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Climate change is the issue of our time. The science is clear, but how to tackle it is not. And we are approaching a defining moment: if we do not go further and faster on cutting emissions soon, the consequences could be severe. The United Nations, which is holding its latest climate change conference in Madrid, has identified a clear gap between national pledges to cut emissions and what needs to be cut to avoid catastrophic climate change. The challenge now is to persuade the world to emit less carbon - or go ‘net zero’ - more quickly, even if US leadership is lacking. Investors can help reduce emissions by investing in low-carbon alternatives and knowing their portfolio’s climate pathway.

World needs to halve emissions by 2030

The world needs to almost halve emissions by 2030 to limit global warming to the 1.5 degrees recommended by scientists in order to prevent catastrophe. We are nowhere near that target, and instead are currently on a path towards more than 4 degrees of warming. Mitigation policies agreed so far only take us nearer to 3 degrees. Fortunately, the tools to get us closer to the 1.5 degree target are available, but need to be much more widely adopted and supported by governments. This will affect every sector, dis-intermediate many existing business models and create new opportunities for long-term growth.

Knowing your portfolio’s climate pathway

Companies will not only have to speed up their transition to low carbon but also give investors more information to be able to assess corporate progress against clear targets. Measuring the level of carbon emitted across a portfolio relative to the benchmark will not trigger sufficient reductions in emissions. Instead investors will need to ask what climate pathway their investee companies are on. For example, are their activities and emission cuts consistent with a 1.5 degree centigrade pathway? Or are they headed towards 3-4 degrees and climate disaster? Some of the largest, most engaged pension funds are still running portfolios with climate pathways of 3-4 degrees. That has to change, as their capital allocation decisions have an impact in the real world. 

Technologies that will power the transition

In our view, there are specific low-carbon technologies that will aid the transition across five sectors: transport, power, industry, buildings and consumer. Electric and autonomous vehicles, as well as ride sharing platforms, are already offering transport alternatives, while renewables and the smart grid will enable green power to be delivered efficiently, even for large industrial users. The most talked-about changes are underway in the consumer sector, where changing behaviours, particularly among the young, are leading to more recycling of goods, meat alternatives and electronic health services. In aggregate, these technologies can help reduce our global carbon footprint and, if universally adopted, should go some way towards closing the emissions gap.

Fidelity International

Fidelity International

Fidelity International