“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.
13 June 2018
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
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
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.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.