Blog - 2020 was a watershed year for climate policy and 2021 will follow suit

By Dr. Joshua Woodbury, Senior Climate Risk Scientist

2020 broke numerous climate records, closed out the warmest decade on record and brought increasingly worrisome forecasts about the pace of climate change. Yet there were also greater calls and commitments from governments and private entities worldwide to address the issue. The list of governments committing to net carbon neutrality grew in 2020 and in many cases with increasingly aggressive targets. More countries put in place climate reporting requirements for private companies, while companies themselves stepped up their commitment to limit emissions. All of these changes set the stage for more action on climate that will impact investment strategies in 2021.

Looking first at the pledges made in 2020, the EU made its 2019 net zero commitment legally binding, while the UK announced plans to reduce carbon emissions by at least 68 percent by 2030, compared to 1990 levels, on top of the previous goal of being carbon neutral by 2050. Significantly, three of Asia's largest economies, China, Japan, and South Korea (the world's largest, fifth largest, and 11th largest greenhouse gas emitters respectively), announced plans to be carbon neutral by around the middle of the century (Japan and South Korea by 2050 and China by 2060). By the end of the year, Canada had also announced plans to be carbon neutral by 2050.

In the US, despite officially leaving the Paris Agreement in November 2020, there was progress on addressing climate risks. The US Commodity Futures Trading Commission (CFTC), an independent federal agency, released its Managing Climate Risk in the US Financial System report, outlining the significant risks of climate change to the financial system and imploring leaders to act. For the first time, the US Federal Reserve Board also included climate change as a material risk to the economy in its November 2020 financial stability report. The Fed also joined the Network for Greening the Financial System (NGFS), a group of central banks and supervisors working on environmental and climate risk management.

Countries also began to set climate risk reporting requirements across their economies. In September, New Zealand became the first to set plans to make climate-related financial disclosures mandatory for publicly listed companies, large insurers, banks, and investment managers. The UK did likewise in November, with plans to mandate Task Force on Climate-related Financial Disclosures (TCFD)-aligned reporting across the economy. Reporting plans remain in development in multiple countries, and others will likely follow suit, as climate change is increasingly seen as a systemic risk to economies. ​

Private-sector progress

In addition to these new government commitments, the private sector also continued to take action to understand and limit both carbon emissions and climate risk. The 2020 TCFD annual report showed that more than 1,500 organizations, representing nearly 60 percent of the world's 100 largest public companies, expressed their support for the TCFD reporting recommendations, an increase of more than 85 percent since the 2019 edition. The financial sector in particular has taken a leading role, as shown by work such as the United Nations Environment Programme Finance Initiative (UNEP FI)'s Collective Commitment to Climate Action (CCCA). The CCCA's Year One in Review outlines the steps taken by banks representing more than $15 trillion in assets to align with the Paris Agreement goals.

Investors are also increasingly calling for climate risk and carbon emissions management, applying pressure to companies to report on these subjects. Climate Action 100+, an investor-led initiative to ensure the world's largest corporate greenhouse gas emitters take the necessary action on climate change, found in its 2020 Progress Report that more companies are committing to net zero emissions by mid-century, while also increasing transparency around their carbon emissions and climate risks. For many financial services companies, playing an active role in addressing climate-change risk and carbon emission management is becoming a core part of business sustainability. ​

Outlook for 2021

​ With all that has happened in 2020, what can we expect in the year ahead? In short, likely more commitments to carbon reduction and climate risk reporting. Newly inaugurated US President Joe Biden placed climate policy at the front of his bid for the White House and has committed to rejoining the Paris Agreement. With Democrats now in control of both the House and the Senate, Biden's agenda stands a better chance in Congress, and the Fed's accommodative monetary policy could support policy-makers with the fiscal firepower to increase federal spending on low-carbon technologies. However, slim majorities in both houses and a conservative Supreme Court could stymie more ambitious climate policies. ​

Across the Atlantic, the Bank of England will this summer launch its Climate Biennial Exploratory Scenario to help better understand systemic climate risks in the financial system. In the Eurozone, the ECB is considering changes to its bond-buying program, which could soon exclude bonds the ECB deems to have high climate risk. ​

Under pressure from regulators and investors, companies will likely continue to increase their emissions reduction targets and the scope of disclosures. BP announced ambitious carbon reduction goals in 2020, and the US oil and gas majors ExxonMobil and Chevron could face pressure to do the same, both from investors and any new disclosure requirements from the Biden administration. Investor pressure to date has predominately focused on carbon-intensive industries, including energy, materials and transport, however this year we expect a greater push for disclosure in other sectors, such as agriculture. ​

On the technology front, momentum will likely continue to build toward commercializing low-carbon technologies, including low carbon hydrogen and carbon capture and storage (CCS), which will be critical to decarbonizing certain energy-intensive sectors and applications. ​

As both the transition and physical risks of climate-change intensify, and investor demands and reporting requirements increase, the urgent need to better understand climate risk will continue to grow through 2021 and beyond. With a focus on helping the financial sector manage the risks and meet the growing calls for transparency, Vivid Economics launched Planetrics, a comprehensive climate-change data and analytics provider, in late 2020. Planetrics leverages its deep expertise in transition and physical risk to develop state-of-the-art analytics for identifying and quantifying climate risk. ​

We use a scenario-based approach that allows our clients to analyze competing technological and political pathways to carbon neutrality, and assess different physical and transition risk impacts on their assets. Our tools also allow financial services companies to devise strategies that trade risk for opportunity as they navigate climate-change uncertainty, all while satisfying internal and external reporting requirements.

About the authors

Josh has a background in physical risk modeling, insurance and climate change. At Planetrics he combines these skills to develop and deliver cutting edge climate change analytics and tools for our clients. Email Josh at Joshua.Woodbury@planetrics.com.

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