Morningstar experts warn easing climate ambitions risks undermining urgency and “sending the wrong signals” to investors.
Speakers at a Morningstar COP28 media roundtable stressed that moving the “goalposts” of a 1.5°C temperature increase could jeopardise investor attempts to reach Paris Agreement targets.
Climate change experts have warned 2023 is on track to be the hottest year on record, and last month BBC analysis found there had been a record number of days for breaches of the 1.5°C warming mark globally.
Speaking at the roundtable focused on the implications of missing the 1.5°C target for investors, Hortense Bioy, Global Director of Sustainability Research at Morningstar, said that ahead of COP28, there is a “growing consensus” that the world is “losing the race” to secure the goal of the Paris Agreement and mitigate the “most devastating impacts of climate change”.
Almost a year ago, Inevitable Policy Response (IPR) found the current policies of global governments meant the goal of limiting the rise in global temperatures to 1.5°C is likely to be missed.
An IPR forecast of global climate policies commissioned by the UN-convened Principles for Responsible Investment (PRI) projected that although temperatures are expected to remain “well below 2°C” they will likely peak between 1.7°C and 1.8°C.
According to IPR, only 3% of global policies are currently moving towards a 1.5°C low or no overshoot target.
Morningstar Sustainalytics data suggests that up to 87% of companies are on a pathway towards a global temperature rise of 2.1°C.
Bioy noted that a change to these goalposts’ risks undermining the urgency of emissions reduction and “sending the wrong signals” to investors.
“Even worse highly polluting companies could see that change as an opportunity to increase emissions,” she said, adding that it could also lead to “more complacency” from governments and policymakers.
Cost of inaction
The International Energy Agency (IEA) recently published an updated Net Zero Roadmap, which called for ambitious action to limit global warming to 1.5°C.
In the net zero pathway, global clean energy spending must increase from US$1.8 trillion in 2023 to US$4.5 trillion annually by the early 2030s.
By 2030, the roadmap envisions a tripling of global renewable power capacity, a doubling of annual energy efficiency improvements, increased sales of electric vehicles and heat pumps, and a 75% reduction in energy sector methane emissions.
Bioy said that changes to the 1.5°C target could decrease investments in companies that are planning for, or would benefit from, a faster transition.
In August, ESG Investor reported that the possibility of limiting global warming to 1.5°C is rapidly falling out of reach, despite most net zero commitments set by governments, investors and companies targeting a 1.5°C pathway.
It also highlighted that failure to mitigate climate change will be catastrophic at a human and financial level, triggering estimated damages and losses of more than US$20 trillion annually by 2100.
“It can be tempting to ask whether it is time to stop pretending we can limit the increase to 1.5°C, but shifting the goalpost could cause the private sector to delay necessary investments to decarbonise their businesses faster,” Bioy said.
The “cost of inaction” will be higher than the “cost of transition”, she added.
Lindsey Stewart, Director of Investment Stewardship Research at Morningstar, said that even if 1.5°C is deemed to be a “safe level”, the effects of a 1.2°C world has already had significant impacts including droughts and wildfires.
“At COP26 the message was let’s keep 1.5°C alive. At COP27 it was 1.5°C is on life support,” Bioy said. “What is the tagline going to be this year?”
Dangers of disengagement
According to the United Nations Development Programme’s (UNDP) 2023 Production Gap Report, governments plan to produce as much as 110% more fossil fuels in 2030 than would be consistent with limiting warming to 1.5°C, and 69% more than would be consistent with 2°C.
The report said that many major fossil-fuel-producing governments are still planning near-term increases in coal production and long-term increases in oil and gas production. It noted that oil and gas companies increased their upstream investments by 39% to nearly US$500 billion in 2022 worldwide, the highest level since 2014.
The UNDP urged governments to be “more transparent” in their plans, projections, and support for fossil fuel production and how this aligns with national and international climate goals.
The report also underscored the “central role” that governments play in “setting the direction” of future fossil fuel production, as well as the influence they can have on the decision-making of private fossil fuel companies and investors through their regulatory approaches.
A report released by the UN-convened Net Zero Asset Owner Alliance (NZAOA) in September suggested that nascent technologies, such as carbon capture and storage (CCS) and sustainable fuels, could be the “biggest areas of opportunity”.
Mark Fulton, Founder of IPR, previously told ESG Investor that direct air carbon capture and storage (DACCS) could be a “game changer” for addressing climate change with a “significant impact” on carbon removals.
”It is important we do not succumb to doomism,” Bioy said. “Doomism leads to disengagement, which only favours bad actors who favour a business-as-usual approach.”
Taking stock
The first Global Stocktake is scheduled to take place at COP28, which is designed to assess the global response to the climate crisis every five years.
A synthesis report released in September containing the United Nations Framework Convention on Climate Change’s (UNFCCC) key findings ahead of the summit said that global emissions are not in line with modelled global mitigation pathways consistent with the temperature goal of the Paris Agreement, noting a “rapidly narrowing window” to implement existing commitments.
It also said that if stronger action is not taken ahead of the second Global Stocktake in 2028, there may be a “devastating reality” of global temperatures far exceeding 1.5°C.
Anya Solovieva, Global Head of Climate Solutions at Morningstar Sustainalytics, noted the Global Stocktake as being “one of the most important conversations” at COP28.
“The global stocktake will show if we’re on track to offer 1.5°C,” she added, noting 1.5 would likely be a best-case scenario. This would likely see the conversation “start to shift towards keeping the overshoot to a minimum”, according to Solovieva.
