Jaakko Kooroshy, Global Head of Sustainable Investment Research, and Kieran Brophy, Research Lead – Sovereign Climate, consider the key findings from the latest edition of LSEG's COP29 Net Zero Atlas.
Environmental Finance (EF): What is the Net Zero Atlas?
Jaakko Kooroshy (JK): The Net Zero Atlas is published every year ahead of the COP climate negotiations. It focuses on assessing climate commitments and targets of G20 countries and analyses the implications for climate outcomes. Helping to guide the report is a methodology we developed for the sovereign bond space to analyse what temperature outcomes national climate targets align to. Another important part of the Net Zero Atlas is an analysis of the physical risks that G20 countries face, which help us to put their climate commitments into context.
While there is other research out there that provides an aggregate picture of climate commitments and associated temperature outcomes, the Net Zero Atlas is quite unique in comparing and contrasting the level of ambition of national G20 commitments and tracking countries' progress to those goals.
EF: This year's Net Zero Atlas focuses on 2035 targets, why are these so important?
Kieran Brophy (KB): We are now at a critical juncture for the implementation of the Paris Agreement. The next generation of nationally determined contributions (NDCs) for 2035 – the NDCs 3.0 – are due in February under the Paris Agreement's timeline. They are a big deal because they will put governments on record in terms of the shape of the decarbonisation curve that they are envisaging for their national economies post 2030. In most cases this is something we currently don't have a good handle on today.
JK: Most investors we talk to are only beginning to understand that we are entering the next phase of the Paris Agreement. The NDCs 3.0 are crucial, because they will give investors a sense as to what kind of economic transition countries are aiming for – and they could diverge significantly.
In some ways, we got the first data point after the US elections. It is not yet clear what the climate policy of the second Donald Trump administration will look like, but it seems very unlikely that Trump will commit to meeting the standards of the Paris Agreement. The UK prime minister, in contrast, just committed to a very ambitious new NDC at COP29.
But elsewhere we are still waiting on the direction of travel. Take for example the case of China. We expect that emissions will peak before 2030, something that Beijing has committed to, but it's much less clear what will happen afterwards. Will emissions reduce slowly creating an extended 'emissions plateau' or decline much faster creating more of an 'emissions peak'? We don't know but their new 2035 emissions target will tell us a lot about how the leadership thinks about their decarbonisation pathway going forward.
As we get a read on these 2035 targets across G20 countries, they give us a framework to judge how ambitious countries are planning to be on reigning in their emissions, and also help us to understand much better what the global emissions pathway is likely to look like in the 2030s and 2040s.
If we see very ambitious 2035 targets, then the goals of the Paris Agreement can be met, and physical climate risks might be able to be contained. But this would also result in a spike in transition risks. In advanced economies, for example, the low carbon transition would have to be substantially completed in autos and power generation, and would have to start making significant in so-called hard-to-abate sectors.
EF: the Net Zero Atlas also covers physical climate risk analysis, what are the key findings here?
KB: Physical risk is the other side of the climate coin. It is important to understand that humanity has always wrestled with climate hazards. But what we have been seeing in terms of the frequency and intensity of these hazards is really beginning to change. These events will be even more frequent and violent if we start to go above 2°C.
For the COP29 Net Zero Atlas, we partnered with climate hazard data specialist Sust Global to look at how climate hazards might impact the major cities throughout the G20. Exactly where physical climate risk is going to strike is often very hard to predict, but we know impacts tend to be very local – rather than hitting an entire country or continent. But with cities, you have an extreme concentration of assets, economic activity and human life in one place. So, if you have major climate risks materialising in cities, the impacts could be huge.
JK: We forecast a major increase in physical risk exposure for cities – from less than one-in-five having a major exposure to climate hazards to almost one-in-two by 2050.
There will need to be lots of investment to climate-proof our cities, including nature-based solutions, to make them less sensitive to heat, flooding and storms. There is a huge financial cost attached to this, and it will be very interesting to see how that plays out.
EF: What can investors learn from this year's LSEG Net Zero Atlas findings?
JK: Investors might watch the dot plot from the Federal Reserve to try and understand what policymakers think about inflation and interest rates. We believe that investors need to look at these new climate targets in a similar way, to understand governments' long-term thinking on climate, and what that means in terms of transition and physical risk for critical sectors. Investors typically have a view on how they see transition risks play out in sectors like autos or power generation over the next few years, but the picture gets much hazier on how the next leg will play out in the 2030s.
But it's not only about transition risks. Physical risks are also starting to have a significant impact on assets in sectors like insurance or real estate, but in areas like agriculture too. We are still at the beginning of understanding this emerging topography of physical risk and how that will shape portfolios. A decade ago, investors expected that transition risk would impact the oil and gas sector, but didn't necessarily understand that the automobile industry would be impacted first.
To download the latest edition of the Net Zero Atlas, click here.
