2020 was an extraordinary year by any standard. The Covid-19 crisis taught us the meaning of urgency and highlighted the links between global health and the environment. It was also the second warmest year in recorded history while being the warmest year on record for the total amount of heat stored by the oceans. This extreme warming was responsible for a record number of climate disasters that cost the world $210 billion of damage in 2020. At the same time, global carbon emissions experienced the biggest drop ever (by approx. 7%). However, a rebound in emissions is expected once lockdowns lift amid the roll out of vaccines.
Tesla became the world’s most valuable car manufacturer thereby confirming that the future of car manufacturing is electric. For the first time, a renewable energy company, NextEra Energy, became the most valuable US energy company, overtaking the likes of ExxonMobil and Chevron. This shift highlights an ongoing energy transition where fossil fuels are being left behind. In fact, the EU reached a significant milestone in 2020, producing more electricity from renewable sources (38%) than from fossil fuels (37%) for the first time.
US voters made clear that they care about the climate crisis and voted out climate-change denier Donald Trump. President-elect Joe Biden put environmental protection at the forefront of his campaign, including a $2 trillion climate plan that links fighting climate change to the economic recovery from the Covid-19 crisis. He also immediately re-joined the Paris Climate Accord once he took office.
The ambition and resolve of world leaders to address the climate crisis intensified during the year. The UK brought its ban on the sale of internal combustion engine cars forward by 10 years, to 2030. The Brexit deal had the most ambitious climate language ever included in a trade deal. The European Union increased its 2030 emission reduction target from 40% to 55% compared to 1990 levels. This new target will speed up the energy transition, requiring an additional €350 billion investment a year. Following the announcement, the price of carbon under the EU’s emissions trading system (ETS) reached an all-time high of more than €31 per tonne of CO2.
The ETS is a mandatory “cap and trade” system that applies to carbon emissions from polluting sectors. It currently accounts for about 50% of European emissions, though its scope is set to be extended to more industries over time. A robust carbon price promotes investment in low carbon technologies, as the cost of polluting becomes more onerous for companies in the scheme. Analysts believe the price of carbon could rise to a range of €56 to €89 per tonne of CO2 by the end of this decade. This poses significant risks to polluting sectors (for example fossil fuels, chemicals, refining) and companies that are slow to transition to a low carbon future.
Sustainability risk took centre stage in 2020. Financial services providers began preparing for the upcoming Sustainable Finance Disclosure Regulation (SFDR), the first provisions of which will come into force in March 2021. Financial services providers will be required to disclose how they integrate sustainability risks in investment decisions along with periodic reporting on sustainability-related impacts. At its heart, this new EU regulation aims to create a more standardised and transparent approach to ESG.
Environmental, Social and Governance (ESG) investing experienced a pivotal year, with an explosion of ESG funds being brought onto the market. Issues such as climate change and racial and economic injustice were particularly highlighted in 2020. Indeed, social issues, which had until now been dwarfed by environmental and governance criteria in ESG, came to the fore on the back of the Covid-19 crisis. Working from home was a paradigm shift for labour management issues, while social inequalities were highlighted by how disproportionately Covid-19 affected certain groups of people. The E, S, and G in ESG came full circle in 2020, with a realisation that our collective efforts for long-term economic prosperity will only succeed when we invest in people and the planet.
ESG funds outperformed more traditional funds during a year of market turbulence and economic uncertainty. A recent report by PwC forecast ESG equity funds will see a compound annual growth rate of 27%, while predicting that 60% of the market could be ESG by 2025. Considering that a key goal of the European Green Deal (the EU’s growth strategy) is to reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth, there are reasons to believe ESG investing will go from strength to strength in the years to come.
Carolina Angarita-Cala is Sustainability & Responsible Investing Manager at Cantor Fitzgerald Ireland.
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