Looking beyond COP21
The climate agreement reached at COP21 in Paris on 12 December 2015 underscores, once and for all, that climate change is a common issue that needs to be addressed in a strong and coordinated manner.
A major diplomatic achievement, bridging the views of developed and developing nations, the agreement leaves no nation behind as it provides nearly 200 countries with a global roadmap for accelerating the vital transition to a low-carbon economy.
It is now up to national governments to turn goals into action. Looking at the Intended Nationally Determined Contributions (INDCs) submitted in conjunction with COP21, we clearly expect China to demonstrate the most visible leadership for the short term in our investment region. China has already signalled that the environment will take centre stage in the 13th Five-Year Plan. Among other things, we think this will imply tougher pollution standards, stricter regulation as well as taxes and fines to incentivise corporates to decrease pollution and increase energy and resource efficiency. We also expect to see further clarity on a national carbon trading scheme and initiatives for green finance. This will fuel growth of China’s clean tech market (already the largest in the world) and will be clearly supportive to East Capital’s recent decision to transform the East Capital China Fund into a thematic environmental strategy.
In other parts of our investment region, we expect national action to be less revolutionary, short term. Russia, the fourth largest greenhouse gas emitter, has seen very limited national pressure to act on climate change and its INDC did not surprise on the upside in terms of ambition. The climate agreement is nevertheless an additional reason for us to review all our portfolios for unnecessarily high climate change-related investment risk. In particular, we believe that coal will struggle in the new world following COP21. We therefore decided to exit the direct coal exposure we had in our Eastern European fund. Furthermore, we are benefitting from the underweight in the energy sector (oil & gas) that we have in all our funds. On 31 December, this underweight amounted to as much as 19 and 25 percentage points in our Eastern European and Russian funds, respectively.
Finally, we believe the component in the climate agreement requiring nations to be transparent on progress and to ratchet up national commitments every 5 years will result in a strong self-regulating effect between nations, creating a moral push for the largest possible climate efforts, eventually also bringing stubborn climate laggards into the fold.
Louise Hedberg is head of Corporate Governance at East Capital