The Paris Climate Agreement is an important step in slowing dangerous climate change. But it’s only the beginning – and to be effective it needs to be backed up by sustained, targeted action.
The Paris Agreement: why it’s important
The global community made an important start to tackling dangerous emission levels in April 2016, when 152 countries – including Australia, the USA and China – committed to action that would limit global warming to well below 2° Celsius (2°C).
Ultimately, the global goal is to have net-zero emissions by around 2050. To achieve this, nations must reduce their emissions while also finding ways to remove carbon from the atmosphere – such as better farming practices, planting more trees and stopping deforestation.
The Paris Agreement is a strong signal that governments intend to implement policies to move to a net-zero emissions global economy. The big deal is that it’s clearer for companies, investors and everyday people to know where the world is heading as they plan for the future.
However, in June 2017, US President Trump announced he wants to withdraw the US from the current Paris Agreement. While this is disturbing, it has also led to a strong show of support for the Paris goals from many states within the US and by other countries (see Trump and the Paris Agreement sub-heading below).
It’s important not to get distracted by Trump’s antics, but to keep pressure on leaders and companies to honour their commitment to Paris. Australian Ethical is playing our part in this challenge, making our voice heard to government and scrutinising companies’ commitment to the goal to limit warming to at least 2°C. And we’re investing in companies that are on the path to achieving this goal.
Trump and the Paris Agreement
In June, President Trump announced that the US will stop implementing the Paris Agreement and seek to renegotiate its involvement. This is significant – but let’s not panic.
Even if the US does withdraw from the Agreement, it won’t take effect until 2020. And after any withdrawal, the remaining countries still account for two thirds of the world’s emissions.
The strong pro-Paris responses to the Trump announcement were also encouraging. Over 20 US states and 125 US cities declared commitment to the Paris climate goals.
China, the European Union and many other countries (including Australia) stated their ongoing support for the Paris Agreement. And France continues to show climate leadership with a commitment to become carbon neutral by 2050 and to ban sales of petrol and diesel cars by 2040.
Climate action down under
As a signatory to the Paris Agreement, Australia has said it will reduce its emissions to meet the 2°C goal by setting ‘nationally determined contributions’ (NDCs) to reduce greenhouse gas emissions. It’s also committed to regularly reviewing and reporting on these NDCs, and increasing them over time to meet the 2°C goal.
However, while five out of seven Australian states and territories have set targets of net-zero emissions by 2050, the Federal Government has not. What’s more, since the Coalition Government repealed the carbon tax in 2014, company emissions have increased again.
Australian Ethical recently delivered a submission to the Australian Government’s review of its climate change policies. We believe that Australia needs a long-term, bipartisan approach to climate policy to achieve the 2°C goal. We think a carbon pricing mechanism is the most effective way to meet our Paris commitments. We also support action such as ceasing fossil fuel subsidies, boosting support for clean technology, adopting strict vehicle emissions standards, and favouring public transport infrastructure over road building.
Getting companies to walk their talk
Many companies also support the Paris Agreement and a 2°C goal in word. But these companies still need to make significant changes to rapidly transition to net-zero emissions. So for instance, if an energy company is truly committed to the 2°C goal, they will invest in more renewable and less fossil fuel generation.
While Australian Ethical doesn’t invest in fossil fuel companies, we still try to influence them to be more transparent about their support for the 2°C transition. For example, we supported a shareholder resolution by Market Forces, asking Santos to more effectively disclose how they are addressing climate risk and opportunity. We did this by holding a nominal number of shares in Santos, which meant we could vote at the company’s annual general meeting (AGM).
Before and during the AGM, Santos was unclear about its climate change strategy. For instance, one communication stated that it is aligned with the Paris Agreement (which is for a 2°C transition) but at the AGM, the Chairman said that Santos adopts a 4°C pathway when assessing new projects. This lack of clarity means it’s impossible to assess what their climate strategy really is.
One way companies can demonstrate their commitment to the 2°C alignment is by explaining how they incorporate a price for carbon emissions in their decisions about potential new investments. Santos and Origin Energy say they do price carbon in their modelling for the future (see Carbon pricing and the 2°C goal sub-heading below). That’s a positive step – but to assess a company’s 2°C alignment we also need to know how they’ve come up with a price, and how it’s used in decision-making.
We’re also concerned that many companies won’t meet the 2°C goal due to unrealistic assumptions. While some think that carbon capture and storage (CCS) technology will become economically viable, we haven’t seen good evidence that it will. Others assume that they’ll meet the 2°C goal by sticking to the government’s current emissions reduction targets. They won’t – because the Paris Agreement is designed so that governments increase their emission reduction targets over time.
Finally, some energy companies seem to underestimate the speed of technological change and disruption, and its impact on fossil fuels. Some oil companies see bright futures based on skyrocketing ownership of fossil fuel cars in India. However, an electrified future for Indian transport, powered by renewables, is far more likely.
But it’s not all bad news in the energy sector. For instance, we invest in Contact Energy, a company that’s expanding its renewable electricity generation capacity. While Contact does earn some revenue from gas (we’ve included them in our investments because they only have a low exposure to fossil fuels), we think they’re worth supporting as they transition to 100% clean energy. In 2016, 82% of their electricity production came from renewables, so they’re well on their way.
The big banks – not always the baddies
The banks deserve criticism on many fronts. Too often they’re involved in irresponsible lending, unconscionable fees, and poor financial advice. They also lend to high emissions companies and projects which contribute to climate change.
However, responsible and well-regulated banks can do good. They make loans to individuals to help them pursue their goals. They fund commercial activity which meets individual and societal needs. And they help individuals and organisations save, invest and manage risk.
On the climate front, large banks are needed to support the massive shifts of capital required to combat climate change. To limit warming to 2°C, more than US$1 trillion needs to be invested in clean energy every year through to 2050, according to the International Energy Agency. Smaller Australian banks simply don’t have the capacity to fund large scale clean energy infrastructure.
In 2016, more than half of the $4.29 billion of Australian investment in clean energy was contributed by loans from the ‘Big Four’ Australian banks. National Australia Bank (NAB) alone lent $1.3 billion to renewables in 2016, and Westpac ranked in the top five banks globally for syndicated lending to renewables.
Banks can also use their public voice for good. For instance, Westpac’s latest climate action plan now rules out lending to Adani Carmichael. Westpac also imposed other fossil fuel lending restrictions and set significant targets for lending to climate change solutions ($10 billion by 2020 and $25 billion by 2030).
By refusing to invest in high profile projects such as Adani Carmichael, big banks can send a message to government and the wider public that such projects are unsustainable.
Carbon pricing and the 2°C goal
Origin Energy and Santos say that they use carbon pricing for their future modelling. Santos have used examples of AU$20 in their reporting, while Origin Energy have said they model prices up to AU$50.
But according to Commission on Carbon Prices, to meet the Paris 2°C target the price on carbon would need to be supported by strong policy, and be at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030.
In Australian dollars, these prices are equivalent to $50 to $130 per tonne. We don’t prescribe carbon price assumptions for companies to use – but we do expect them to tell us what their chosen price assumptions are, and how they’ll inform their future investment decisions. We also encourage companies to think about signing up to Science Based Targets, an initiative for companies to set emissions reduction targets, which are independently assessed to be in line with climate science. Read more about Science Based Targets here.
Assessing a bank’s ethical performance
Australian Ethical invests in both small and large banks, provided we can assess that they’re aligned with our Ethical Charter.
We currently invest in Westpac and NAB. We assess their lending activities to be aligned with the 2°C goal. Making this assessment is complex; to do so, we use a climate scorecard which assesses how much they lend to the fossil fuel sector, renewable energy, energy storage, and technologies and activities which reduce energy usage or store carbon, such as reforestation or low-emissions transport.
For each category, we look at a bank’s current lending, historical trends and lending targets. We also have ‘no go’ projects. For instance, we won’t invest in any bank lending to an Adani Carmichael coal mine, and internationally, we avoid any bank which lends to the Keystone XL pipeline transporting oil from the tar sands of Canada. We also consider the banks’ support for government climate policy aligned with the 2°C transition – both directly and indirectly through participation in industry associations.
By investing selectively in banks, we also pressure them to do better. Our climate investment expertise, ethical perspective and public voice makes a difference. We have seen this approach create positive competition between the large Australian banks to demonstrate climate responsibility.
For instance, at Westpac’s last AGM, Australian Ethical asked the Chairman to rule out support for the proposed Adani Carmichael mine to demonstrate the integrity of the bank’s climate commitments. You can see their answer here.
Beyond energy companies
We also need to investigate other changes required across the economy and society to limit warming to well below 2°C. While electricity and heat production is the biggest contributor to emissions, over half of emissions come from other sources like transportation, agriculture and industrial processes like cement and fertiliser production. This means that we need to take action in all these sectors.
For example, Australian Ethical is part of a group of global investors encouraging food companies to replace animal protein in their food products with plant based protein. Animal protein production is much more emissions (and water) intensive, and has wide-ranging impacts that are negative for the environment and animals.
Action on a personal level
As investors, it’s essential that we keep on speaking up to support climate action. We all need to scrutinise what companies are doing wrong and get angry about the wrongs we find. And we need use our power as investors and consumers to oppose them.
But we also need to look closely at our own consumption and other choices. For example, we need to ask ourselves why we are buying something – do we need it, or are we are buying out of habit, impulse or boredom? We also need to think about the impact of all our day-to-day choices about how we live and work. Browse our whole Good Money blog for all sorts of tips and hints to help you live a more ethical lifestyle.
One approach to consider is ‘effective altruism’ – using high quality evidence and reasoning to make the most impactful choices. This could include decisions about what career to pursue, how to influence change within organisations, through to what phone to buy or what cause to protest – and how to protest it.
Dr Stuart Palmer is the Head of Ethics Research at Australian Ethical.