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MAY 2020 GLOBAL MACRO RESEARCH NEARING THE TIPPING POINT WHY THE TWENTIES REPRESENT THE CRITICAL DECADE IN HUMAN RESPONSE TO CLIMATE CHANGE

> Christiana Figueres, a Costa Rican diplomat and architect of the 2015 climate agreement, explains why this decade is the tipping point for taking action before climate change becomes irreversible.

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THIS DECADE IS THE LAST IN WHICH WE CAN MAKE A MEANINGFUL DIFFERENCE TO AVOID THE WORST IMPACTS OF CLIMATE CHANGE. IN THIS PAPER, I EXPLORE THE REASONS WHY, AND ASSESS THE GREEN SHOOTS OF PROGRESS THAT DEMONSTRATE HOW COUNTRIES AND FINANCIAL INSTITUTIONS STILL HAVE A CHANCE TO RESPOND TO THIS CRISIS.

Science has been shedding light on the facts of climate change for decades, but the extent of our knowledge is more specific and granular now.

• Five years after the , scientists now estimate that if the world were to heat by 2°C (as compared to 1.5°C), there would be three times as much infrastructure destruction, biodiversity destruction, human pain and death.

There is already evidence of what a future could look like if we do not attempt to change course. • Within the last 12 to 18 months, we have seen damage being done to Earth in the form of extreme bushfires. In Australia, for example, fires devastated more than 8 million hectares of Australian territory (an area larger than countries like Scotland, Austria and Panama).

The direction of decarbonisation is irreversible, and businesses are preparing for this new future in a bid to remain competitive in the future landscape. • A recent study found 65% of the US economy continues to decarbonise.

Asian countries are moving to renewables despite the challenges. • The governments of these nations understand that in order to bring their populations out of poverty, they must continue producing energy; however, they also understand that fossil fuels are not as benign as we thought decades ago.

Climate change concerns are likely to drive advances. • Progress will be driven by the standardisation of measurement of environmental, social and governance (ESG) metrics for governments and corporates alike. It is likely to be climate change that is going to be the most-focused-on aspect of ESG factors, for the simple reason that it is the easiest facet of ESG to understand and measure.

ESG is here to stay in the financial sector. • This is evidenced by the Principles for Responsible Investment (PRI), which has 2,000 institutions as signatories and, more recently, the Principles of Responsible Banking, which includes 130 banks from 49 countries, equating to around USD$47 trillion in assets.

Financial institutions are waking up to new opportunities presented by ESG. • One such example is the UN-convened Net-Zero Asset Owner Alliance, a group of 20 asset owners, who collectively hold around USD$5 trillion in assets.

2 WE ARE IN THE CRITICAL DECADE

THIS DECADE IS THE LAST IN WHICH WE CAN MAKE A MEANINGFUL DIFFERENCE TO AVOID THE WORST IMPACTS OF CLIMATE CHANGE.

The science is now clear: if we continue on our current path, by 2030 we will have loaded the atmosphere so much that irreparable damage will have been done, putting us on a path to unavoidably pass tipping points. Basic ecosystems, including the Amazon, the Antarctic ice sheet and the Russian tundra would be on their way to irreversible transformations. If we do not shift successfully from our current trajectory, many other very sensitive ecosystems could quickly fail, resulting in a cascading and catastrophic domino effect.

In this paper, I explore the reasons why this decade could be our final opportunity to alter the current trajectory of human impact on our planet. I will also assess the green shoots of progress which demonstrate how countries and financial institutions still have a chance to respond to this crisis.

CHRISTIANA FIGUERES

Christiana Figueres is a Costa Rican citizen and was the Executive Secretary of the United Nations Framework Convention on Climate Change 2010 - 2016. During her tenure at the UNFCCC, Ms. Figueres brought together national and sub-national governments, corporations and activists, financial institutions and NGOs to jointly deliver the historic Paris Agreement on climate change, in which 195 sovereign nations agreed on a collaborative path forward to limit future global warming to well below 2°C, and strive for 1.5°C in order to protect the most vulnerable. For this achievement Ms. Figueres has been credited with forging a new brand of collaborative diplomacy, for which she has received multiple awards.

Since then Ms. Figueres has continued to serve her one and only boss, the global atmosphere. She sits on multiple boards and is a founding partner of Global Optimism Ltd., a purpose driven enterprise focused on social and environmental change. She convenes Mission 2020 and co-chairs the Global Covenant of Mayors.

In this cautionary but optimistic book, Figueres and Rivett-Carnac – the architects of the 2015 Paris Climate Change Agreement – tackle arguably the most urgent and consequential challenge humankind has ever faced: the world’s changing climate and the fate of humanity.

In The Future We Choose, the authors outline two possible scenarios for the planet. In one, they describe what life on Earth will be like by 2050 if we fail to meet the Paris targets for carbon dioxide emission reduction. In the other, they describe what it will take to create and live in a carbon neutral, regenerative world. They argue for confronting the climate crisis head on, with determination and optimism.

How all of us address the climate crisis in the next thirty years will determine not only the world we will live in but also the world we will bequeath to our children and theirs. The Future We Choose presents our options and tells us, in no uncertain terms, what governments, corporations, and each of us can and must do to fend off disaster.

3 SCIENCE ILLUMINATES THE PATH AHEAD 1

SCIENCE HAS BEEN SHEDDING LIGHT ON THE FACTS OF CLIMATE CHANGE FOR DECADES, AND THE EXTENT OF OUR KNOWLEDGE IS MORE SPECIFIC AND GRANULAR THAN EVER. IN 2018, WE HEARD THE UNEQUIVOCAL EVIDENCE FROM THE INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, WHICH INVOLVES HUNDREDS OF CLIMATE SCIENTISTS AROUND THE WORLD.

It is clear to us now that the margin set out in the Paris Agreement1, for the target temperature that could keep us within manageable boundaries, was too broad. Five years after the agreement, scientists now estimate that if the world were to heat by 2°C (as compared to 1.5°C), there would be three times as much infrastructure destruction, biodiversity destruction, human pain and death.

As the science has improved, particularly on carbon measurement and effects, we now know that at an average of 2°C of warming, some large landmasses would become uninhabitable, sea levels could rise 5 20 to 30 feet, and the world’s coral reefs could be completely lost2. A recent study predicted that a billion people will either be displaced or forced to endure insufferable heat for every additional 1°C rise in the global temperature3. That is over 10% of the global population for each degree.

Before 2020, the detailed data was not available to be clear on these facts, but now we have a high level of certainty as to what our trajectory needs to be. There is no excuse. If we continue with current levels of emissions, it is certain that by 2030 we will have closed the door to a path that takes us toward a 1.5°C increase in global temperature. This represents an astonishing responsibility that our generation bears on its shoulders: we now have the knowledge to understand the desperate need for change. If we do nothing, by 2030 we will face a planet where our species is completely at the 7 mercy of natural disasters.

In order to deviate from our current trajectory, we will all need to make changes to how we live.

1 The Paris Agreement is the first-ever universal, legally binding global climate change agreement, adopted at the Paris climate conference (COP21) in December 2015. Among other things, governments agreed a long-term goal of keeping the increase in global average temperature to well below 2°C above pre-industrial levels and aiming to limit the increase to 1.5°C, since this would significantly reduce risks and the impacts of climate change. Read more here: https://ec.europa.eu/clima/policies/international/ negotiations/paris_en 2 https://www.nationalgeographic.co.uk/environment-and-conservation/2019/11/ climate-change-driving-entire-planet-to-dangerous-tipping 3 https://www.pnas.org/content/ early/2020/04/28/1910114117

4 ACTION POINTS FROM ‘THE FUTURE WE CHOOSE’

Let go of the old world. Make profound shifts 2 1 in how we live, work and relate to each other

Face your grief but hold a vision of the future. 2 Accept the realities of climate change but look to what we can still create

Defend the truth. Learn to distinguish between 3 real science and pseudoscience3

4 4 See yourself as a citizen, not a consumer 3

5 Move beyond fossil fuels

6 Reforest the Earth

7 Invest in a clean economy

8 Use technology responsibly. Artificial intelligence, robotics and the internet of things may be great allies

9 Build gender equality 8

10 Engage in politics. Democracies are threatened by the 9 climate crisis and must evolve to meet the challenge 3 Pseudoscience consists of statements, beliefs, or practices that are claimed 10 to be both scientific and factual but are incompatible with the scientific method.

5 THE EVIDENCE OF RECENT HISTORY

WHILE DRASTIC CHANGES ARE EXPECTED TO EMERGE IN DECADES, ALREADY TODAY THERE ARE SOME STARK GLIMPSES INTO WHAT A FUTURE COULD LOOK LIKE IF WE DO NOT ATTEMPT TO CHANGE COURSE. INDEED, THERE IS ABUNDANT EVIDENCE OF THE DAMAGE BEING DONE TO EARTH.

Even within the last 12 to 18 months, we have seen fires far more destructive than average burning swathes of the Amazon, California, Siberia and Australia. Taking the latter as an example, the recent Australian bushfires devastated more than 8 million hectares of Australian territory, (an area larger than countries like Scotland, Austria and Panama) burning a billion animals, taking human lives and displacing hundreds of thousands of people.

These recent events serve as evidence of the impact that climate change can have on our planet and the destruction it could wreak on people’s lives. Such events are a stark reminder of why attempting to lower global warming to within 1.5°C range now is so important.

6 THE GLOBAL RESPONSE TO DECARBONISATION

SLOW BUT DEFINITE DECARBONISATION IN THE US TO REMAIN COMPETITIVE IN THE FUTURE LANDSCAPE As decarbonisation continues to come to the fore, many companies in the US are busy preparing for this new environment – even though the incumbent government has deemed decarbonisation less of a focus. In November 2019, US President Donald Trump initiated the formal process to pull the US out of the Paris Agreement. Nevertheless, 65% of the US economy continues to decarbonise in a bid to remain competitive in the future landscape. This is based on the understanding that the direction of decarbonisation is irreversible; the only question mark is the speed and scale of transition, but there is increasingly broad acceptance that decarbonisation is the direction in which we are headed.

EUROPEAN UNION RAISES DECARBONISATION TARGET Meanwhile, the European Union earlier this year moved its decarbonisation target from 80% decarbonisation to 100% by 20504, which clearly shows the Union’s commitment to tackling climate change, despite resistance from some member countries. There are further discussions scheduled to review other emissions targets.

CHINA AND INDIA LOOK SET TO MOVE AWAY FROM EMISSIONS IN YEARS TO COME Somewhere between the US and Europe, continues to burn coal, but I expect the levels of coal burned in the country to max out in the coming two to three years, before trending downwards. Meanwhile, India is in an interesting position as one of the many countries where solar energy is dramatically cheaper than coal. This fact, compounded by public pressure on the Indian government about air pollution and its damaging effect on health, means that the country is also beginning to reduce its coal burning, especially around cities.

ASIAN COUNTRIES ARE MOVING TO RENEWABLES DESPITE THE CHALLENGES Some other developing nations, and particularly those in Asia, like Vietnam and , will affect the overall growth of emissions. These countries are unfortunately in a difficult situation, as their governments understand that in order to bring their populations out of poverty, they must continue producing energy, just as the many of their developed counterparts have done before them. However, these developing countries now understand that fossil fuels are not as benign as we thought they were decades ago. They need to provide quick, dependable and plentiful energy to their people. And they need financing from abroad. Fortunately, development banks and private financial institutions have turned away from coal and toward renewable energy financing. However, that does not mean that coal is not being financed at all in Asia. In fact, almost all the coal in Asia is currently being financed publicly by government institutions of China, Japan, and Korea. This is because these countries are aware that coal is a strong domestic industry, but that there is dwindling social and policy tolerance for burning those fuels at home.

4 For more information please see https://ec.europa.eu/clima/policies/strategies/2050_en

7 GREEN SHOOTS OF PROGRESS

DIGITISATION AND ARTIFICIAL INTELLIGENCE climate change has meant that these adults are demanding their MAY HELP TRANSITION asset managers invest their portfolios in a responsible way, perhaps Technological advances, like digitisation and developments in owing in part to the fact that their average life expectancy could see artificial intelligence, have enabled some sectors, like energy and them live for a further 60-plus years, and therefore the impact of their transport, to electrify and become cleaner, ubiquitous and less investments on climate change may well affect them in later life. expensive. The textile industry could also stand to benefit from The increased focus by institutions is also driven by regulation technological advances, with increased use of innovations like on-site globally. For example, the EU’s IORP II Directive requires pension 3D printing offering the potential to bring down CO2 emissions funds above a certain size to consider ESG issues and disclose how caused by manufacturing products that are then flown to a their risks are considered in the Investment Policy Statement. In different location. That said, there remain plenty of sectors where the US, the Department of Labor has clarified that ESG factors can technological advances still have some way to go, particularly in be part of primary analysis of prudent investment decision making areas like agriculture and food technology, which is a key laggard and and pension funds in Ontario are required to disclose in their a large contributor to climate change. Advancing technologies that investment policies information about whether ESG factors are could improve these areas could go a long way to driving change. incorporated into the plan’s investment policies and procedures. In Australia, the Financial Services Council requires its members CLIMATE CHANGE CONCERNS ARE LIKELY to develop an investment policy stating how ESG issues are TO DRIVE ADVANCES addressed, and while there is no pensions regulation covering ESG Another development which could drive significant progress would issues across Asia yet, there are a number of stewardship codes be the standardisation of measurement of ESG metrics for – such as in Japan – that have helped to put ESG issues firmly on governments and corporates alike. However, the difficulty here is the map for institutions in these local markets. that broad measurement of ESG metrics is complex and varied, and difficult to build a consensus on as there are many facets and Central banks are also tuning in to the importance of considering stakeholders involved. ESG risk. The Central Banks and Supervisors Network for Greening the Financial System is composed of central banks concerned While ESG concerns will continue to mature as a core investment about the risk to the economic system posed by climate change5. tenet, it is likely to be climate change that is going to be the The group, which began with eight banks three years ago, now most-focused-on aspect of ESG factors, for the simple reason that comprises 42 central banks globally, including the Central Bank it is the easiest facet of ESG to understand and measure. For this of China, although the US Federal Reserve is not a member. A reason, I expect that carbon concerns and climate change will be comprehensive report released by the group in 2019 gives a very the areas to advance most quickly, and they will pioneer the clear sense of how crucial they believe the role of the financial direction for our tackling of other ESG issues. sector is in achieving and protecting the Paris Agreement6. ESG IS HERE TO STAY FOR THE FINANCIAL SECTOR FINANCIAL INSTITUTIONS WAKING UP In recent years, we have seen increasing numbers of financial TO THE OPPORTUNITIES institutions bring ESG concerns to the foreground. Fortunately, this In light of this, while financial institutions are becoming aware of the trend looks set to continue. ESG risks are being integrated into risk of climate change, they are equally beginning to understand core strategies and truly embedded into investment decisions. This the opportunities that addressing it head-on represents. One such is evidenced by the Principles for Responsible Investment (PRI), example is the UN-convened Net-Zero Asset Owner Alliance, a group which has 2,000 institutions as signatories and, more recently, the of 20 asset owners, who collectively hold around USD$5 trillion in Principles of Responsible Banking, which includes 130 banks from assets7. The alliance was formed in September 2019, with the asset 49 countries, equating to around USD$47 trillion in assets. owners committing to transition their investment portfolios to The focus of financial institutions on these initiatives is for a good net-zero GHG emissions by 2050. The group members are reason. From a business perspective, these institutions are aware mandating their asset managers and the companies that they that their typical clientele is increasingly demanding social and partially own to also align their portfolios, in order to attempt to environmental purpose be a core tenet. capitalise on the opportunities that exist in the clean technologies The current generation of adults in their thirties and forties that are space. We can see now a new trend emerging in which those with likely to inherit wealth (around USD$40 trillion is set to be inherited long-term investment horizons that have long-term liabilities are around the world over the next two to three years) have a different intentionally catalysing the de-carbonization of the global economy worldview to the generations before them. Increased focus on because of the embedded opportunities and rewards.

5 https://www.ngfs.net/en 6 https://www.ngfs.net/sites/default/files/medias/documents/ngfs-a-sustainable-and-responsible-investment-guide.pdf 7 https://www.unepfi.org/net-zero-alliance/ A 10-YEAR WINDOW: FROM DENY, DELUDE AND DELAY TO PRODUCE, PROFIT AND PROSPER

Low carbon is not an enemy to economic growth.

We have a 10-year window and it is in this narrow window that we are going to decide collectively whether we continue to deny, delude and delay on climate change, or whether we wake up to the rewards of taking ESG risks seriously.

If we act within the coming decade, we have an opportunity to move to producing, profiting and prospering. Each of the paths open to us will result in a very different world.

After this decade, the window of opportunity will close. This means we all bear an enormous responsibility to act, particularly the institutions – be they financial, governmental or others – still sitting at the decision-makers’ table.

Let us not pray to be sheltered from dangers, but to be fearless when facing them.

RAVINDRANATH TAGORE Poet, musician, artist, Ayurveda-researcher and first non-European to win the Nobel Prize in Literature

9 This is the final hour. It can be our finest. But we must act now.

CHRISTIANA FIGUERES

10 FIND OUT MORE

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