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CONTRIBUTORS
Emily Ulrich
Senior Product Manager
Sustainability
[email protected]
Martina Macpherson
Global Head of
Sustainability Indices
martina.macpherson
@spglobal.com
The Climate Change Challenge –
From COP 21 to COP 22
Climate change has been one of the most frequently discussed topics of
the year on a global scale.
Multiple policies have been put in place; at the September 2016 G20
summit, leaders promoted climate change as a main concern of the modern
era and cited “green finance” as one of the most effective ways to combat
global warming. Interest in green finance (i.e., financial investment related
to environmental or sustainable initiatives) has increased significantly.
Green bond issuance totaled USD 42 billion in 2015, and issuance for 2016
has already surpassed USD 65 billion YTD.1
Arguably, this discussion kicked off with the December 2015 Conference of
the Parties (COP 21) in Paris, during which 197 countries agreed on their
aim to keep global temperature rise “well below” 2ºC from pre-industrial
times.2 This paper explores the ramifications of that goal and the
movement toward COP 22.
DEFINING THE CONTEXT FOR COP 21
Green bond
issuance totaled
USD 42 billion in
2015, and
issuance for 2016
has already
surpassed USD
50 billion YTD.
Despite popular misconception, “COP” does not include the words “climate”
or “change.” In fact, it stands for “Conference of the Parties,” which serves
as a governing body for the United Nations Framework Convention on
Climate Change (UNFCCC). According to the UNFCCC website, COP is
the “supreme decision making body of the Convention” and is currently
composed of 197 countries.
The international political response to climate change began at the Rio
Earth Summit in 1992. The resulting Rio Convention included the adoption
of the UNFCCC, which came into effect on March 21, 1994. This
Convention set out a framework for action aimed at stabilizing atmospheric
concentrations of greenhouse gases (GHGs) to avoid “dangerous
anthropogenic interference with the climate system.”3
All parties (the participating countries) of the Convention are represented at
the COP, at which they “review the implementation of the Convention and
1
“Explaining green bonds,” Climate Bonds Initiative.
2
“The Paris Agreement”. UNFCCC.
3
“First Steps to a Safer Future”. UNFCCC.
The Climate Change Challenge – From COP 21 to COP 22
November 2016
any other legal instruments that the COP adopts and take decisions
necessary to promote the effective implementation of the Convention,
including institutional and administrative arrangements.”4
The main objective of the annual conference is to review the Convention’s
implementation. The first COP took place in Berlin in 1995, and it meets
annually. Some of the more notable meetings include COP 3, in which the
Kyoto Protocol was adopted, COP 11, which produced the Montreal Action
Plan, and COP 17 in Durban, where the Green Climate Fund was created.
At COP 21 in 2015, for the first time in over 20 years of UN negotiations, all
parties aimed for a legally binding and universal agreement on climate
change, with the goal of keeping global warming below 2°C.
WHAT DOES COP HAVE TO DO WITH CLIMATE CHANGE?
The UNFCCC was created as “a framework for international cooperation to
combat climate change by limiting average global temperature increases
and the resulting climate change, and coping with impacts that were, by
then, inevitable.”5
For the first time in
over 20 years of
UN negotiations,
all parties aimed
for a legally
binding and
universal
agreement on
climate change.
COP 21, the 2015 conference, has been frequently mentioned in the media
due to its bold declaration to keep global temperature increases below 2°C
from pre-industrial levels. The topic, while a hot one, has had some mixed
reviews. Critics argue that its aim and reach are not sufficient and that a
threshold of 2°C still allows too much destruction and irreversible damage.
Others point out that, while many countries have pledged their support, the
agreement is not entirely legally binding. This poses some risks, which we
will discuss later in more detail.
On Oct. 5, 2016, the minimum number of parties (55 countries representing
at least 55% of global GHG emissions) ratified the agreement; thus, the socalled Paris Agreement entered into force on Nov. 4, 2016, followed by
COP 22, which took place Nov. 7-18, 2016, in Marrakesh. The ratification
of the Paris Agreement, within the UNFCCC framework, was particularly
significant, because both China and the U.S.—the world’s two largest
economies and highest carbon emitters—ratified the agreement.6
The full effect of the Paris Agreement cannot be illustrated without first
explaining the context of the Kyoto Protocol.
4
“Conference of the Parties (COP),” UNFCCC.
5
“Background on the UNFCCC: The international response to climate change,” UNFCCC.
6
“The largest producers of CO2 emissions worldwide in 2015, based on their share of global CO2 emissions,” Statista.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
THE KYOTO PROTOCOL
The Kyoto Protocol was a legally binding agreement adopted in 1995 by the
COP. Specifically aimed at developed countries, it held them to specific
carbon emission reduction targets within explicit time periods. The first
commitment period lasted from 2008-2012, with the second one beginning
on Jan. 1, 2013, and set to end in 2020.
The Kyoto Protocol’s aim was to recognize the influence of developed
countries on climate change (especially in relation to the Industrial
Revolution), along with their powerful ability to counteract it. Arguably,
developed countries yield greater influence (in terms of leadership) and
greater flexibility (in terms of financial resources) to act against climate
change than their developing and emerging counterparts.
Two of the world’s
highest carbon
emitters, China
and the U.S., were
not bound by the
Kyoto Protocol.
The Kyoto Protocol suffered from many issues. The U.S. signed but did not
ratify the protocol, reasoning that confronting climate change requires
action from both developed and emerging nations.7 This created a serious
problem: two of the world’s highest carbon emitters, China and the U.S.,
were not bound by the agreement. The first commitment period had 55
members’ signatures, just enough to ratify it. The goal of that period was
for industrialized countries to decrease their GHG emissions 5% from 1990
levels.
So was the first part successful? Based simply on GHG measurements,
the agreement was reasonably successful. According to the UN, emissions
of the signatories were 22.6% below 1990 levels, significantly better than
the 5% reduction target. However, overall carbon emissions have
continued to increase, signaling that the actions of a few still do not cover
the many.8
7
“Kyoto Protocol: Why did the US pull out?” BBC.
8
King, Ed, “Kyoto Protocol: 10 years of the world’s first climate change treaty,” Climate Home.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
Exhibit 1: The Climate Change Challenge in Numbers
2°C
• Earth's average temperature has risen by 0.85°C over the past century and is
projected to rise by 3.7°C to 4.8°C by the end of the century. In 2010, world
governments agreed to limit the increase in global temperature to 2°C above preindustrial levels to avoid the worst impacts of climate change.*
3,010 Gt CO2
• Cumulative CO2 emissions are getting close to the 3,010 GT "Carbon Budget." It has
been estimated that to have at least a 50% chance of keeping warming below 2°C
throughout the 21st century, the cumulative carbon emissions between 2011 and 2050
need to be limited to around 1,100 gigatonnes of carbon dioxide (Gt CO2).
USD 36 trillion
• To have an 80% chance of maintaining this 2°C limit, the IEA estimates an additional
USD 36 trillion in low carbon/clean energy investment is needed through 2050—or an
average of USD 1 trillion more per year, compared to a business as usual scenario,
over the next 36 years.
From COP 21 (2015) to
COP 22 (2016)
• At COP 21 in Paris in December 2015, 195+ nations agreed to combat climate
change and unleash actions and investment toward a low carbon, resilient, and
sustainable future. The universal agreement’s main aim is to drive efforts to limit the
temperature increase even to 2°C above pre-industrial levels. On Nov. 4, 2016, the
Paris Agreement entered into force, in time for COP 22 in Marrakech.
France's Energy
Transition Law,
Article 173, makes
France the first
country to
introduce
mandatory climate
reporting for
market
participants.
Source: International Energy Agency (IEA), “Energy Technology Perspectives 2012: Pathways to a
Clean Energy System,” (Paris: OECD/IEA, 2012; Clarke, L. et al., “Climate Change 2014: Mitigation of
Climate Change,” Edenhofer, O. et al., Chapter 6, Cambridge University Press, 2014; National Centers
for Environmental Information (NOAA), “Global Analysis–2015,” January 2016; UNFCCC, “Historic Paris
Agreement on Climate Change,” Dec. 12, 2015. Chart is provided for illustrative purposes.
PUBLIC POLICY AND REGULATORY IMPLICATIONS
Like the Kyoto Protocol, the Paris Agreement is legally binding. However, it
is aimed at all parties in the UNFCCC (including emerging and developed
countries). Here, we discuss some recent global actions that may promote
the Paris Agreement’s effectiveness (as well as that of the Kyoto Protocol).
France has enacted one of the most effective regulatory actions to date. In
May 2015, the French finance minister announced that institutional
investors in France would be required to disclose how they are managing
climate change risk.
France's Energy Transition Law, Article 173,9 made France the first country
to introduce mandatory climate reporting for market participants, although
similar ideas have been considered in Sweden. The requirement applies to
market participants with a balance sheet of EUR 500 million or more.
Market participants must deliver their first reports, which should cover 2016,
by June 2017.
9
“LOIS,” Journal Officiel de la République Française, August 2015.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
Many responsible market participant campaigns have begun to push for the
global expansion of the Energy Transition Law, arguing that it allows for
increased transparency and offers a unique look into the relationship
between finance and climate change.10
In fact, a surge of low-carbon policies has emerged between COP 21 and
COP 22, even in North America.
The Governor of California signed a bill that aims to reduce state carbon
emissions 40% below 1990 levels by 2030.11 Over the summer of 2016,
the New York City Comptroller released a request for proposal (RFP) on
behalf of the city’s pension funds calling for “carbon footprint analysis
services and a climate risk investment strategy consultant.”12
Most recently, Canadian Prime Minister Trudeau implemented a minimum
price for all carbon emissions, with the national carbon price starting at
CAD 10 per ton in 2018 and increasing by CAD 10 per year until 2022,
when every ton of carbon will cost CAD 50.13
Regionally, Europe continues to forge ahead. In September 2016,
Switzerland became the first country to vote on whether to implement a
green economy. This initiative set a goal to decrease Switzerland’s
excessive resource consumption—and 36% of voters actively supported it.
Similar initiatives are expected elsewhere in the near future.14
BEYOND COP 21
Only 54% of those
polled felt that
climate change
was a “very
serious” issue.
In light of COP 22 and the ratification of the “2°C” agreement, what else can
we expect?
Multiple governments and institutions are now responsible and bound to
slow down the effects of climate change. However, this may be an
unpopular stance. In April 2016, the Pew Research Center polled 40
nations and found that, on average, only 54% of those polled felt that
climate change was a “very serious” issue. On average, only 51% of those
polled in each region felt that climate change was currently harmful, and
just 28% felt that it would become an issue in the next few years.
Surprisingly, Latin America expressed the greatest concern in the short
term—77% of Latin Americans expressed concern for climate change
impacts today. These concerns have bled into corporate policy. In July
2012, Mexico passed the General Law on Climate Change, closely followed
10
Brooksbank, Daniel, “France’s Article 173 should be replicated at EU level, say campaign groups.” Responsible Investor. Oct. 28, 2016.
11
Chang, Alicia, “California extends most ambitious climate change law in US,” Phys.org.
12
Stringer, Scott, “A Carbon Footprint Analysis Services and a Climate Risk Investment Strategy Consultant for the NYC Retirement Systems
and Related Funds,” City of New York Office of the Comptroller, June 7, 2016.
13
“Canada’s climate policy: Let the haggling begin,” The Economist, Oct. 22, 2016.
14
Wackernagel, Mathis, “How Switzerland made history with green economy vote,” Global Footprint Network, Sept. 26, 2016.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
by the 10-20-40 National Climate Change Strategy, which focuses on eight
points of action, with the intended result of decreasing GHG emissions and
adopting other climate change preventative measures by 2040.15
This brings us back to the intended consequences of COP 21 and COP 22;
while the ultimate goal is admirable, the methods are slightly flawed.
The agreement is “legally binding,” but that term is also slightly misleading;
it is helpful to outline which parts are and are not legally binding.
Terms that are legally binding include the following.
•
•
Developed markets are required to supply a USD 100 billion fund to
help emerging markets and developing countries decarbonize.
The regular submission and accompanying review of carbon
emission targets per each individual country.
However, the emissions targets themselves are not legally binding, and
each country will determine its own target.16
This poses a much larger issue: how can the “2°C” initiative be enforced if
each individual country can choose its own target? What will stop countries
from choosing low, achievable targets?
The emissions
targets
themselves are
not legally binding,
and each country
will determine its
own target.
As of November 2016, 187 countries have submitted their targets, known
as Intended National Determined Contributions (INDCs). If the targets are
met, it is estimated that global warming will be cut by only 2.7°C, meaning
that global temperature increases will remain well above the 2°C target.
Despite this flaw, many have pointed out that the 2009 climate change
conference in Copenhagen resulted in failure because there were strict,
legally binding targets for each country. This led to some of the highest
emitters (like China and India) rejecting the agreement. While fighting
climate change is clearly a global challenge, it is essential to include those
high emitters in these agreements. As illustrated by the conferences in
Kyoto and Copenhagen, without participation of the greatest offenders, the
impact of any agreement can be limited.
15
“The Global Climate Legislation Study: Mexico,” The London School of Economics and Political Science, Jan. 25, 2016.
16
Kinver, Mark, “COP21: What does the Paris climate agreement mean for me?” BBC News, Dec. 14, 2015.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
IMPLICATIONS FOR CORPORATIONS – AND THE ROLE
MARKET PARTICIPANTS CAN PLAY
Large companies are increasingly required to report on their GHG
emissions and other environmental impacts.
In a November 2015 report, the Organization for Economic Cooperation
and Development (OECD) noted that of the G20 countries, only five—
Argentina, India, Indonesia, Russia, and Saudi Arabia—do not have some
kind of mandatory climate-reporting scheme in place for corporations.17
Reporting may help companies understand their environmental footprints
and can be the first step toward improving environmental performance.
The
decarbonization of
market
participants'
portfolios is
increasingly seen
as crucial in the
drive to reduce
GHG emissions
and manage the
financial risks from
climate change.
However, to date, the market participants who provide capital to those
companies have not been subjected to reporting obligations on the climate
risks they could be facing in their portfolios. In the absence of mandatory
reporting, market participants such as pension funds and life insurance
companies can use voluntary standards to assess the amount of climate
risk in their portfolios and move away from investing in companies that
might lose out in the shift to a low-carbon economy.
In July 2015, French lawmakers adopted an amendment to France's
Energy Transition Law that requires large market participants to make
annual disclosures on the following.
•
•
•
•
“The extent to which they have integrated environmental and
especially climate-related considerations in their investment policies.
The GHG emissions embodied in their investments.
How they contribute to meeting French and international climate
objectives.
How much of a financial risk they face because of climate
change.”18
The decarbonization of market participants' portfolios is increasingly seen
as crucial in the drive to reduce GHG emissions and manage the potential
financial risks from climate change. This amendment is seen as a
pioneering initiative by the Portfolio Decarbonization Coalition, which brings
together market participants with the support of the United Nations
Environment Programme–Finance Initiative.
In a November 2015 report,19 which was partly funded by a European
Union Horizon 2020 project called SEI Metrics,20 the Portfolio
17
“Climate Change Disclosure in G20 Countries,” OECD, 2015.
18
“Investors to Assess Climate Risk in France,” European Commission.
19
“Climate Strategies and Metrics,” UNEP-FI, 2015.
20
2º Investing Initiative.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
Decarbonization Coalition21 estimated that France's largest market
participants hold more than EUR 2 trillion in assets. The report found that
mandatory disclosures would “significantly boost the demand for climate
metrics” and would help to “set the international standard,” making it easier
for other countries to adopt similar rules.
INDICES THAT ADDRESS ENVIRONMENTAL FOOTPRINTS
How can non-institutions address the threat of global warming? S&P Dow
Jones Indices has an entire suite of indices catered to addressing GHG
emissions, fossil fuels, and high-carbon emitters.
Techniques include a process of reweighting based on carbon emissions,
exclusion based on fossil fuel ownership, and excluding those with the
highest carbon intensity.
As illustrated in Exhibit 2, the indices have performed quite well. The
benchmark, the S&P Global 1200, has notably underperformed its carbonefficient counterparts.
Exhibit 2: Annualized Returns Comparison of Climate Change Indices
160
S&P Global 1200 Fossil Fuel
Free Carbon Efficient Index (TR)
150
140
S&P Global 1200 Fossil Fuel
Free Carbon Efficient Select
Index (TR)
130
S&P Global 1200 Fossil Fuel
Free Index (TR)
120
S&P Global 1200 Carbon
Efficient Index (TR)
110
S&P Global 1200 Carbon
Efficient Select Index (TR)
100
S&P Global 1200 (TR)
90
Sep. 2012
Sep. 2013
Sep. 2014
Sep. 2015
Sep. 2016
Source: S&P Dow Jones Indices LLC. Data as of September 2016. Past performance is no guarantee
of future results. Chart is provided for illustrative purposes and reflects hypothetical historical
performance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.
21
Portfolio Decarbonization Coalition.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
CONCLUSION
We expect to see
a continued
increase in green
finance and
increasing
pressure on
corporations and
market
participants.
Based on recent developments, countries, companies, and participants in
the investment value chain must find a way to maintain a more carbonefficient and less harmful society. Additionally, many of the highest-carbonemitting sectors have been declining. Oil prices are in the midst of their
worst downturn since the 1990s, in part due to an oversupply of oil coupled
with a decrease in demand (to some degree attributable to the shift to
renewable energy).
Looking past COP 22, we expect to see a continued increase in green
finance and increasing pressure on corporations and market participants,
particularly as these 197 countries look to implement regulations and
measures.
The recent U.S. elections have created some uncertainty. Hence, the key
emphasis in relation to climate change mitigation and adoption strategies
must now shift—from global policies and frameworks toward regional
implementation of the Paris Agreement goals.
Here, investment instruments such as indices can help to guide market
participants by providing metrics and frameworks for low-carbon and fossilfuel-free assessments.
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
PERFORMANCE DISCLOSURE
The S&P Global 1200 Fossil Fuel Free Carbon Efficient Index was launched on November 16, 2015. The S&P Global 1200 Fossil Fuel Free
Carbon Efficient Select Index was launched on January 11, 2016. The S&P Global 1200 Fossil Fuel Free Index was launched on August 28,
2015. The S&P Global 1200 Carbon Efficient Index was launched on August 20, 2015. The S&P Global 1200 Carbon Efficient Select Index
was launched on August 28, 2015. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual
performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index
methodology details are available at www.spdji.com.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which
there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for
calculation purposes. The Launch Date designates the date upon which the values of an index are first considered live: index values provided
for any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as
the date by which the values of an index are known to have been released to the public, for example via the company’s public website or its
datafeed to external parties. For Dow Jones-branded indices introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013,
was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, but
that may have been prior to the Index’s public release date.
Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index
may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the
entire available history of the Index. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about
the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all
index calculations.
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Backtested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can
completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed
income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set
forth, all of which can affect actual performance.
The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains
the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not
reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are
intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of
the securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000
investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the
investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an
annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US
$5,375, and a cumulative net return of 27.2% (or US $27,200).
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The Climate Change Challenge – From COP 21 to COP 22
November 2016
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