Global policy chiefs raise temperature on climate

Thought of the day

by Chief Investment Office 02 Dec 2019

The United Nations Climate Change Conference, also known as COP25, starts today in Madrid, and comes amid rising pressure from policy makers around the world for action on emissions. Central bankers have increasingly become involved in the climate debate. European Central Bank president Christine Lagarde has said she wants climate change to become a "mission critical" priority for the ECB. Meanwhile Mark Carney, the outgoing governor of the Bank of England, has been appointed as a UN envoy for climate action and finance once his term as governor ends.

Climate change remains a politically vexed issue. But we believe the recent intensification of rhetoric is likely to presage further action on emissions – creating both risks and opportunities for investors. We believe the long-term outlook for investments in renewable energy— both equities and green bonds — remains positive:

  • Firms with high carbon emissions are facing increasing financial headwinds. The price of European Union carbon permits has increased by 225% over the past two years to EUR 25.2. In November, credit rating agency Moody's said it was considering stripping Exxon Mobil, the US oil firm, of its triple A credit rating, reflecting risks over the move to a lower-carbon economy, the Financial Times reported. In 2018 Moody's said that 11 sectors, with USD2.2 trillion in rated debt outstanding, were at risk of credit downgrades over carbon emissions. Meanwhile, earlier this year North American insurer Chubb announced that it would follow the lead of European insurers, such as Axa and Allianz, and stop offering coverage to utilities that generate more than 30% of their output from coal-fired plants.
  • The commercial appeal of renewable energy is increasing. Between 2009 and 2017, prices of solar panels dropped 76% and wind turbines 34%, making them competitive with, or cheaper than, fossil fuels in most major markets, according to IMF data. Falling costs also explain why the growth of installed capacity for renewables has continued to rise, even though the dollar value of investment in green energy has been falling.
  • The range of investment options has been increasing. Issuance of bonds used to finance clean energy projects — green bonds — has reached a record USD 220bn so far this year. Green bonds as an asset class have grown from nonexistent to a USD 690bn market in just over a decade, and issuance of higher-yielding green bonds from emerging markets has also been rising. Liquidity has been improving as well. Over half of the emerging markets' green bond issuance last year was benchmark-sized, at USD 500m or more.

We believe clean energy offers potential for long-term investors. For more details, see our long-term themes on renewable energy and energy efficiency along with our Year Ahead 2020 publication. Green bonds, meanwhile, are becoming an established asset class and have so far been offering comparable returns to conventional bonds, while allowing investors to align their portfolios with their ethical values. For more on this asset class, see our Green bond slidepack.

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