We'll always have Paris
We'll always have Paris
US President Donald Trump’s announcement that the US will withdraw from the Paris Agreement, which commits the world’s major economies to significantly reducing greenhouse gas emissions, raises many questions.
President Trump did not announce an exit from the broader UNFCC climate framework1 and appeared to leave the door open to renegotiation. However, yesterday’s announcement outlines a clear intent to revitalise industries directly or indirectly tied to domestic fossil fuel reserves. A number of headlines are negative and questions over future commitments will continue, but our view of climate change as a key investment focus remains unchanged.
Momentum is likely to continue
The US contributes around 16% of global greenhouse gas emissions, second only to China2. However, while the decision is disappointing it does not change our view that climate change will remain a key issue for companies to navigate in the coming years and decades. The decision will undoubtedly slow the pace of change in the US but we do not expect it to undermine global progress, for several reasons:
- The swift reiteration of support for the agreement by other countries’ leaders – including China, Russia, India, Japan and the EU – underscores our belief that efforts to decarbonise the global economy will continue even without US participation3. The reaction also highlights the progress made and global momentum established; the strength of international support demonstrated would have been unthinkable even a few years ago.
- Climate policies are generally less developed in the US than other developed countries. Carbon pricing remains policymakers’ key tool and continues expanding to cover a growing share of the world’s emissions. US carbon trading schemes cover less than 1% of the world’s greenhouse gas (GHG) emissions. Assuming China completes its national programme this year, close to one quarter of the world’s emissions will have a cost attached4. Global progress is unlikely to reverse.
- The US has well-developed renewable energy and electric vehicle markets which have provided economic and employment benefits – in our view, the US government is unlikely to quickly undermine this segment5. These industries have benefited from public support in the past, but their economics have now improved to the point of standalone competitiveness in many cases.
- Social pressures can continue to prompt action where regulation does not. US public concern over climate change and support for action have strengthened significantly. In April, 71% of the people asked by analytics firm Gallup favoured protecting the environment over increasing production of fossil fuels6.
Corporates and capital markets have a huge role to play and there are encouraging signs of progress. Recent CDP research found that 48% of Fortune 500 companies have one or more climate change targets and 15% have set targets to buy or invest in clean energy7.
In 2016, Schroders engaged with more than 80 companies to push for more robust climate strategies and transparent communication to investors. Over the last three years, Schroders has supported over 80% of the climate resolutions on which we were able to vote8.
We are encouraged that a growing number of other institutional investors are moving in the same direction. In particular, the 62% shareholder support for a resolution that Schroders co-filed requiring Exxon to publish an annual assessment of climate policies on its business, is a clear indication of action on the issue. That success follows similar results at other major energy companies and puts the issue firmly on the industry radar4.
As long-term, responsible investors we are deepening our analysis of the investment challenges and opportunities climate change represents, engaging companies to demand far-sighted and responsible strategies and supporting political and industry initiatives to address climate challenges.
Yesterday’s announcement is disappointing and represents a backward step in the journey towards decarbonisation. However, considering the progress that has been made and the commitment of most global leaders and many corporate executives, our investment view undoubtedly remains unchanged. We firmly believe that climate change will prove a key theme in the global economy, societies and financial markets. We are committed to developing the tools and pushing for the changes needed to help protect our clients’ investments.
1. The United Nations Framework Convention on Climate Change (UNFCCC) is the overarching framework within which climate agreements including Paris are negotiated, agreed and overseen↩
2. For example https://en.wikipedia.org/wiki/List_of_countries_by_greenhouse_gas_emissions↩
3. Leaders of those countries have expressed their support for the Paris Accord individually as well as collectively at the recent G7 summit eg http://news.sky.com/story/g7-summit-breaks-up-in-stalemate-over-agreement-with-us-on-gas-emissions-10895141↩
4. Schroders analysis of implemented and planned emissions trading schemes and carbon tax programmes, primarily using data from the World Bank↩
5. IRENA reports that renewable energy employment has reached over 750,000, growing three times faster than overall employment and representing roughly three times as many jobs as oil, gas and coal extraction combined. See http://www.se4all.org/sites/default/files/IRENA_RE_Jobs_Annual_Review_2016.pdf↩
6. See http://www.gallup.com/opinion/polling-matters/207608/public-opinion-context-trump-environmental-actions.aspx?g_source=CATEGORY_CLIMATE_CHANGE&g_medium=topic&g_campaign=tiles↩
7. See CDP report at https://www.cdp.net/en/articles/climate/power-forward-3-0-press-release↩
8. Our default position is to support climate resolutions provided their wording allows for meaningful action and does not limit action to specific areas↩
9. Tellingly, several US energy companies - including Exxon - reiterated their support for the Paris deal ahead of President Trump’s announcement↩
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.