3 min read 31 Oct 22
In November 2021, the COP26 conference brought world leaders together to discuss climate change and accelerate action towards the goals of the Paris Agreement. With the COP27 conference in Egypt fast approaching, we look at the progress that has been made, and the challenges that have arisen, in the past year.
A major positive of COP26 was that it pushed climate issues, and the need for urgent emission reductions, into the mainstream. Geopolitical issues have since taken precedence. Russia’s invasion of Ukraine sparked a humanitarian crisis, while causing turmoil in the global energy system, as Russian gas supplies were cut and energy costs skyrocketed.
Governments have been forced to confront a host of new problems, and yet the urgency of the climate challenge remains. In April, the IPCC clarified that the goals of the Paris Agreement would not be met without ‘immediate and deep emission reductions’.1 Droughts, floods and other extreme weather events have warned of the risks of inaction this year.
With countries unwilling or unable to rely on Russian gas, they have looked to other sources for their energy needs. Renewables cannot be relied upon solely to provide baseload power, or to meet natural peaks in demand. This has led some countries to review their nuclear energy policies, while many have fallen back on other fossil fuels to fill the gaps in the short term.
Despite many countries committing to phasing out or reducing coal use at COP26, coal demand is set to hit an all-time high in 2022. In China, coal production rose 11% in the first half of 20222, and the government approved plans to add more than 8 gigawatts of new coal power plants in the first quarter alone.3 The closures of coal power plants in the UK and US have been delayed, while Germany has recommissioned coal facilities to prevent blackouts. Similar stories have emerged across the globe.
While this will undoubtedly increase emissions in the short term, the social consequences of not doing so would also be disastrous. If energy becomes too expensive or scarce, business will close, people will lose their jobs and families will be unable to heat their homes.
The war in Ukraine has highlighted the drawbacks of relying on external regimes for energy needs. It has become clear that energy decarbonisation and energy security go hand in hand, and that clean energy will play a major role in many countries’ efforts to secure energy supply and reduce costs.
Encouragingly, this has fuelled further investment in clean energy technology. According to BloombergNEF, global investment in renewable energy reached a record high of $226 billion for the first six months of 2022.4
Furthermore, several governments have made bold new commitments in this area. The European Union has brought forward its decarbonisation targets, and announced an accelerated roll-out of renewables through the RepowerEU plan. In the US, the Inflation Reduction Act features billions of dollars of investment for domestic renewable energy production, decarbonisation solutions and improved energy efficiency.
It has also been encouraging to see companies taking positive steps against climate change. Since November 2021, more than 1,500 companies have committed to science based targets, bringing the total to above 3,500. Science based targets are emission reduction targets that are considered to be in line with the goals of the Paris Agreement (to keep the temperature increase below 1.5°C compared to pre-industrial temperatures).
It’s important to note that the fight against climate change is a long-term endeavour. It requires action across all geographies and industries, and won’t be solved overnight. 2022 has undoubtedly disrupted progress in the short term, while creating new challenges which must be addressed alongside climate action. However, we believe there is growing momentum for emission reductions and the push towards net zero, from companies and governments alike. This should only be increased by the potential of clean energy for improving energy security while driving down costs.
As investors, we expect climate action to remain high on the agenda over the coming decades. As long-term investors, this means we will continue to consider the risks and opportunities of climate change, including the action a company is taking, when analysing potential or existing holdings.
At M&G we believe the investment industry needs to evolve. Rather than short-termism and quick wins, we believe investing requires forward thinking, a long-term outlook and active engagement with companies. Helping them to adapt and make a more meaningful and lasting impact on our world.
When it comes to the world’s most pressing issues, there’s no quick fix. But by investing sustainably in a pragmatic and measured way, we can work towards a future that’s better for everyone, delivering positive returns for both investors and the planet.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.