Countdown to 2025

ESG Investor

Bert Kramer, Head of Climate Research at Ortec Finance, says we cannot discount the possibility of a transition-related financial crisis.

As the clock ticks down from the 2015 Paris Agreement, there is growing uncertainty that on our current trajectory the world is going to meet the stated goal to be net zero by 2050. As this target approaches and governments around the world come under increasing pressure to implement policy and other measures to reach it, the likelihood of a smooth, orderly transition to a low-carbon economy diminishes. Experience tells us that financial markets rarely react well to sudden shocks or forced changes.

Losses from stranded fossil fuel assets could result in a US$2.5 trillion loss in financial wealth. This represents some 2.5% of global stock market capitalisation. While this may not seem a significant figure, it is worth bearing in mind that subprime mortgages that started the 2008 Global Financial Crisis were worth less than US$0.5 trillion.

Identifying trigger points for such events ahead of time is inherently difficult, but there are a couple coming up that warrant further attention as they have the potential to catalyse a financial crisis. The submission of new nationally determined contributions (NDCs) by countries in time for COP30 next year is one and the forthcoming interim review of decarbonisation targets by some of the major investor groupings, such as the UN-convened Net Zero Asset Owner Alliance (NZAOA), is another.

Forecast overshoot

A key component of the Paris Agreement, NDCs are submitted every five years. They outline each signatory country’s plans to decarbonise their respective economies including a set of intermediate targets and the steps to reach net zero, which include the all-important policy action required to enforce compliance. The intention is that targets become more ambitious each time they are submitted.

The problem with the current set of NDCs is that they are not ambitious enough to limit global warming to below 1.5 or even 2° Celsius by 2100 and the current policy framework isn’t adequate to enforce them. According to the latest Carbon Action Tracker report, under the current NDCs a temperature increase of 2.5° Celsius by the end of the century is considered most likely with 2.1° Celsius regarded as being an optimistic outcome if all current and long-term commitments are adhered to. This forecast overshoot of the 2100 goal is likely to mount further pressure on governments to make next

The full article is available here. This article was published at ESG Investor.