Summary

  • We view the Paris Agreement as accelerating the ‘race to the top’ in responding to climate change. Developed countries will need technologies and business models that de-carbonize their existing economies. Developing nations will focus on technologies that drive strong economic growth and improve living standards.
  • Going forward, the Paris Agreement solidifies countries’ commitments to reducing emissions and adapting to climate impacts. Transparency will spur countries to do more through social pressure while investment in innovation will drive the deployment of emissions reduction technologies.
  • India and China, who were reticent to place restrictions on growth during the last negotiations in Copenhagen, have adopted the Agreement as reducing emissions now generates co-benefits by addressing serious domestic issues. China can reduce its air pollution with new low emission technologies while India can provide power to 400 million underserved consumers through solar power and storage. Understanding co-benefits is key to identifying investment opportunities, particularly in developing countries.
  • Outside of the United States, where election season creates heightened risk that the next President could renege on commitments, there is little political risk that countries will abandon their pledges. Differentiation between countries and detailed understanding of climate policy is critical for investments in technologies and business models that rely on government support.
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Source: Cornerstone Capital Group

Why are we bullish on the Paris Agreement?

The Paris Agreement (the Agreement) is the first globally adopted agreement on climate change since the Kyoto Protocol in 1997.[1] It represents a strengthening global response to climate change, and the resultant ‘race to the top’ on climate-related innovation will create significant investment opportunities.

The US and other developed countries, with legacy assets in energy, transport and manufacturing, have to use innovation and policy to cost-effectively transition their systems. Less developed countries will be able to roll out new technologies faster, assuming that appropriate governance and regulatory structures are in place.

Investment opportunities and risks will vary significantly by region, based on a complex intersection of priority needs, funding sources and methods, degree of government involvement and effectiveness. In our view, investments should include a focus on empowering consumers and facilitating economic growth.

While the broad consensus on the Agreement is in line with our positive view, there are detractors who cite various shortcomings. We summarize those concerns, and what we see as mitigating factors, in an appendix to this note.

Benefits for developing economies

A clear change since the Copenhagen Agreement is the role of India and China in global climate negotiations. Prior negotiations were hampered by the countries’ strong insistence that their economic growth not be curbed by a global climate response. China and India now align with other countries, including the US, on climate response because of ‘co-benefits’. India and China are able to achieve their commitments under the Agreement while addressing critical domestic issues:

  • China has severe air pollution issues, and low/zero emission technologies in manufacturing, transport and energy will be critical for addressing the problem.
  • India recognizes solar as a key technology for cost-effectively providing electricity to 400 million consumers that the electricity grid has failed to reach or underserves[2].

Other co-benefit investments could include food refrigeration systems that are cheap and do not rely on hydrofluorocarbon[3] (HFCs) for developing food supply chains in Africa, China and India. Use of HFCs has major climate impacts and food refrigeration reduces food waste in developing countries. Understanding these co-benefits will help identify investment opportunities for investors.

Challenges for the US

The political will to adhere to the Agreement is more of a question for the US than other countries. In 1997, the US Congress refused to ratify the Kyoto Protocol and substantially weakened the treaty. While the Paris Agreement does not require ratification, it’s possible that the next President will renege on the US’s climate commitments. Other major economies such as China, Germany and Japan do not face this short-term political risk.

Recommendation/next steps section

Differentiation and detailed understanding of climate policy is critical for climate related investments. These considerations were identified previously as part of Cornerstone Capital Group’s Statement on Climate Change.

Appendix: Addressing concerns about the Paris Agreement

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Source: Cornerstone Capital Group

[1] The most recent predecessor to the Paris Agreement, the Copenhagen Agreement in 2009, was ‘taken note of’ by delegates and was not adopted.

[2] “Millions of people in India have no electricity,” The Economic Times, http://economictimes.indiatimes.com/ new-sections/energy/millions-of-people-in-india-have-noelectricity/lifenologyshow/41089385.cms

[3] HFCs, which belong to a category of substances known as short-lived climate forcers (SLCFs), have an incredibly high potential to contribute to global warming, yet a relatively short atmospheric lifetime.

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Sebastian Vanderzeil is a Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.