Originals | December 20, 2019

Climate Finance 2020: Leaders and laggards in the race to net-zero

The team at


ImpactAlpha, December 20 – Even in the best of circumstances, an annual 7% reduction in greenhouse gas emissions would be a heavy lift. Yet 7%, every year for three decades, is actually just the minimum reduction target we must hit to try to avert the worst of catastrophic climate change. If we halve emissions by 2030, halve them again by 2040, and then again by 2050, we may be able to reach net-zero emissions and meet the goals of the Paris climate accord. That 7% is a pace of change the world has never approached – the best-performing industries and geographies are achieving annual reductions of perhaps a couple percentage points – so the need for exponential progress has never been clearer.

And these aren’t the best of circumstances. 2020 was supposed to be the year emissions peaked and countries ratcheted up their ambitions for rapid reductions. Instead, the breakdown of the COP25 climate talks in Madrid set back the Paris process, perhaps irreparably. The IPO of oil giant Saudi Aramco may be a signal that we’ve reached Peak Oil, but the oil axis of Saudi Arabia, Russia and now the U.S. government is trying to ensure a long tail for the fossil fuel economy. At the end of the warmest decade on record, fires swept the Amazon, swaths of California and now Australia. U.N. Secretary General António Guterres laments that the point of no return “is in sight and hurtling toward us.” Climate wars, climate refugees and climate emergencies of disaster, drought and disease will test our social resiliency as never before.

Around the world, young people are in the streets protesting inaction by governments, banks and energy companies. Dozens of countries have pledged to achieve net-zero carbon emissions by 2050. This winter will see a campaign to increase pressure on asset managers like BlackRock, which by its sheer size is among the biggest owners of fossil fuel companies, and big banks like JPMorgan Chase, the biggest backer of oil and gas projects. A presidential election in the U.S. will determine whether the world’s largest per capita emitter of greenhouse gases will be a climate leader or laggard. The table is set for dramatic action. Deadlines loom. But that’s the thing about exponential growth curves: Things move very slowly, until they move very fast.

– David Bank and Amy Cortese

1. Tiptoeing to the tipping point 

Expect falling costs for the low-carbon transition and an inevitable policy response. The economic case for the transition to a low-carbon economy is overwhelmingly compelling. By next year, solar and onshore wind should become cost–competitive with existing coal and gas plants in key markets, meaning it will often make economic sense to shut coal plants down. Electric vehicles should be less expensive than conventional gas-powered cars by 2025, as scale economics, driven by China, drive down costs. In a growing number of sectors, insurgent innovations are achieving the 5%, 10% or even 15% adoption rates that signal the impending disruption of the established order. 

  • Carbon tax. Economy-wide, the tipping point in the low-carbon transition requires effective policy leadership. That may seem more distant than ever, but the inexorable science of climate change makes a policy response inevitable – eventually. The European Union is setting a global example with policies necessary for the ambitious European Green Deal passed earlier this month. Carbon tax, anyone? Makes sense to Elon Musk and Rex Tillerson (and a growing number of other Republicans), and most fossil fuel companies are already calculating a price on carbon.
  • Fresh calls. “To give us the best chance of combating climate change,” says Goldman Sachs’ David Solomon, “governments must put a price on the cost of carbon, whether through a cap and trade system, a carbon tax or other means.” The question is not if governments will act, but how fast. A belated response, say by 2025, will be “forceful, abrupt, and disorderly,” predicts the Principles for Responsible Investment.
  • ImpactAlpha is watching for: Nations to reveal their appetite for serious action at the U.N.-convened COP26 in Glasgow in November, when they submit quinquennial plan updates for long-term emission reductions. 
  • Listen to ImpactAlpha’s latest Returns on Investment podcast, “The decapitalization of the fossil fuel industry.” Catch up on all our podcasts (and subscribe for free) on iTunesSpotifySoundCloud or Stitcher.

2. Bursting the carbon bubble 

Expect more stranded asset write downs as oil and gas majors reckon with deteriorating fossil fuel economics. ExxonMobile may have escaped fraud charges, but it can’t hide from mounting climate risks. The rapidly crumbling economics of fossil fuels, in particular coal and shale oil, drove write-downs at Repsol and Chevron. More will come. The question is whether the write-downs will be part of a proactive net-zero strategy, as at Repsol, or forced onto companies without effective decarbonization plans. All told, oil and gas companies will have to shrink production by more than a third to meet the Paris goals, according to Carbon Tracker. The challenge for the financial markets will be to manage a massive write-down of assets that makes the mortgage bubble of little more than a decade ago look like a hiccup.

  • Rapid repricing. The repricing of climate risks extends beyond energy companies. This year began with PG&E’s climate-related bankruptcyGE lost nearly three-quarters of its market value from 2016 to 2018, in part because of its ill-timed acquisition of Alstom’s thermal power division. Last year, GE took a $23 billion write-down, roughly double its purchase price for Alstom three years earlier. 
  • BlackRock’s stranded assets. Over the past decade, BlackRock’s fossil fuel investments have lost investors $90 billion in value. “Markets are mispricing the potential for an abrupt and disruptive shift in climate policy,” says Grantham Research Institute’s Nick Robins. The longer policymakers, companies and investors delay, the more rapid and disruptive the transition to a zero-carbon economy will have to be. Prepare for shocks ahead: “In reality, sudden changes in return impacts are more likely than neat, annual averages,” the consultancy Mercer advises
  • ImpactAlpha is watching for: Major asset owners and other shareholders to press fossil fuel companies to manage their own decline, throwing off cash while writing down assets and winding down operations. “There’s a complete clash between what companies want to do and what their shareholders want them to do,” Carbon Tracker’s Mark Campanale tells ImpactAlpha.

3. Banks in the hot seat 

Expect pressure on banks to curtail financing for a growing range of fossil fuel projects. Divestment only gets you so far. Climate activists and shareholders have a new target: the banks that finance fossil fuel infrastructure that will be with us for decades to come. Since the Paris accord, a few dozen global banks have financed nearly $2 trillion worth of fossil fuel business. That puts them at risk of being saddled with stranded financial assets, yet they’ve shown a “systematic reluctance” to push transformational change onto their carbon-intensive clients. JPMorgan, by far the largest fossil fuel enabler, has been the target of protests and shareholder resolutions pushing for more disclosure and action.

  • Turning point. Just this week, Goldman Sachs dropped future financing for oil exploration in the Arctic and Liberty Mutual said it would stop underwriting companies that get more than a quarter of their revenues from coal extraction or production. “If these financial giants begin to move, the effects will be both quick and global,” says activist Bill McKibben.
  • Multilateral gains. The European Investment Bank, the world’s largest multilateral bank, announced it would cease funding fossil fuel projects after 2022. Climate financing from the six multilateral development banks grew 22% last year, even as global climate finance fell. 
  • Glass half full. Boston Common Asset Management found that 37 of 58 major banks had reported substantive progress across climate-related strategy, risk management and opportunities. More than 30 banks are restricting lending or investment as a result of these assessments. 
  • ImpactAlpha is watching for: Stress tests for banks and insurance companies along the lines of the Task Force on Climate-Related Financial Disclosure‘s recommendations, as an increasing number of central banks move to quantify climate risks to their financial systems.

4. Solutions at hand

Expect investors to look to a broader range of climate solutions as they seek to meet their pledges for climate action. Forests are climate-negative technology at scale. Regenerative agriculture practices improve soil health, which helps sequester carbon. Electrification of transport could reduce the energy sector’s carbon emissions by 72% by 2050, but carbon capture technologies, long dismissed as a pipe dream, will still need to remove 10 gigatons of carbon a year. Goldman Sachs’ $750 billion commitment to sustainable finance themes by 2030 includes sustainable transportation, agriculture and ecosystem services, as well as clean energy. Played right, we’ll be writing the story of how global capital blew past the “clean trillion” goal for annual low-carbon investments, just as solar and wind energy capacity has already blown past the best-case scenarios of only a few years ago.

  • Natural capital. “Catalytic” investors are backing forest funds. Terra Silva, a new $90 million fund of funds, aims to prove that sustainable tropical forests are a profitable bet for commercial investors. The Conservation Fund is leveraging green bonds to finance the acquisition and protection of forestlands.
  • Soil wealth. At least 54 U.S.-based investment vehicles, with nearly $50 billion in assets, are backing farmers boosting soil health with regenerative farming practices in order to mitigate climate change. 
  • Carbon tech. growing number of startups and their climate-smart venture backers are aiming to scale techniques to suck billions, or hundreds of billions, of tons of carbon out of the atmosphere. 
  • ImpactAlpha is watching for: Green bonds and other sustainable financing mechanisms to truly break out. A record $250 billion of green bonds were issued last year – but that still represents a tiny slice of the fixed-income market.