto on a US news channel the other day and he said: “Pittsburgh is where oil was discovered at the Drake Well just north of our city. Coal was discovered along the shores of our Monongahela River. We sit at one of the largest reserves of natural gas in the world. And yet there's more jobs in green and renewable energy than oil, gas, and coal, combined."
So, this is what Joe Biden means when he says: “When I think about climate change, I think about jobs".
Finally, after decades of debate, we seem to be re-interpreting the sustainability triangle. No longer do we see trade-offs between the economy, the environment and our social well-being. Fighting climate change is no longer simply 'doing good for the planet'. In fact, solving climate change could turn into the business case of our century.
So, let's have a look at a number of recent developments at the level of the government and the private sector.
The Paris Agreement is the biggest success in global climate policy thus far. With the adoption of the Paris Agreement, governments established transformational ambition by setting a goal of limiting global warming to “well below 2°C and to pursue efforts to limit the temperature increase to 1.5°C above pre industrial levels". What makes the Paris Agreement so special is that no fewer than 195 countries – meaning, basically, all countries in the world – signed up, and no fewer than 190 also ratified the agreement. The only country to ever leave the Paris Agreement, the United States, has just announced its decision to re-join.
International leaders stand together at the gathering of COP21 in 2015. Presidencia de la Republica Mexicana via Flickr.
In addition to setting high overall ambition, the Paris Agreement also sets rules for transparency and provides a framework for individual countries to increase ambition, collaborate on research, technology and climate finance.
At the climate conference later this year in Glasgow, postponed because of the Covid-19 pandemic, one of the Paris Agreement's most important elements for the private sector will be agreed on: the rules for international cooperation on climate mitigation, which could ultimately lead to a global carbon market.
Unfortunately, the agreement itself does not lead to legally binding commitments by governments, and there is no sanction mechanism provided. This is different from the Kyoto Protocol, where signatory governments committed to legally binding emission reduction targets in its Annex II. Of course, the big flaw of the Kyoto Protocol was that only developed countries were listed in Annex II, and the even bigger flaw was that major countries like the US never ratified it.
In summary, it is important to note that the Paris Agreement itself is very strong in its call for ambition, but less so in actually enforcing action. For the action to unfold, we have to rely on national governments and their own regulations and laws.
The good news is that in major blocs, the stars are currently aligning in terms of ambitious climate policies. For a meaningful global response to climate change, you will need, at a minimum, the three major contributors to it, namely China, the US and the EU.
In mid-2020, the EU embarked on its European Green Deal, which is probably Europe's most ambitious policy initiative since the introduction of the Euro. With the Green Deal, the European Union is creating a regulatory storm that will likely stretch far into the future, deep into today's profit models, and way beyond Europe's borders. The centerpiece is the European Climate Law, which is in its final stages of negotiation between EU institutions. That will enshrine the goal to reach net zero emissions in 2050 in law, plus a host of measures for achieving this.
The Green Deal will bring a flurry of new regulation, plans and changes to EU law: among them, strategies for agriculture, hydrogen, mobility, efficient buildings, offshore wind energy, methane pollution, sustainable investment and the circular economy. One of the most interesting aspects of the Green Deal is that it is not solely targeted at the environment. The EU sees the Green Deal as a tool to boost competitiveness and clean jobs across the bloc.
One important enabler for the implementation of the European Green Deal is the so-called EU taxonomy. The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. The idea is that by providing appropriate definitions to companies, investors and policymakers, we gain clarity on which economic activities can be considered environmentally sustainable. This is expected to create security for investors, protect private investors from greenwashing, help companies to plan the transition, mitigate market fragmentation and eventually help shift investments to where they are most needed.
This has changed radically with the inauguration of the new administration, which has pledged to make climate action one of its top priorities. Of course, it is too early to fully recognise the impact the new policies have on actually curbing emissions. However, just one week ago, a new Executive Order signed by President Biden takes bold steps to combat the climate crisis both at home and across the world. In signing this Executive Order, President Biden has directed his Administration to:
This is excellent news and we look forward to seeing the concrete steps being taken to fulfil these adjectives.
While it is the largest polluter in absolute terms, China has also been an early and large-scale investor in climate solutions. It is, for example, by far the largest producer of solar photovoltaic plants in the world.
Great wall of China. Image via National Geographic
However, in addition to roughly 1,000 gigawatts of existing coal capacity, China has 121 gigawatts of coal plants under construction, which is more than that being built in the rest of the world combined. Some time ago, China had already pledged to peak its emissions before 2030 and achieve net-zero emissions by 2060, 10 years after the US and the EU.
A new exciting development is that China recently announced its plan to set an absolute emissions limit after 2026. Until now, China has only been willing to cut emissions measured as a portion of a unit of economic output, which gives no guarantee of a physical limit. While the details are still unclear, an absolute emissions cap in China would be a game-changer, which could well inspire other nations to follow suit. As a first step, just yesterday, China launched what will become the world's largest carbon market. The initial compliance phase covers carbon dioxide pollution from 2,225 power plants that each emit more than 26,000 mt/year.
Let us now take a closer look at how the private sector has responded to the global calls for enhanced climate action, starting with climate finance.
USD 750 billion: that's the amount that Goldman Sachs has committed to deploying across sustainable investing, financing and advisory activities in the next decade. And it is not alone. Mainstream banks, asset managers and heavyweights such as BlackRock have made large, high-profile financial commitments to grow sustainable finance and sustainable investing by integrating ESG considerations into their financial products and services. Many of them have pledged to divest from fossil fuels or, like SwissRe, to no longer provide insurance coverage to coal-fired power plants.
Inside many financial sector organisations, sustainable finance is shifting from a largely corporate social responsibility and philanthropic-led activity to an area more closely integrated with overall corporate strategy and business activities. In addition to reducing risk by, for example, moving away from companies who are likely to do poorly in a warmer world, many have spotted an investment opportunity in actively looking for businesses that will benefit from – or directly help – the transition to a net-zero economy. Recent findings show that investors favouring ESG do not have to compromise on returns. Quite the opposite, in fact.
The 450 members of Climate Action 100+, one of the world's leading investor groups who collectively manage over USD 40 trillion of assets, are successfully engaging with high-emitting companies globally, driving them to take climate action.
However, and I am sure we will discuss this later on the panel, the number of different sustainability initiatives geared towards the financial sector can be an overwhelming alphabet soup with no standardisation. To measure economic performance, we have centuries-old tools like balance sheets or P&L statements, and we use globally accepted accounting standards, such as the IFRS.
However, to measure environmental performance, such standardisation is largely still missing. Coordination between initiatives is not always obvious, although the Better Alignment Project is welcome, and so are the efforts by the EU on taxonomy, as discussed earlier. But to effectively integrate such considerations into long-term financial decisions and achieve ambitious climate claims, the financial industry urgently requires a new set of skills and reliable data.
One of these global efforts is the TCFD. This stands for the Task Force on Climate-related Financial Disclosures and was initiated by Mark Carney, former chair of the Financial Stability Board. The TCFD recommendations are a global framework which aims to channel private sector efforts into realising the goals of the Paris Agreement: most importantly, by limiting greenhouse gas emissions to prevent warming beyond 1.5 or 2 degrees above pre-industrial levels. The framework is principles-based and can be applied to any sector. Its focus on analysing and reporting the impacts of climate change on the business model and strategy of a company is clear.
Around the world, investors, lenders, insurers and governments are increasingly reliant on the data emerging from corporate disclosures for the assessment of their own value and to inform their investment strategies. TCFD has a five-year implementation period, with most companies incrementally adding to their disclosures during this window. The TCFD recommendations contain four key elements on which to report annually: (1) improve governance, (2) define strategy, (3) establish risk management, and (4) set metrics and targets.
The perspectives on ESG and sustainable finance have changed in the past few years but much more remains to be done. Incremental changes will only bring society so far: they may not be enough to help the planet meet the goals of the Paris Agreement. Filling skills gaps and effective collaboration is key to moving forward.
The good news? Today, we have access to simple, cost-effective and actionable solutions that can be tailored to different organizations working in the financial industry. The transition to a zero-emissions future brings great opportunities – and with the right tools and advice, companies and investors can successfully prepare for this transition and mitigate risks.
However, what was probably the most exciting development of the past few months was the massive surge in companies pledging to reach net-zero emissions. Since the publication of the IPCC report, limiting global warming to 1.5 degrees Celsius and achieving net zero have become synonymous with real and ambitious action on climate change – the ultimate goal for a greener future.
A net-zero target means that a company has to reduce emissions in line with climate-based science and compensate for remaining emissions by financing climate action projects. The growth in net-zero pledges has been spectacular. This is even more impressive since we are talking about 2020, the year of the pandemic:
Finally, in 2020, a Taskforce on Scaling the Voluntary Carbon Market was created under the leadership – once again – of Mark Carney. The taskforce estimates that, in order to keep the world within the 1.5°C pathway, carbon markets need to grow by a factor of 15 between now and 2030, and over a hundredfold by 2050.
Finally, let me conclude with a question I get a lot these days, which of course is about the pandemic that keeps all of us busy:
“Thanks to Covid-19, most airplanes remain on the ground, many factories are closed, and fish are once again found swimming in rivers and harbours. Isn't this a great thing for the climate?"
As you might expect, the answer is not simple. On the one hand, emissions dropped last year. For example, US carbon emissions decreased by 10% due to Covid19 curbing travel. However, these reductions are temporary and not systemic. What's more, the shocking reality is that, in order to reach net-zero, we will need the same level of reduction every year in the next few decades. To make things worse, early data from 2020 shows that deforestation levels, far away from the media spotlight , rose significantly.
Photo by Jon Tyson on Unsplash
The far bigger hope is somewhere else. Across the globe, governments are ramping up huge financial stimulus packages to rescue their ailing economies. Big infrastructure programmes have been unleashed. The question is: can we 'build back better'? Will we use this opportunity to invest in programmes like a massive roll-out of electric-charging stations? Of high-speed rail replacing flights? Regenerative agriculture? A power grid suitable for transporting electricity quickly from places where the wind blows and the sun shines?
Another interesting topic is company bail-out packages. There is increasing pressure on tying environmental performance with receiving support, particularly when it comes to carbon-intensive industries. Social media is playing a key role – hashtags like #greenrecovery are going viral – and the Extinction Rebellion campaign #notgoingback focuses on governments around the world who are putting relief packages together for high-carbon industries. Greenpeace requested a stimulus plan which prioritises the transition to a low-carbon economy or a Green New Deal, as communicated by the EU. Meanwhile, global investor groups published a joint statement calling for a sustainable recovery.
In this respect, the approach taken in Canada is interesting and groundbreaking: in order to obtain Covid-19 bailout funds, firms are required to file TCFD reports, i.e. to assess their climate-related risks and opportunities. While unique in its approach to state aid, the message resonates with a deeper trend aimed at boosting corporate reporting around climate-related risks and actions. Such transparency can become the bedrock for a resilient economic recovery.
All in all, we can learn at least four lessons from the Covid-19 pandemic that are relevant for our fight against climate change:
First, Covid-19 is an example of what happens if you ignore science. My feeling is that a number of people are painfully aware of this now, and it appears that scientists are back in fashion. This is clearly a good thing for the climate.
Second, like the coronavirus, fighting climate change requires international cooperation. Major global challenges cannot be solved by one country alone, and you need the cooperation of all stakeholders as well as the general public.
Third, the power of innovation. Covid-19 vaccines were developed in less than one year. Previously, the fastest vaccine to go from development to deployment was for the vaccine in the 1960s, which took about four years. This shows us that if humanity really wants to solve a problem, the job gets done fast. This is encouraging for the climate, but it is clear that, just like for vaccines, large amounts of risk capital are needed, as is a business case for the developers. The equivalent of a guaranteed offtake for vaccines is a fixed minimum price on carbon.
Fourth: Why was the world able to react so quickly to Covid-19, while we have been dabbling in combating climate change for 30 years? A key reason is that Covid-19 affects you personally and immediately, while climate change does not. Fighting Covid-19 requires a relatively simple solution: wash your hands, put on a mask, practise social distancing, get a vaccine.
With climate change, the solution is a lot more complex. The lesson here is: we need to re-think how we talk about climate change. It must become easy to understand, tangible, clear – and we must propose clear and manageable steps for how to proceed.
Finally, let me end on a positive note: against many predictions, Covid-19 has not slowed down, but rather sped up company climate action. According to a research piece published by my own company, South Pole, 65% of companies report that climate mitigation efforts have stayed the same or accelerated throughout Covid-19. 69% are more open to adopting transformational innovation for climate action. 63% are keen to collaborate with other industry players on climate solutions.
Clearly, if not even Covid-19 can stop climate action from growing, then I think it's fair to say that solving climate change could well turn from the biggest challenge to the biggest business opportunity of our century. So, welcome to the year of climate action, 2021.
South Pole is a leading global carbon project developer and provider of climate solutions. South Pole currently supports over 1,000 companies and organisations in designing and implementing their sustainability strategies, moving them from ambition to climate action.
For more information, contact Isabel Hagbrink, Director of Communications, South Pole, email: i.hagbrink@southpole.com
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