Insights

“Peak Policy” - are politicians running out of steam in tackling climate change?

We assess whether policy's impact on climate change is beginning to wane.

06/13/2018

Sustainable Investment Team

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2017 marked one of the three warmest years on record and the warmest since 1850; reached without the influence of El Niño on temperatures in the Pacific Ocean. The blame lies with relentless rises in atmospheric levels of greenhouse gases (figure 1). While the dates and headlines change, the message has been consistent for years: tougher action and more radical changes in the global energy system are needed.

Figure 1. Direct measurements: 2005 – present

carbon_direct_measurements

Source: https://climate.nasa.gov/vital-signs/carbon-dioxide/

Politicians and regulators have historically been seen as the key change agents. Investors and the media have focused on their willingness to introduce legislation to create meaningful penalties for carbon emissions, provide incentives for alternatives or outlaw high carbon activities. The growth of emission trading schemes is an example of that policy in action, such as implemented in the EU and China. However, despite the growing evidence for the need of change and some headline policies, in general political leaders have proven indecisive in recent years. While implemented legislation saw a steady increase from 2004 to 2012 (green line in Figure 2), recent years have shown much less legislative output. On the face of it, that weak level of action presents a challenge to companies focused on climate solutions. However, the challenge is much lower than it has been in the past.  

Figure 2. Policy impact is fading

policy_impact)declines

Source: 2018, Climate Change Laws of the World, Grantham Research Institute on Climate Change  and the Environment; Thomson Reuters

The green line shows the profitability (return on assets) of the global alternative energy sector. The green and blue lines – profitability and policy – moved in tandem until 2010/11.  Since then however, that relationship has broken down; technological advances make alternative energy increasingly competitive with fossil fuels, regardless of policy support. Policy still matters – without government intervention it is hard to see how the global economy will come close to the two degree limit agreed in Paris – but companies and investors’ fortunes are no longer tied to policy cycles. 

The trend affirms our view of the opportunity from identifying future growth markets driven by the adaption to, and mitigation of, climate change. Policymakers may find their mettle but if they do not, climate investing has matured beyond its shadow.