With less than 100 days to go until the start of the Paris climate summit (COP 21), investors are already starting to take note of some major policy announcements, argues Christina Larkin
These are interesting times in the world of climate politics. In recent weeks, President Obama announced his "war on coal" via the US Clean Power Plan, with an increased focus on wind and solar development.
The French government has passed the Energy Transition for Green Growth bill, set to increase the emissions tax on fossil fuel use four-fold to €56 ($67) per tonne in 2020.
Somewhat less related to climate policy, but equally relevant, was the decision by the Australian federal court to withdraw approval for the proposed Carmichael coal mine (which would have been the third largest coal mine in the world).
These developments occur against a backdrop of increased pressure on countries to agree to a new global deal to tackle climate change in the lead up to the 21st UN Conference of the Parties (COP21) in Paris in December.
The process is already well underway, with some national governments having already submitted Intended Nationally Determined Contributions (INDCs) to the UNFCCC, providing some insight into their climate policy ambitions and the likelihood of limiting global temperature rises to 2°C.
The US has committed to reduce emissions by 26-28% by 2025 from a 2005 baseline, and President Obama's most recent announcement provides confidence that this is achievable.
China has committed to cut the carbon intensity per unit of GDP by 60-65% on a 2005 baseline, aiming for greenhouse gas (GHG) emissions to peak "around 2030" through a number of measures, including a national emissions trading scheme (ETS) that builds on the existing regional pilots.
The European Union has been applauded for continuing to display leadership on climate policy, agreeing to cut GHG emissions by at least 40% from 1990 by 2030, by increasing the use of renewable energy and investments in energy efficiency.
The jury is still out on whether the sum of the INDCs will be within the carbon budget necessary to deliver on the 2°C ambition, with the current INDCs pointing towards an outcome closer to the 3 to 3.5°C range.
However, unlike previous negotiations for international frameworks, this "bottom up" approach to the development of an internal framework is hoped to create a more conducive environment for "linking" between countries.
The major shift in attitude signalled by the China-US joint climate change agreement has renewed optimism for a meaningful agreement out of Paris
So what does this mean for the finance sector?
While there has been much research and analysis regarding the financial implications of the longer-term physical risks associated with changing weather patterns due to global warming, there has been far less focus on the shorter-term, more immediate financial risks posed by non-physical factors of climate change, including the rapidly changing public policy and private sector regulatory environment. This may be a result of past perceived failings of regulations such as Kyoto, and little impact on the flow of capital.
Historically, this has been attributed to the unwillingness of China and the US to come to the table on climate policy action. However, the major shift in attitude signalled by the China-US joint climate change agreement late last year has renewed optimism for a meaningful agreement out of Paris, and therefore a potentially greater risk of carbon-intensive assets being rendered 'stranded'.
Some investors are already taking note of the signals, and trying to get ahead of the curve when it comes to stranding risks. EY's most recent survey of global institutional investors - Tomorrow's investment rules: How global institutional investors are using ESG to inform decision-making in 2015 – set to be released in coming weeks, has found that more than a third of respondents cut their holdings due to the risk of stranded assets, with another 27% planning to monitor this risk closely in the future.
This demonstrates that financial markets are beginning to receive the necessary signals to start pricing this risk into their decision making.
The key for success will therefore not hinge solely on whether we have a global, legally-binding agreement after COP21, but on how quickly financial markets react to the collective ambitions of each country.
Christina Larkin is a London-based manager of EY's climate change and sustainability services