29/10/2021 - ABN Amro Bank NV: Can we rely on the climate summit or is the ball in our court?

My family and I are doing our best to turn the tide of climate change. We almost never eat meat, for example, and we travel by plane no more than once every three years. Overall I am optimistic that the climate change goals are achievable. Still, sometimes I lose heart - for example if I talk to other people in my 1930s neighbourhood.

Ball in the court of the governments

Many of my neighbours are looking at what they can do to improve sustainability, often giving the higher gas prices and climate change as their reasons. At the same time, many of them tell me that they are putting it off. Spending a week in the sun during the grey and rainy autumn holidays is a more enjoyable way to spend their money, surely, than insulating the attic, with all the mess involved? And anyway, will saving energy on such a small scale even make any difference? Surely the ball is in the governments' court, at the upcoming climate change conference in Glasgow? That is where the solution lies, not with us as individuals.

With the climate change ambitions being defined in the Paris Agreement, in Glasgow the time has actually come to see what measures the world's leaders can agree with each other. The report of the Intergovernmental Panel on Climate Change (IPCC) provides a useful overview of the academic consensus on the issue of climate change. Scientists are warning that temperatures could rise much more than originally predicted. It is high time, then, to make policy decisions, for example by introducing a worldwide price for greenhouse gasses. It is uncertain whether this will succeed, though: at previous climate change conferences (for example in Madrid in 2019), the attending countries were unable to agree on an international plan of action.

Going for a run along the motorway

What those earlier climate changes conferences failed to achieve, the pandemic proved to be possible. During the first lockdown in 2020, greenhouse gas emissions dropped significantly in only a short space of time. For a few weeks, I could go for a run along the A1 motorway, and I could hear birds singing in Amsterdam's city centre.

Obviously I am happy that the end of this latest crisis is in sight. At the same time, though, it is disappointing to see that our emissions have returned to pre-pandemic levels. Nevertheless, it did show that we can in fact reduce our emissions. I agree with my neighbours that it would be wonderful if the world's leaders could agree on a solution with less dramatic economic consequences than the Covid-19 crisis. At a minimum, it is undeniable now that government measures can affect how much we emit.

Possible impact on investments

So what might this mean for companies - and for investments in companies? Higher carbon prices will mean higher costs for the companies that produce carbon emissions. If rules and standards are introduced, this could dictate an end to some types of operations, either with or without government compensation. "So," I can hear you think, "it will be like during the pandemic?" In this case, it will be a shift, from activities that produce emissions to activities that don't. However, this will not necessarily be any less profitable, despite the cost that this shift involves: the market for zero-emission (or at least low-emission) products and services offers the potential for significant growth.

It will be important to identify what companies need to change, and to analyse whether they can actually change, and if so how long that will take. Some companies will be unable or unwilling to change their business model, and will suffer the consequences if and when new laws and regulations are introduced. This is called the 'transition risk': the risk that companies will not adapt, or at least not quickly enough. Another risk is the physical climate change risk: the risk to operations and assets as a result of extreme weather conditions such as high temperatures and flooding.

A good way to minimise these risks is by investing in sustainability frontrunners: companies that already have a long track record in sustainability improvement. Logically, these companies are less likely to suffer from regulatory changes, since a company with low or zero carbon emissions will clearly be less vulnerable to higher carbon prices. In some cases companies that have not reached that point yet can be influenced - at their shareholder meetings, for example, where investors can vote in favour of climate change resolutions.

Identifying the physical climate risks is tricky, particularly since so much remains unclear about extreme weather conditions and the regions that they would affect. One advantage is that minimising transition risks can also help to reduce the physical risks in the long term: by limiting our emissions, we could reduce the financial risks and in the longer term the physical risks as well.

Supply and demand aligned?

The question is whether this is the entire solution. Regulation, and perhaps investors as well, can influence the choices that companies make in the products and services that they offer. However, their buyers are just as important, if not more so. As long as the demand for gas and oil continues (and as long as their output is permitted), companies will keep offering them. If this becomes more difficult through regulation or under influence from investors, the demand will not diminish, although the supply might. A slight drop in supply, with the same demand, can quickly result in higher prices, or scarcity - witness the rising gas prices, for example.

It is important, then, to ensure alignment when we make sustainability improvements. Even though it sometimes seems as if our individual actions have little effect or impact, collectively we can (and must) make a difference. If we all insulate, the demand for gas will fall. Everyone needs to do their bit - companies, governments and members of the public - to make the solutions work. The transition does not have a simple, ready-to-go solution.

This brings me back to my neighbour who claimed that small-scale sustainability improvements are largely pointless. "If you really want to be sustainable, you need to build new neighbourhoods of energy-neutral houses!" Clearly my neighbour has done some reading. Still, I feel compelled to let him know that I disagree. Yes, under the Building Decree, new houses are almost entirely energy-neutral. The government's rules are working. "The difficulty is with our old houses. That's where we can make a difference." I leave him to ponder that.

Spending the autumn holidays, however many years in the future, in the comfort of a nice cosy home, with only a little damp around my feet, after a walk (perhaps even along the motorway) - that prospect makes the effort worthwhile, don't you agree?