The landmark report from the United Nations (UN) Intergovernmental Panel on Climate Change depicted a dire future for the Earth’s climate, highlighting that each of the last four decades has been successively warmer than any decade that preceded it since 1850. Policymakers around the world have started to incorporate climate into their policymaking. Intra-government organizations, like central banks, also started introducing strategies to mitigate the risks global economies face from climate change. Major central banks’ quantitative easing (QE) programs, deployed to stabilize economic activities and financial markets, are projected to be increasingly aimed towards de-carbonization efforts. In short, QE is becoming QE“D”, with D referring to de-carbonization efforts. In the meantime, investors are deploying more and more resources towards the Environmental, Social, and Governance (ESG) aspects of their investments, stressing the Environment component. In short, ESG is becoming “E”SG, with an emphasis on E.
Europe is leading the charge
Europe is the leader in policymaking for climate change
The European Union (EU) is on track to meet its greenhouse gas emissions reduction target for 2020 and has a plan to further cut emissions by at least 55% by 2030. By 2050, Europe has the aspiration to become the world’s first climate-neutral continent. This ultimate goal is at the heart of the European Green Deal, a set of policy initiatives aimed at achieving carbon neutrality. It's also in line with the EU’s commitment to the Paris Agreement. Ultimately, while dealing with climate change, the EU aims to promote sustainable economic growth, create jobs, and deliver environmental benefits for its citizens. Investing in green technologies could also bolster the long-term global competitiveness of the EU economy. Policymaking in major political institutions, as well as the establishment in the EU, is concentrated on achieving climate-related goals, especially the influential monetary authority, the European Central Bank (ECB).
The ECB is trying to kill two birds with one stone
In July of this year, the ECB showed a solid commitment to incorporating climate change considerations into its monetary policy framework. Including climate change considerations in monetary policy operations for disclosure and risk assessment is one thing, but implementing a new collateral framework and shifting corporate sector asset purchases according to climate change is another thing. The ECB’s goals could have a profound shift in how future investments are allocated between alternative opportunities. Under its authority to fight with the pandemic-related economic slowdown, the ECB has been buying on average €120 billion worth of bonds issued by European sovereigns and corporates per month. Rules on how these purchases are allocated are currently being rewritten.
European policymakers and central banks are leading the charge in climate change initiatives. As a result, Europe has made good progress towards some of their emissions-related goals. The ECB has already started making changes to their asset purchase program and collateral framework to incorporate sustainability and climate change, and more could be on the way. Additionally, the BoJ and BoE have started to place an emphasis on climate change risks. As a result, this could dramatically change where capital is allocated in the EU, UK, and Japan as focus on climate change continues to heighten, and we're starting to see a greater focus in the U.S. as well; this will increasingly influence global investing.
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