Will 1.5 Die in Dubai?

Degrees
Matter

Delegates
will
be
focused
on
whether
the
1.5
degree
global
warming
target,
agreed
in
Paris
at
COP21
in
2015,
is
still
feasible.
As
such,
a
global
“stocktake”
of
carbon
emissions
will
be
revealed
at
the
summit,
and
there’s
growing
consensus
that
the
“world
is
losing
the
race”
to
meet
the
target,
says
Hortense
Bioy,
Morningstar’s
global
director
of
sustainability
Research.

She
says
there’s
a
chance
that
1.5
may
“die
in
the
desert
in
Dubai”,
having
been
kept
alive
at
COP26
and
put
on
life
support
at
COP27
in
Egypt
last
year.
Indeed,
Morningstar
data
shows
87%
of
companies
are
heading
towards
a
global
temperature
rise
of
2.1%.
So
delegates
and
the
world’s
media
will
be
focused
on
the
overshoot.

That
said,
there’s
also
a
danger
the
focus
will
be
too
narrow,
argues
Anya
Solovieva,
global
head
of
climate
solutions,
Morningstar
Sustainalytics.
OECD
countries
are
already
aligned
on
net
zero
targets,
she
argues,
so
arguing
over
1.5
or
1.6
degrees
seems
rather
reductive.

The
Perils
of
Pessimism

The
tone
has
already
been
set,
then.
But
Bioy
also
argues
against
undue
pessimism:
“it
is
important
we
do
not
succumb
to
doomism.
Doomism
leads
to
disengagement,
which
only
favours
bad
actors
who
favour
a
business-as-usual
approach,”
she
says.

If
the
world
is
off
course
in
terms
of
targets,
surely
it’s
time
to
relax
them
and
adjust
the
Paris
target
to
something
more
realistic?
Bioy
says
this
could
be
counterproductive
in
terms
of
the
knock-on
effects
on
existing
and
future
investment
plans.
Complacency
is
the
enemy.

“Shifting
the
goalpost
could
cause
the
private
sector
to
delay
necessary
investments
to
decarbonise
their
businesses
faster,”
she
argues.
And
that
includes
technological
developments
such
as
carbon
capture,
storage
and
direct
air
capture
(DAC),
which
involves
CO2
being
removed
from
the
atmosphere.
Even
the
fossil
fuel
sector
is
demanding
more
investment
to
manage
the
transition.

Companies
still
have
time
to
invest
in
low-carbon
technology,
she
argues.

Let’s
Talk
Business

Recent
COP
summits
have
repeatedly
highlighted
the
importance
of
business
and
finance
in
meeting
net
zero.
The
conversation
has
already
shifted
towards
how
finance
can
lead
climate
change
mitigation
and
adaptation,
says
Lindsey
Stewart,
Morningstar’s
director
of
investment
stewardship
research.

With
climate
change
already
with
us
in
the
form
of
extreme
heat
in
2022
and
2023,
the
focus
is
now
on
what
we
can
do
to
adapt
to
the
current
situation.

“Adaptation
will
be
a
key
watchword
at
COP28
and
investors
have
a
role
to
play,”
he
says.
But
he
argues
finance,
policymakers
and
government
now
need
to
focus
on
delivering
on
promises
already
made.

For
the
finance
community,
targets
are
important
as
well
as
pinning
down
what
investors
are
expecting
from
the
process,
Stewart
says.
For
Morningstar
Sustainalytics’
Solovieva
this
is
an
urgent
conversation
investors
are
having
today
–
it’s
no
longer
enough
to
know
a
climate
change
target
is
in
place.

“[Investors
need
to
know]
what
are
the
actions
that
companies
are
taking
today
to
given
them
confidence
the
company
is
on
track
to
meet
their
future
commitments,”
she
says.

Climate
risk
exposure
is
a
key
part
of
that
conversation,
she
says,
and
one
that
will
reverberate
after
the
conference
has
closed.

Practical
Matters,
Passive
Products

ESG
issues
are
already
a
material
part
of
the
investment
process,
says
Rob
Edwards,
director
of
product
management,
Morningstar
Indexes.
That
was
a
key
finding
of
a
recent
asset
owners
survey
conducted
by
Morningstar.
And
it’s
also
where
indices
and
benchmarks
can
be
useful
in
ascertaining
whether
companies
are
off
target.
Forward-looking
climate
metrics
are
important
because
much
of
the
science
behind
climate
change
measurement
is
backward-looking,
he
adds.

At
COP28
he
expects
a
renewed
focus
on
passive
investment’s
role
in
financing
the
push
to
net
zero.
That
will
tilt
the
debate
once
more
towards
issues
like
biodiversity
and
water
risks.

Products
are
evolving
quickly
as
the
regulatory
burden
increases,
he
adds.

Investors
Get
Wise

Speaking
of
sustainable
funds
and
stocks,
both
enjoyed
a
boom
in
the
pandemic
era.
But
sustainable
investing
is
not
a
simple
case
of
jumping
on
a
moving
train
and
hoping
it’s
heading
in
the
right
direction –
as
we
saw
with
last
year’s
ESG
performance
figures.

Part
of
this
is
down
to
uncertainty
about
what
the
future
will
look
like,
how
bad
the
effects
of
climate
change
will
be
and
how
effective
our
attempts
to
mitigate
them
might
be.
So
scenario
planning
remains
important
for
equity
and
bond
investors,
says
Nicolo
Bragazza,
portfolio
manager,
Morningstar
Investment
Management
Europe.

“We
don’t
know
exactly
what
the
future
will
look
like,”
he
says.
So
the
path
to
net
zero
presents
opportunities
and
challenges
to
investors.
Alternative
energy
stocks
have
underperformed
since
the
Paris
Agreement
in
2015,
he
notes,
which
is
counterintuitive
considering
the
global
push
to
tackle
climate
change.

“Growth
opportunities
don’t
always
translate
to
investment
opportunities,”
he
says.
Investors
need
to
focus
on
traditional
finance
metrics
like
valuations
and
not
overpaying
for
assets.

“They
also
need
to
think
about
the
overall
robustness
of
their
portfolios,
balancing
investment
and
climate
risk
considerations
based
on
clients’
objectives,”
he
notes.

Another
factor
is
that
investors
have
become
more
realistic
about
the
hit
to
gross
domestic
product
from
tackling
climate
change.
“The
path
to
net
zero
is
going
to
be
very
expensive,”
he
says.

As
we
saw
with
last
year’s
event,
with
war
in
Europe,
sustainable
investing
is
not
immune
to
global
events.
Bioy
agrees,
saying
the
Ukraine
war
exposed
many
of
the
contradictions
in
the
ESG
movement,
some
of
which
will
be
played
out
at
this
COP
conference
once
more.

The
“S”
of
the
ESG
could
now
be
considered
as
“security”,
she
says.
As
geopolitics
comes
to
the
fore
once
more,
its
role
as
a
help
or
hindrance
is
yet
to
be
determined.

*
Our
panel
included:

Hortense
Bioy,
Global
Director
of
Sustainability
Research,
Morningstar

Rob
Edwards,
Director
of
Product
Management,
Morningstar
Indexes 

Lindsey
Stewart,
Director,
Investment
Stewardship
Research,
Morningstar

Anya
Solovieva,
Global
Head
of
Climate
Solutions,
Morningstar
Sustainalytics

Nicolo
Bragazza,
Portfolio
Manager,
Morningstar
Investment
Management
Europe

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