03 May 2021
31 Mar 21 | By Randeep Somel
Randeep Somel, Fund Manager, M&G Climate Solutions Fund does a question and answer for the Guide to Responsible Investing.
Q: Last year was an important one in terms of the race to zero carbon emissions. What were the most significant developments?
A: In the space of just six weeks, the future of the Paris Agreement on climate change was transformed by two significant events. On 22 September, shortly after US president Donald Trump called the Paris Agreement “a one-sided deal” and criticised China for being “the world’s largest source of carbon emissions”, president Xi Jinping of China told the UN General Assembly via video that China would scale up its intended nationally determined contributions (under the Paris climate agreement) by adopting more vigorous policies.
In practice, this would see China achieve a peak in carbon dioxide emissions before 2030 and carbon neutrality before 2060. Xi added that “the human race cannot ignore the warnings of nature over and over again” and he urged other countries to pursue “a green recovery of the world economy in the post-Covid era”.
Second, on 3 November, the US elected a new president with a very different approach to the challenges of climate change. Joe Biden ran his campaign on a policy of getting the US back into the Paris Agreement, so it came as no surprise that his first act of business on entering the Oval Office was to do just that.
Meanwhile, the Democrats won both run-off elections for the Georgia Senate seats in early January – occupied by Republicans since the 1980s – creating a 50/50 split in the US Senate. With vice-president Kamala Harris having the deciding vote, the Democrats now control all three chambers of the US government: the executive and both of the legislative branches.
That doesn’t mean it’s going to be easy – Biden has wafer-thin majorities in both – but it does dictate that the Democrats effectively control the order of business being put to the floor. As long as they can focus their own members successfully they can work through any legislation they want now, and they are moving in the right direction.
Q: Are you positive on the progress made in terms of the reduction of carbon emissions?
A: The timing of president Xi’s announcement just before the US election did have an element of politicking to it, as it was likely calculated to reveal the incumbent US presidents’ policies as outdated. It will be crucial now that the US and the rest of the global community keep the pressure on China to ensure it is making good on its goals.
China has been a laggard in terms of technological developments in the past and it now has an opportunity to develop a new industry in clean power and green technology. It can use this to support its own domestic economic growth and create a strong export market. As Mark Carney, former governor of the Bank of England, said the transition to net zero is “creating the greatest commercial opportunity of our age”.
While progress is being made, we are still not doing enough. The next key event will be the UN’s Conference of Parties (COP26) summit in Glasgow in November this year. All countries that are UN signatories will attend and state their carbon reduction targets and what they are doing to achieve them.
The UK is well placed here. No country has decarbonised more in the past ten years than the UK. However, while the chancellor’s recent budget had green elements to it and a positive tone, we need to keep the momentum going.
The climate challenge can be thought of as a three-legged stool for the stakeholders that need to participate: consumers, industry and government. Studies from across the world now show populations are concerned about climate change and are willing to modify their own behaviour. Industry can see the economics working in favour of sustainability and are willing to commit capital to the effort and starve funding for ‘de-merit’ activities.
That then leaves government. While European governments have taken a lead, the awakening of both the Chinese and US governments will provide the much-needed impetus to reach our carbon targets over the coming decades.
Q: You mentioned Europe. What progress is being made in the region?
A: The major positive for Europe is that European companies (and I include the UK in this) have sustainability already built into what they do, as it is something they have been doing for a while. There has been lots of talk of Europe being behind in certain areas, particularly technology. Europe simply has not had the culture that has cultivated the kind of tech stocks that have done well in the US in the past decade.
However, as we look out over the coming decade, there is a structural shift that may benefit European companies. Europe has a strong history in sustainability, especially with regards to the environment. With the Paris Agreement now in place, we believe we are at the beginning of a multi-decade transition to reduce global emissions. This is an area where European companies have a rich heritage and they are well placed for the coming growth in the domain of their expertise.
Q: What are the potential headwinds and challenges investors need to be aware of?
A: Unfortunately, due to Covid and the economic shutdown, the amount of debt at every level of society has greatly increased. To change our carbon behaviours effectively will require a lot of capital. The problem is there are governments globally with huge amounts of debt, in most cases at levels not seen since the second world war. This will hinder their ability to progress effectively, especially if interest rates start to rise.
To replace your fossil fuel and electricity production with renewables requires capital, to transfer hard-to-electrify industries to green hydrogen requires capital and to get everyone recycling requires infrastructure build-out. This capital is needed at every level: consumer, industry and government. It is estimated that over the coming decades the UK is going to need £1.5trn and the EU €10trn (£8.55trn) to start hitting their long-term carbon targets*.
Due to the covid debt build-up, governments will likely raise taxes going forward. The question is which sources they raise from. The idea of a carbon tax has been mentioned by the US treasury secretary Janet Yellen. A more effective price for carbon and carbon-emitting activities will help our transition. As carbon is more and more considered a de-merit activity, like alcohol and cigarettes in the past, governments could use this as a potential source of taxation and income.
Q: Is economic growth good for combatting climate change?
A: In the past, economic growth was always bad for the environment because the richer people became, the more their carbon footprint increased. As industrial activity increases, the more pollution you have and the more carbon you emit. This is changing, however, and we have effectively reached a tipping point where economic growth is positive for the environment.
For example, in the past you would probably have swapped your old petrol car for something bigger like an SUV if you became more wealthy, increasing your emissions. Today, however, you would likely switch to an electric vehicle. But if you are worried about your job security, what are the chances you would make such a large purchase with confidence?
It is economic growth that provides the opportunity. We have the tools today to decarbonise, but it requires capital and confidence.
Q: What do you expect will be the growth areas going forward?
A: One of the main growth areas is likely to be green technology, whether it be geothermal, hydrogen or semiconductors. It will be technology that provides the solutions. While the effects of working from home and less business travel because of the pandemic have helped out on the climate side, there has also been a negative. Most countries are now emitting more carbon than pre-Covid-19. For example, people are worried about the confinements of public transportation so they are making more trips by car.
While we need to focus on the areas that are positive, such as remote working and cleaner business practices, at the same time we must push forward in areas like the adoption of electric vehicles and providing the infrastructure to speed this up. Again, Europe and the UK are leading the way, with the UK committed to banning the sale of new combustion vehicles by 2030.
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