Morning Update

Nick Stansbury, head of LGIM’s Climate Solutions, maintains that he has become less convinced that companies are adequately investing into the green transition, meaning that the likelihood of the Paris climate agreement being met is far less. The report stated that “the world could easily absorb the costs associated with realising the goals of the Paris climate agreement. But the window to successfully meet a 1.5C climate outcome is closing at a worrying speed”. Under the 2015 Paris agreement, delegates from around the world agreed to take steps to limit global warming to below 2°C above pre-industrial levels while pursuing efforts to try to limit it to 1.5°C. According to LGIM’s modelling, a transition to below the 2°C would lower monthly global GDP by just 1bp over the next 25-years – though this figure is subject to differences across regions. However, if firms and policy markers fail to take the necessary steps for a gradual transition and instead are required to do a sudden transition, ensuing inflationary pressures and instability may harm investors.

This comes as EU Carbon Permits are currently trading at below €95 per tonne having fallen from around €105 per tonne, earlier this year. This marked the first time that Carbon Permit prices reached triple figures. According to the FT, here “the threshold has been seen as psychologically important, and a price at which companies may start looking more seriously at investing in expensive emerging technologies such as carbon capture and storage.”

It is thought that the carbon credit system helped reduce emissions in the EU by roughly 4% by 2020, with much of this reduction being driven by firms shifting from fossil fuel usage to renewables. Hence, as permit prices rise, it is hoped that firms will decarbonise.