COMMENT: In 2015, virtually every country signed up to the Paris Agreement, and committed to try to hold global temperature increases to below +2C above pre-industrialised levels.
But the world is already halfway there. It is sitting at +1C up on this measure.
During the week, a United Nations report found the biggest economies were not tracking to meet their pledges to limit global warming, and governments needed to act with more urgency. The finding follows the Special Report on Global Warming of 1.5C from the Intergovernmental Panel on Climate Change (IPCC)1 which found there would be significant damage from global warming of just +1.5C. This is expected to have dire consequences for the environment.
Even more confronting is that the IPCC estimates we could hit that figure in 2030. That's only 12 years away — the time in which a child starts primary school and finishes high school. The change in our physical environment will be dramatic and if we don't act soon, irreversible.
Climate change has far-reaching environmental and social impacts. It also has enormous financial implications.
Investors are in a unique position to influence, monitor and hold to account many companies that are large emitters of greenhouse gases. They can demand change.
Climate change is rapidly becoming a critical factor when valuing investments. Investors must now forecast, among other disruptions, the impact of climate change.
Investors will now start to build in clear costs and revenue impacts from direct and indirect pressures of climate change, as well as the capital investment required to adapt or completely change business models.
Which businesses are sustainable in a +1.5C world? What strategies do they have to deal with rising costs associated with an increasing carbon price?
In five or six years, when +1.5C is even closer, do you want to own a business that hasn't put in place measures to decarbonise? Do you want to own a business that people view as being responsible for climate change?
Expect to see a wave of businesses disrupted by climate change. These will fit into three broad categories of disruption: Financial, consumer choice, and environmental.
• Businesses will face financial pressures and could become unviable due to carbon cost increases. Banks and insurance companies will consider the risks, and businesses may face challenges when accessing long-term finance or insurance.
• Consumer choice may become an issue for companies that don't respond fast enough. Consumers may reject products if it is perceived their production is contributing to climate change, and New Zealand exporters may face the issue of carbon miles being added to the carbon footprint of their products.
• Environmental changes could force location changes and leave company assets stranded. Low-lying, coast locations could prove vulnerable (such as airports), while it may become too hot or wet for some crops, or difficult for farming or fishing.
Financial markets are very efficient at pricing issues and carbon (ie CO2 equivalent measure for greenhouse gases) should be no different. The carbon price is effectively a price on the damage that we are causing — a Net Present Value of the cost. Previously this had been an invisible "subsidy" being paid for by the environment, sometime in the future.
The IPCC has identified the implementation of a carbon price as the main tool to drive change. Fortunately, the New Zealand Government had the foresight in 2008 to create an emissions trading scheme.
The New Zealand Emissions Trading Scheme (ETS) has a critical role to play in reducing CO2 emissions. Having a market price on greenhouse gases ("carbon") should change the behaviour of emitters and consumers, plus provide an incentive to absorbers such as forestry and to the clean-tech innovators. By putting a price on carbon, emitters and consumers can see the true social cost of their decisions.
Companies and individuals need a plan of action now and, to their credit, many do. Internationally, some large companies including the likes of Rio Tinto, BHP Billiton, Woodside Petroleum and ExxonMobil have started to publicly acknowledge the challenge that climate change presents to their business models and actively begun to call for a price on carbon. In New Zealand we have seen the formation of the Climate Leaders Coalition in an effort to encourage businesses to proactively address climate change.
There is an increasing understanding that we must act now to prevent climate change becoming an ugly legacy. The heat is on.
• Paul Harrison is the managing director of Salt Funds which manages The Carbon Fund.