In this quarterly ESG newsletter we review recent updates and trends pertaining to sustainability policy and the implications for business, finance, and investors. We will also provide highlights from the COP28 UN Climate Conference (COP – Conference of the Parties), which was recently held in Dubai, United Arab Emirates.
While the first COP in Berlin in 1995 was a quiet affair with a modest 4,000 people attending, this year’s event attracted a record 84,000.[1] This tremendous growth and interest is seen by some as a sign of success and by others as a dangerous distraction from the business of combating climate change as nearly three decades of global oil demand, carbon emissions and temperatures have marched steadily upward. In this year’s gleaming host city of Dubai, billboards advertised the benefits of wind energy, climate ambition, and Exxon Mobil’s carbon capture projects
The COP28 carbon footprint calculator
This event, of course, generates its own carbon footprint as participants travel from around the world to debate and discuss climate policy, with many traveling by private jet. According to the University College London (UCL), it is estimated that 60% of the greenhouse gas emissions from COP26 were attributed to international travel. Researchers from UCL have helpfully created anonline tool to calculate the carbon footprint of travel to this year’s COP in Dubai to shine a spotlight on the impact of travel and provide suggestions to mitigate and even offset this part of its footprint. Their first recommendation: attend virtually.
What has been the track record of the COPs? Based on the below chart in answer to this question, at the risk of committing a pun, not so hot.[2]As of COP1, the global measure of carbon dioxide (CO2) in the atmosphere stood at 360 ppm (parts per million).[3] Today that level is around 420 and is increasing at roughly a rate of 3 ppm per year.
The last time the Earth’s atmosphere held this much CO2 was approximately 2.5 million years ago at the beginning of the Pleistocene (commonly referred to as the Ice Age). As a point of comparison, sea levels were approximately 20 feet higher than they are today. The lag effects of warming and the effect the oceans have had on absorbing excessive radiative forcing, meaning that the Earth receives more energy from sunlight than it radiates to space, largely explains the reason why sea levels remain lower.[4] This is important for policymakers and investors to be aware of, especially vis-à-vis the dense urban coastal populations and trillions of dollars in oceanfront real estate that may be at risk of rising sea levels in the coming decades driven by warmer temperatures.
Big Oil chairs COP28 and decides to phase itself out
Representatives from nearly 200 countries agreed at the COP28 climate summit to begin reducing global consumption of fossil fuels to avert the worst of climate change, signaling the eventual end of the oil age.
The deal struck after two weeks of negotiations was meant to send a message to investors and policymakers that the world is united in its desire to break with fossil fuels, something scientists say is the last best hope to stave off climate catastrophe. COP28 President Sultan al-Jaber, president of state-owned oil company, Adnoc (Abu Dhabi National Oil Company) called the deal “historic” but added that its true success would be in its implementation. The deal calls for “transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner … so as to achieve net zero by 2050 in keeping with the science.”[5]
The deal calls on governments to accelerate that reduction – specifically by a tripling of renewable energy capacity globally by 2030, speeding up efforts to reduce coal use, and accelerating technologies such as carbon capture and storage that can clean up hard-to-decarbonize industries.
While the pledge generated a lot of excitement, it has no specific requirements or targets for the phase out. Oil, gas, and coal account for about 80% of the world’s energy, and projections vary widely about when global demand will finally hit its peak. This past summer, Private Asset Management Portfolio Manager, Chris Merker, and a team at Marquette University, analyzed potential greenhouse gas reduction measures based on what the team viewed as a baseline scenario for alternative energy development between 2023 and 2050. Given the continued need to meet growing energy demand, especially from emerging market countries, and the slow-moving regulatory approval process for energy projects among other factors, they found that a reduction from 80% to 40% in fossil fuel use by mid-century was more a realistic scenario than achieving net zero.[6]
Our take on the conference
COP28 was notable because the nearly 200 countries in COP21, which was held in Paris, agreed to a key target, the “Paris Agreement,” to limit absolute long-term global temperature rises to 1.5C by this meeting. Experts have commented on the likely failure to achieve this target in the coming years.[7] It was necessary to extend the negotiations during the conference based due to a poorly written initial draft agreement. According to Al Gore, the conference was on the “the verge of complete failure” because they could not agree on the wording.[8]
In its final form, a “just, orderly and equitable manner” came with no specific definitions, key performance indicators or requirements. In addition, China and India managed to safeguard their production and use of coal from the phase-out targets. Their only concession was to “accelerate efforts” rather than a rapid phase-down. In the final analysis, the agreement came with loopholes and lacked specific objectives, and appeared mostly to be a pledge of “we will try.”If anything was accomplished, it was only agreeing on the need to transition away from fossil fuels, but there was no agreement regarding how this will be accomplished.
Investment opportunities exist, just don’t rely on governments to get us there
We see the investment opportunities around climate policy through private equity investments in areas including renewables, food, agriculture, and water and resource efficiency. We do not believe the best approach would be reliance on the huge, but potentially unpredictable or short-lived, government subsidies. We believe areas of opportunity would be in projects with good inherent fundamentals that can deliver a standalone financial return without requiring government subsidies (but can benefit from such subsidies), while also providing measurable environmental benefits.
