Investing
Building a low-carbon world Capital markets have embraced the transition to a low-carbon economy. They are transforming themselves to ensure an orderly process, writes Paul Bryant
T
he only way we are going to make a real difference to the climate emergency is to simply stop investing in coal, oil and polluting industries altogether.” That was a client’s perspective conveyed to Chris Halliwell of Sanlam Wealth Planning. It is a view from one end of the spectrum – some investors take a more nuanced approach – but it’s not uncommon. But a large and abrupt withdrawal of capital from carbon-intensive industries comes with risks for investors. Sanlam’s Chief Investment Officer, Phil Smeaton, highlights cost and inflationary pressures as vast amounts of ‘brown’ infrastructure gets replaced before the end of its useful life. Some assets are likely to become ‘stranded’ – for example, many coal mines will be redundant as coal gets replaced as a fuel source. Meanwhile, we will still need iron and steel in the future, so abandoning these industries and their supply chains makes little sense. They have to transform, not disappear. Smeaton says capital markets are designed to deal with change. They continually deal with emerging and dying companies and industries. It’s the speed of change demanded by the climate emergency which is an abnormally complex challenge. But markets are adapting. Calls for even faster change The Paris Agreement of December 2015 – a legally binding treaty signed by 195 governments – marked a rapid acceleration in the transition to a low-carbon economy. Reacting to a growing body of research, signatories committed to limit the increase in the global average temperature to ‘well below’ 2°C above pre-industrial levels (1861–1880 was used as the ‘pre-industrial’ base) and to try to limit the increase to 1.5°C. It was found that the risks of global-warming-induced events ramped up significantly
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