A May 2021 report by the International Energy Agency revealed that there must be no new investment in fossil fuel projects if countries are to reach net-zero carbon emissions by 2050.
At the same time, the European Union has outlined its intention to further develop its taxation plans for carbon-heavy sectors.
In September 2020, the European Parliament voted in favour of including greenhouse gas emissions from the maritime sector into the European Union’s carbon market from 2022. It means that shipping companies will become the latest businesses to begin paying a pollution levy.
There are also plans to tax imports into Europe, with non-renewable, heavy-carbon materials such as steel, cement, and electricity all subject to new tariffs. The move will impose major costs on businesses and will present a new set of risks to investors between 2023 and 2026.
Concerns surrounding so-called “stranded assets” have circulated for some time. The term was originally used to describe oil, gas and coal reserves that would be prematurely devalued due to their carbon-intensive properties, but companies in other sectors are now also at risk of seeing their value threatened by new regulatory costs and taxation plans.
Investors are becoming increasingly sensitive to such threats which have the potential to impact portfolio returns. A study conducted by Research in Finance examining retail and institutional attitudes to responsible investing, shows a significant change in investor attitudes over the past two years. Particularly in relation to the climate risks that remain in portfolios.
The poll of institutional investor attitudes revealed a preference for looking at an investment managers’ engagement efforts and climate change risk exposure that exists in a portfolio – with 54% and 53% of respondents highlighting the importance of these themes, respectively.
Surprisingly, however, 29% said they didn’t consider climate risk or carbon reporting, when evaluating an asset manager’s reporting efforts on responsible investment.
Despite this, there is no doubt that demand for responsible investments continues to increase. Consultants and professional trustees reported a 95% increase in demand for responsible investment products over the last 12 months in the study.
On 21 September 2021, global nations will mark Zero Emissions Day. The action day, launched by the Climate Leadership Coalition is raising awareness about harm caused by carbon emissions. It is a chance to engage and encourage people and business to opt for climate-friendly choices in their daily lives and in corporate practice. But are investors concerned?
During the 2021 AGM season, there was significant shareholder action on corporate climate strategy and the so-called ‘Say on Climate Votes’ put the onus on management to table proposals on climate impact.
Unilever received 90% backing for its climate proposals and even companies in high-carbon emitting sectors had their climate agenda passed – Total received 92%, Royal Dutch Shell received 88% and Glencore received 94%, according to Robeco.
Whether the strategies will adequately combat emissions is unclear. Royal Dutch Shell was legally mandated to implement its net zero strategies by 2030 by a Hague District Court in May.
S&P Global, citing Sabin Center for Change Law, Colombia Law School data, revealed there are currently 425 pending climate lawsuits in various countries around the world.
But Europe is moving quicker than most on regulation. The European Commission is due to propose its carbon border tariff policy in July, to be applied from 2026, with a possible transition period starting from 2023. It would apply to iron, steel, aluminium, cement, fertilisers, and electricity.
Many nations are setting themselves increasingly ambitious carbon targets in the lead up to COP26, setting out plans towards net-zero. The UK, for example, enshrined a new target into law to slash emissions by 78% by 2035 and the EU pledged to reduce greenhouse gas emissions by 55% by 2030. Despite all of this, some fear the industry may not be moving at an adequate speed.
Europe’s carbon border tax will certainly move things along a little quicker, but investors must stay alert as the associated financial risks to some industries gather pace too.