As he takes a different role, Mark Fulton, Founder and Project Director of the Inevitable Policy Response, says investors should expect an uneven acceleration in climate policy across developed and emerging economies.
Commissioned in 2018 by the UN Principles for Responsible Investment (PRI), the Inevitable Policy Response (IPR) has worked tirelessly to prepare institutional investors for the future climate-related risks and opportunities heading for their portfolios. Over the past five years, the organisation, and its approach to this task, has evolved through several cycles, Mark Fulton, IPR Founder, tells ESG Investor.
“We aimed to provide a set of forecasts that could challenge mainstream portfolio construction, rather than simply conducting standalone stress tests,” says Fulton, adding that IPR presented a scenario to investors of how climate-related issues would significantly impact government policy, the economy and consequently affect their portfolios.
This approach revolved around the inevitable policy response that lawmakers would have to initiate, given the scientific evidence of climate change. However, what wasn’t inevitable, he says, was the exact details of how and when this response would materialise.
“It’s fair to say that between 2018-20, before the election of US President Joe Biden, there was quite a lot of interest mixed with healthy scepticism,” says Fulton, noting that since then there has been a significant level of policy acceleration.
On 16 August 2022, the Biden administration signed the Inflation Reduction Act (IRA) into law, earmarking US$369 billion for climate change mitigation and green energy investment over the next decade.
The Russian invasion of the Ukraine and the resulting energy crisis has also accelerated progress in adopting policies in the EU, such as the ‘Fit for 55’ package and RePowerEU plan, which, if implemented effectively, will result in major emissions reductions beyond the bloc’s nationally determined contributions (NDCs) under Article 4 of the Paris Agreement.
“IPR had been warning for some time that policy momentum would pick up and that climate change could bring a myriad of pressures on both policymakers and investors,” says Fulton, noting that the pace of change is only going to quicken in the months and years ahead.
For this reason, IPR began issuing Quarterly Forecast Trackers (QFTs), assessing climate policy, technology and land use developments and the acceleration or deceleration in policy ambition against its 1.8°C Forecast Policy Scenario (FPS) and 1.5°C Required Policy Scenario (RPS) policy suite.
“Due to the pace of new policy announcements, we need to weigh them up, summarise them, and determine their significance against IPR forecasts before presenting them to investors,” says Fulton.
“It’s a reflection of the policy acceleration that IPR forecasted and was founded on that climate-related policy is going to continue to move quicker than anyone could have ever envisaged – everything is happening now.”
Another sign of this acceleration in ambition on climate, according to Fulton, is the fact that clean energy has become the centre of the Organisation for Economic Co-operation and Development’s (OECD) industrial policy. The OECD Clean Energy Finance and Investment Mobilisation Programme (CEFIM) aims to strengthen domestic enabling conditions to attract finance and investment in renewables, energy efficiency and decarbonisation of industry in emerging economies. The CEFIM supports countries in the development of policies and instruments to scale up a pipeline of “bankable” clean energy projects.
“It is no longer just about climate change; it has become a crucial aspect of industrial policy, shaping job creation and rewiring industrial infrastructure,” says Fulton who will formally step aside as Project Director at IPR next week, making way for Jakob Thomae, Managing Director of the 2° Investing Initiative and Senior Fellow at the SOAS Centre for Sustainable Finance.
“This mainstream integration is of great significance. While we refer to ourselves as the inevitable policy response to climate change, it is evident that we are increasingly being mainstreamed because the issue itself is going mainstream.”
The tipping point
However, despite significant progress on climate policy, continued investments in new fossil fuel infrastructure – especially liquified natural gas (LNG) terminals and fossil gas pipelines – undermine the EU’s decarbonisation policies, according to analysis from Climate Action Tracker, which rates the bloc’s overall climate action as “insufficient”.
“Combined, the adoption of most of the regulations proposed in Fit for 55 and RePowerEU would cut emissions by 60–61% below 1990 by 2030, beyond the bloc’s current ‘at least 55%’ target,” Climate Action Tracker noted.
In March, the Intergovernmental Panel on Climate Change’s (IPCC) AR6 synthesis report noted that, while there are “tried and tested” policy measures that can achieve deep greenhouse gas (GHG) emissions reductions and build climate resilience, they will only have an impact if “scaled and applied globally”. However, policy action to tackle climate-related risks and opportunities remains insufficient to achieve the commitments made under the Paris Agreement, with the world on course to overshoot past 1.5°C.
An overshoot of 1.5°C will lead to irreversible ‘tipping points’ and ecosystem losses, according to the UK’s Met Office, with rising global temperatures increasing the frequency of extreme weather events, accelerating the melting of the world’s icesheets, leading to rapid sea level rise.
But, as the realities of climate change become increasingly apparent, governments are compelled to act and accelerate their policy response. This reality led to the launch of the IPR Policy Gap Analysis at COP27, assessing total progress to date against the IPR scenarios in the years preceding the 2025 Paris Ratchet.
The analysis from IPR’s 2022 Policy Gap Analysis finds that its FPS 1.8°C scenario, where policy ambition will be ratcheted up by 2025 on energy, agriculture and land use to bring about an 80% decline in global emissions in 2050 to hold warming well below 2°C, is still in reach. However, it notes that while “technically feasible” no political pathway is currently evident that would deliver no overshoot of 1.5°C.
“It’s important to remember that, while I mention the acceleration we’ve witnessed and how most policies align with our desired outcome, there are still significant gaps that need to be addressed, which are yet to be determined,” says Fulton.
“It’s not surprising that these major gaps exist primarily in the hard-to-abate sectors.”
The power sector is making progress, he says, but there is still much work to be done in industries such as steel, chemicals, cement and aviation.
Fulton believes that the US and EU have the necessary policies in place to address these hard-to-abate sectors, praising the latter’s work on introducing the Carbon Border Adjustment Mechanism (CBAM), which has the potential to globalise Europe’s carbon pricing regime. However, he is quick to point out the “emissions gap” in non-OECD countries is a major cause for concern.
The IPR notes that where policy announcements accelerate between 2023-2025 in advance of countries submitting the third round of nationally determined contributions (NDCs), the policy response is more delayed in non-OECD economies, reflecting rapid energy growth and later net zero targets.
New indications of the pace of policy change across all countries may soon emerge. The Bonn Climate Change Conference – taking place until 15 June – sees the beginning of political discussions about the Global Stocktake, which will play a critical role in shaping NDCs.
“The OECD will hit net zero in 2050, but non-OECD countries, including China, India and Southeast Asia won’t and seemingly don’t intend to, at least they haven’t pledged to, so the big issue to solve is how do we encourage climate policy and investment in the non-OECD.”
Policy engagement
The 2023 AGM season has seen climate-related shareholder proposals take centre stage, with responsible investors attempting to encourage companies to set and meet climate change objectives and invest in transition to a low-carbon economy. But the proxy season has largely disappointed, with energy majors and their shareholders confirming that the climate emergency is not an immediate priority.
Climate-related shareholder proposals at the AGMs of oil and gas majors, including BP, Shell, Exxon and TotalEnergies failed to secure significant voting support, with the NGO Reclaim Finance calling on investors to “go beyond the voting game” by suspending all new investments in companies that continue to develop new fossil fuel projects.
“We need investors pushing at the AGMs, but need them pushing at a policy level too,” says Fulton. “One of the most important policy questions is whether companies are actually doing the opposite.”
In October, Sweden-based pension fund AP7, alongside Danish AkademikerPension and the Church of England Pensions Board, took legal action against German carmaker Volkswagen after it refused repeated attempts to disclose information on its corporate climate lobbying.
The Global Standard on Corporate Climate Lobbying, a project instigated by AP7, BNP Paribas Asset Management and the Church of England Pensions Board, was launched last year and aims to solidify investors’ and companies’ commitment to responsible climate lobbying and the impact of their advocacy to ensure alignment with the goals of the Paris Agreement.
Fulton says investors need to identify which companies are actively trying to stop climate policy from being implemented and get them to disclose their climate-lobbying activities. However, he also stresses the importance of investors engaging with policymakers too.
“Investors seek certainty and need to know what’s going to happen, just like companies do – stop-start approaches are not viable,” he says. “Investors play a pivotal role in climate policy, as they ultimately provide the capital to drive the transition.”
Fulton will step down as Project Director at IPR next week, with Jakob Thomae, Managing Director of the 2° Investing Initiative and Senior Fellow at the SOAS Centre for Sustainable Finance, stepping into the role.
