HSBC | Five climate trends for 2021
By Daniel Klier, Global Head of Sustainable Finance, HSBC
With 2020 so dominated by the COVID-19 pandemic, it would be understandable for politicians, policymakers and the private sector to be consumed by further lockdowns, vaccine roll-outs and economic recovery. But the climate emergency will not wait for a return to normality. Ambitious action from all parts of society needs to be taken in the here and now.
Fortunately, some stars are beginning to align on this topic. Climate commitments are now forthcoming from a huge range of countries and institutions. COP26, the yearly UN climate policy gathering, will now take place in November 2021, after being postponed due to COVID-19.
Hosted by the UK government in Glasgow, it will be a key moment to lock in ambitious low-carbon transition policy goals across the world. We expect the following five trends to dominate the run-up to this event.
1. More power to climate diplomacy
The three major global economic blocs – the US, the European Union and China – have plenty of disagreements, but since Joe Biden’s election to the US Presidency in November, they are united by a desire to take firm action on climate change.
Biden has appointed former US Secretary of State John Kerry as special climate envoy, raising the prospect of a greater role for climate diplomacy. This could mean improvements to the 2015 Paris Agreement, greater international collaboration on technical development and investment, or action on specific economic sectors and industries. China recently committed itself to net-zero emissions by 2060, and the EU has set its sights on the same target by 2050.
The UK has also recently announced ambitious offshore wind targets, and will be ending its financial support for fossil fuel production overseas. It has also renewed its Paris Agreement pledges, which will translate into a 68 per cent reduction in UK emissions by 2030. These are encouraging developments as we head into COP26, and will increase the pressure for action on the private sector.
2. Transition opportunities
The transition to low carbon is starting to pick up pace, particularly in industries where emissions are high and hard to abate. For example, electrical vehicle (EV) sales bucked the overall auto sector decline in 2020. By September, EV sales in the EU had increased by 81 per cent year-to-date, and more than 350 EV models are due for launch across the world next year.
Important work is ongoing in other sectors. In October 2020 the European Commission announced plans to renovate 35 million energy-inefficient buildings by 2030. Buildings account for 40 per cent of energy consumed and 36 per cent of energy-related greenhouse gas emissions in Europe. There is increasing awareness of the need to build new, sustainable infrastructure in the fast-growing Asian economies.
Developing better investment solutions for sectors that are making progress in emissions reduction, but cannot yet qualify for pure green finance, is an important task for the financial sector. This will be an important step in the transition process for heavy-emitting sectors such as steel production and aviation. As new transition products come to the fore, financial institutions and their clients should work together closely to find the right solutions for each client transition journey. HSBC has worked with other market participants to develop new Green and Social Bond Principles that will help guide the growth of the market.
3. Increasing climate-finance returns
Investors have a growing appetite for sustainable finance. This is driven partly by greater pressure from stakeholders, but primarily by expectations of higher returns. In an extremely bumpy year for equities, ‘climate stocks’ (eg renewable energy, energy storage, agriculture and transport efficiencies) made a 37 per cent gain, against 11 per cent for the overall market.
The green and sustainable bonds market also proved its durability in 2020. Despite a dip over the first half of the year, in Q3 green bond issuance alone reached USD64.9 billion – the highest volume in any third quarter period since the market’s inception. Total historical green bond issuance is now almost USD1 trillion.