The return of the US to global climate negotiations

By Old Mutual Investment Group 30 November 2020

After a nail-biting US election count, we appear to have “confirmation” of who will occupy the Oval office come February next year. With Joe Biden’s razor-thin win, the election process and the last four years of the Trump administration have highlighted just how polarising American politics has become. The sheer scale of participation in this year’s election provides a useful proxy measure of the extent to which voters were invested in the final outcome. Many issues hung in the balance, critical amongst these was the extent of US participation in future global climate negotiations.

COP23 in Glasgow was due to start the day after the US election – marking a significant five-year milestone from the Paris Agreement, where countries were due to re-submit their National Determined Contributions or future five-year decarbonisation plans. Owing to the COVID-19 pandemic the event was postponed to early 2021, which provided negotiators with a line of sight of who the next US president would be. 

The timing was already awkward, with the US formally leaving the Paris Accord on 4 November 2020, giving effect to a decision taken by the Trump Administration in 2017. President-elect Biden has committed to rejoining the Agreement the day he takes office, a position in stark contrast to the incumbent president’s. It was expected that Trump’s re-election would have seen the continued rolling back of climate progress, driving a wedge between key countries such as China and India. Some pundits even argue that a Trump victory would crown China the de facto global voice on climate, especially given their recent declarations of a net-zero 2050 emissions target. As it stands the Biden victory bodes well for better global balance and cooperation on Green growth, and importantly, the proposed $2trillion green stimulus package.

Yet irrespective of the US election outcome, the long-running climate crisis persists and urgent action is needed. When it comes to investing, the race is on to decarbonise exposure and this means that investors need to think long and hard about which benchmarks to track. Most traditional performance benchmarks were not designed with carbon constrains in mind and hence it is no surprise that many of the existing benchmarks have carbon intensity levels that put the world on a pathway to a greater than a two-degree outcome.  For investors who understand systemic climate risk and the long-run economic consequences of decarbonisation, the need for more carbon-aware benchmarks has never been greater. The EU has recognised this and published standards for funds that are either 1.5 or two degrees aligned, with specifications for issues such as percentage holdings of primary producers of fossil fuels, relative carbon intensity and rate of carbon intensity decline. 

While such climate aware benchmarks make sense for EU asset owners and investors, for emerging markets, these types of benchmarks will need careful thought. A key consideration here is the accepted principle of ‘shared by differentiated responsibilities’ for developed and emerging market economies. What this means is that emerging market economies are provided with greater carbon “headroom” to manage their carbon transition. South Africa will need to start developing carbon intensity benchmarks that are locally fit for purpose, taking into account issues such as our national decarbonisation commitments, the structure of our economy, our social context and our national energy plans (to name a few).

But for now, the world is resting easier as it breathes a collective sigh of relief at the prospect of having the US back at the global climate negotiating table once again. BM/DM



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