The Paris Agreement

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks the Paris Agreement.

Introduction

The Paris Agreement is a global agreement that intends to keep global average temperatures below 2 degrees Celsius above pre-industrial levels by the end of the 21^st century, with efforts to keep it below 1.5 degrees.

The Paris Agreement was drafted during the Conference of the Parties (COP 21) of the United Nations Framework Convention on Climate Change (UNFCCC21) and signed on December 12, 2015. The agreement was ratified on April 22, 2016, which was recognized as Earth Day by the United Nations, and was signed by all 196 UNFCCC members. In June 2017, President Donald Trump announced that the United States would withdraw from the Paris Agreement, claiming that it was not in the country’s best interests to do so.

Greenhouse gas emissions are considered as the primary cause of global warming.
To accomplish the agreement’s objectives, scientists have agreed that global greenhouse gas emissions must be reduced. As a result, the 20/20/20 targets were established: a 20% reduction in carbon dioxide (CO₂) emissions, a 20% increase in renewable energy market share, and a 20% increase in energy efficiency through current technology such as insulation. The signatories are obligated to put efforts through Nationally Determined Contributions (NDCs), and to continue to do so in the future. This includes the duty to report on national emissions and decarbonization initiatives on a regular basis.

To keep global warming to a maximum of two degrees Celsius by 2100, scientists agree that the world will need to become carbon neutral by 2050. The International Panel on Climate Change (IPCC) issued a study in October 2018 warning that in order to meet the lower 1.5-degree objective, emissions must be reduced by 40-60% from 2010 levels by 2030, with net zero by 2050. To meet the less ambitious 2-degree objective, emissions must be reduced by 25%. Failure to do either will result in irreversible climate change beginning around 2030, according to the paper. According to the IPCC, if current levels of (in)activity continue, the 2-degree target will most likely be met by 2030, with global warming of 3 degrees by the end of the century becoming increasingly likely. The IPCC also warned in September 2019 that unless the world takes action now, sea levels will increase by at least one meter by 2100.

According to studies, CO₂ produced by burning fossil fuels for power, heating, cooling, and transportation is the primary cause of global warming. Carbon dioxide levels in the atmosphere in 2017 were last seen on Earth three million years ago, according to research from the Potsdam Institute for Climate Impact. Before humans originated, the average surface temperature was 2-3 degrees Celsius higher than pre-industrial levels, and the average sea level was up to 25 meters higher than it is today during the Pliocene Era.

The Working Process

The Paris Agreement’s implementation necessitates economic and societal transformations based on the best available knowledge. The Paris Agreement is structured on a five-year cycle in which countries take more ambitious climate action each year. Countries must submit their climate action plans, known as Nationally Determined Contributions (NDCs) by 2020.

NDCs

Countries need to establish the steps that they will take to alleviate greenhouse gas emissions in their NDCs to align with the Paris Agreement’s agendas. Countries also outline the activities they plan to take to build resilience and adapt to the effects of rising temperatures.

Long-Term Planning

The Paris Agreement called for nations to draft and submit long-term low-carbon development strategies by 2020 in order to effectively define their efforts toward the long-term goal (LT-LEDS).

The long-term vision offered by LT-LEDS is beneficial to Nationally Determined Contributions (NDCs). They are not required, unlike NDCs. Irrespective, they place the NDCs in the context of countries’ long-term planning and development goals, giving them a vision and direction for future development.

How are countries supporting one another?

The Paris Agreement establishes a framework for assisting developing countries with financial, technical, and capacity-building support.

Finance

The Paris Agreement maintains that affluent countries should lead in providing financial support to less developed and vulnerable countries, while also encouraging voluntary contributions from other Parties for the first time. Since large financial resources are required to adjust to the negative effects of climate change and mitigate its consequences, it is imperative to adapt climate finance (financing that supports projects to contribute to climate change).

Technology

The Paris Agreement outlines a goal of fully implementing technological development and transfer in order to improve climate change resilience while also lowering greenhouse gas emissions (GHG) emissions. Through its policy and implementation arms, the mechanism is increasing technology development and transfer.

Capacity-Building

Many of the issues posed by climate change are beyond the capabilities of many developing countries. As a result, the Paris Agreement places a strong emphasis on developing nations’ climate-related capacity-building efforts and calls on all wealthy countries to increase their assistance for such efforts.

How are we tracking progress?

Countries adopted a more transparent framework with the Paris Agreement known as the Enhanced Transparency Framework (or ETF) to report information. Starting in 2024, countries will be required to report honestly on their activities and progress in climate change mitigation, adaptation, and support offered or received under the ETF. It also establishes worldwide protocols for the examination of reports provided.

The data from the ETF will be incorporated into the Global Stocktake, which will assess how far we’ve progressed toward our long-term climate goals. This will lead to recommendations for countries to establish more ambitious targets in the next phase.

What have we achieved so far?

Even though massive improvements in climate change action are required to reach the Paris Agreement’s goals, low-carbon solutions and new markets have already emerged in the years after it went into effect. A growing number of governments, regions, cities, and corporations are setting carbon neutrality goals. Zero-carbon solutions are becoming more competitive across a variety of economic sectors that account for 25% of total emissions. This trend is especially obvious in the electricity and transportation sectors, and it has opened up a slew of new business opportunities for those who get in early.

By 2030, zero-carbon solutions may be competitive in industries that account for more than 70% of world emissions.

Useful resources

United Nations The Paris Agreement

United Nations What Is Climate Change?

United Nations How the Paris Agreement will help tackle the climate crisis (with Aidan Gallagher)- Within Our Grasp (video)

United Nations What is the ‘Paris Agreement’, and how does it work? (video)

About the author

The article was written in May 2022 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Climate change’s impact on the financial sector

In this article, Maite CARNICERO MARTINEZ (ESSEC Business School, Global Bachelor of Business Administration, 2021-2022, exchange student from the University of Salamanca) explains how climate change has affected the financial sector.

For the last two decades, the environmental awareness has progressively increased. People are worried about the consequences of the greenhouse effect and the gas emissions and environmental policies play an important role in governments’ agendas. At first, the focus was mainly on the economic activity’s repercussion on the environment and developing less polluting practices. But many actors have acknowledged the major repercussions of climate change on countries, firms, the financial sector and the global economy. Therefore, the management of the risks associated to climate change is crucial.

To illustrate this point, take for instance PG&E, California’s principal power supplier. After the California wildfires in 2018, the firm had to declare bankruptcy due to the damage that its infrastructure had suffered and the amount of obligations that it had to pay because of being responsible of the ignition. Nevertheless, the drought and the extremely high temperatures were crucial for the start, expansion and severity of the fires. Also, the insurance sector is one of the most exposed to the physical risks of the climate change.

There are some regions and sectors specially exposed to these risks, but in a globalized world, they will affect, more or less, all the countries and sectors and will challenge the financial sector. Many agreements have been signed to approach the situation, such as the Kyoto Protocol, the GRI Sustainability Reporting Standards in 1997 (the Global Reporting Initiative, GRI, is a ONG created by Coalition for Environmentally Responsible Economies, CERES; and the United Nations Environment Programme, UNEP), the 2030 Agenda in 2015 or the Green Pact in 2019.

Financial markets’ adaptation

Financial markets have to be adapted, like the 2008’s crisis proved, with measures to ensure the transparency of the environmental risks and the criteria applied. That is the consequence of the “greenwashing” (a marketing method that consists in the use of the ecological argument to communicate with the public to portray the business as an eco-responsible one, when that is in fact not true. Such practice is deceptive and can be likened to false advertising) a phenomenon that appeared due to the increasing demand of “green” financial products, which are financial initiatives, processes, products or services either designed to protect the environment or to manage how the environment impacts finance and the investment. The problem is the lack of clarity when we have to determine if a financial product is sustainable. Sustainable financial products are the ones that take into account social and environmental factors when investing. That can be evaluated using the ESG (Environmental, Social and Governance) criteria.

Despite the risks inherent to climate change, it is important to note that it also comes along with many opportunities related to finding solutions and alternatives to the problem, like the renewables energies, whose value has increased that much, that some are even talking about the formation of a “green bubble”. Also, there is an increasing demand of green bonds (fixed-income assets destined to the financing of projects that meet environmental criteria, sustainable activities or projects to minimize the climate change), green loans and deposits, and energetic efficiency plans.

Risk associated to climate change on the financial sector

But, how to measure the risk of climate change? First of all, we have to rank the exposures depending on criteria like the geographical area, business model, gas emissions or vulnerability towards physical changes. A good starting point is the TCFD (Task Force on Climate-Related Financial Disclosures) recommendations on what are the most exposed sectors. Then, using different scenarios, we have to measure the risk. Nevertheless, there is little evidence that the market has put a price on each type of climatic risk, and even when they are included on the risk measurement of the asset, they are not completely incorporated or they are subject to a very high uncertainty, resulting in a very high volatility.

To sum up, climate change and its raising awareness have completely altered the financial markets outlook. A new concern about the risk of the climate change has been brought up, but also new areas of investment that look very promising, even with the possibility of the development of a new bubble. Therefore, I think that those risks need to be taken into account and its importance is only starting to grow. In the future, we will see how climate change plays a great role in the financial markets.