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Is the World Finally Awakening to the Climate Change Threat?

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Gwen Le Berre

Director, Responsible Investing

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Between new climate change rules from Washington and increased environmental activism from shareholders, we have reasons to be hopeful on Earth Day 2022.

The modern environmental movement was born when we first celebrated Earth Day in 1970, following a massive oil spill off the coast of Santa Barbara, California. Today the stakes are even larger. The United Nations Intergovernmental Panel on Climate Change (IPCC) made headlines in August 2021 upon the release of its sixth report, highlighting that the impacts of climate change are already more widespread and severe than anticipated. UN secretary-general António Guterres summarized the report’s findings as nothing less than a “code red for humanity.”  

The impetus for the world to tackle climate change has never been so immediate and clear. It’s far from easy to influence the course of the climate, as decades of lackluster public policy prove. But we’ve seen ample evidence that governments, regulators, and investors have been listening to calls for action. 

How are US policy makers fighting climate change?

US president Joe Biden marked his first week in office in 2020 by having the US officially rejoin the Paris Agreement, an international climate change treaty first adopted in 2015. This year Biden set a new national goal to reduce emissions by at least 50% by 2030 from 2005 levels, formalizing the plan as the US nationally determined contribution under the Paris Agreement. His administration also included important environmental provisions in the 2021 Infrastructure Investment and Jobs Act, requiring that all new passenger vehicles sold after 2035 produce zero emissions, with an interim goal of half or more of new passenger vehicles sold in 2030 to produce zero emissions. In his March 2022 State of the Union address, Biden touted the economic promise of climate strategies that promote clean energy, electric vehicles, and energy efficiency. These actions make it clear that the Biden administration wants to be known for accelerating US government progress against climate change. 

Outside the White House, the Department of Labor (DOL) released a proposed rule in October 2021 clarifying that climate change and other environmental, social, and governance (ESG) factors are often material, which means fiduciaries should in many cases consider them in their investment decisions. The DOL is currently seeking public comment on the broader question of how to protect retirement savings and pensions from climate risks. While the DOL is still in the exploratory phase of these reforms, we expect more decisive actions to take place in the coming year.

But it’s not just the executive branch creating climate tailwinds. Regulators have made headway of their own following a May 2021 executive order that directed federal agencies to assess and mitigate climate-related financial risks. The Securities and Exchange Commission proposed in March 2022 to require all publicly listed companies in the US to disclose Scope 1 (which companies produce directly) and Scope 2 (which are produced for companies to consume) greenhouse gas (GHG) emissions. They’re also requiring certain companies to disclose Scope 3 (which companies’ supply chains and users produce) emissions, although these disclosures aren’t mandatory across the board. The SEC has also proposed to require companies to disclose how their boards and management oversee climate-related risks and opportunities, as well as details of climate-related transition plans and internal carbon pricing information. The SEC is looking for public comments on their proposal, but we don’t expect material changes to this draft 505-page rule.

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How are investors fighting climate change?

Investors have discussed climate change with the companies they hold many times on an ad hoc basis over the past several years. It wasn’t until December 2017 that investors took substantive collective action by launching Climate Action 100+, comprising more than 600 global investors (including Parametric) from 33 countries representing $65 trillion in assets under management. This initiative bands global investors together to engage with the world’s largest publicly traded corporate GHG emitters to instigate and monitor action on climate change. It seeks commitments from boards and senior management to implement strong climate governance frameworks, reduce greenhouse gas emissions, and enhance corporate disclosures. Climate Action 100+ issued its first net-zero company benchmark in May 2021, defining 10 key indicators of success for business alignment with a net-zero emissions future. Investors can use this benchmark to monitor and press companies to meet their net-zero commitments.

While Climate Action 100+ focuses on large, publicly traded emitters, the larger net-zero movement takes a broader approach. The United Nations Framework Convention on Climate Change (UNFCCC)—the parent treaty to the Paris Agreement and the original 1997 Kyoto Protocol—has articulated the Race to Zero challenge, which looks to accelerate decarbonization worldwide by encouraging actionable pledges from countries, cities, educational institutions, hospitals, companies, financial consultants, and asset managers. This initiative has picked up an impressive amount of steam, with net-zero pledges from entities representing nearly 70% of global economic activity in 2021, up from 16% two years prior.

The world took a step closer to more climate accountability in October 2021, when the Science Based Targets initiative (SBTi) launched the first net-zero corporate standard, which allows for an independent assessment of corporate net-zero target-setting. The SBTi standard is the first science-based certification of companies’ net-zero targets, in line with the Paris Agreement’s goal of keeping planetary warming down to 1.5 degrees Celsius. More than 1,300 companies have committed to submit their net-zero targets through the SBTi’s Business Ambition for 1.5C challenge. We expect this new standard to become table stakes. 

The bottom line

Climate change won’t be solved without a massive collective action, and it seems that we’re finally starting to get there. As more global climate initiatives launch, we have reasons to be optimistic that progress will only accelerate in the coming years. The human race has struggled to get organized and act in the face of our changing climate—but that’s a minor struggle compared with what may come without our efforts.  

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.