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AIQ Editorial TeamGlobal Investment Thinking @avivainvestors
In this month’s instalment of our visual series on topical themes, we look at climate in the aftermath of November’s COP27 event in Egypt.
Read this article to understand:
- The here and now consequences of climate change
- What a difference 0.5 degrees can make
- How markets are reacting to the climate crisis
The scary effects of climate change
This summer, the town of Syracuse in Sicily reached the highest temperature ever recorded in Europe – a staggering 48.8 degrees Celsius.
But Italy was not the only country to be hit. Climate change is causing more frequent and extreme heatwaves across the whole of Europe – 19 countries have recorded their highest temperatures over the last decade, and ten since 2019 (Figure 1).
Figure 1: Record high temperatures in Europe (degrees Celsius)
Source: Aviva Investors, September 20221
But heatwaves are not the only “collateral” effects of climate change being felt today. Others include climate extremes, such as floods, droughts and the ice melting at the poles.
According to the World Bank, 1.81 billion people face significant flood risk worldwide.2 Demand for protection is expected to grow as extreme weather events increase and sea levels rise. The magnitude of flooding in low-lying coastal cities and small islands has intensified significantly in recent years (Figure 2).
Figure 2: Frequency of flooding in low-lying coastal cities and small islands
Now: Once every 100 years
Future: Every year
Source: Aviva Investors, June 2022. Original data sourced from Intergovernmental Panel on Climate Change, 20193
Meanwhile, according to satellite observations, Arctic Sea ice reached its lowest level for the year on September 18. Ice cover shrank to an area of 4.67 million square kilometres, roughly one fourth below the 1981-2010 average minimum.4
Figure 3: Arctic Sea ice minimum extent (4.67 million km2)
Note: Yellow line: 1981-2010 average minimum.
This image visualises sea ice change in the Arctic using data provided by the Japan Aerospace Exploration Agency’s Global Change Observation Mission 1st-Water “SHIZUKU” satellite, which is part of a NASA-led partnership to operate several Earth-observing satellites.
Source: NASA's Scientific Visualization Studio, September 18, 20225
What difference does 0.5 degrees make?
The objective of 2015’s Paris Agreement is to limit global warming to well below two degrees Celsius above pre-industrial levels, and preferably to 1.5 degrees. While a difference of 0.5 degrees might not seem a lot, the consequences of a two degrees world are stark, particularly on species range (Figure 4), with the greatest negative impact in the insect world. Insects support the base of the food chain and play an important role as pollinators.
The coral reef decline stands out for its magnitude, as it is expected to fall a staggering 99 per cent. Corals, home to a quarter of all marine life, are essential to the biological balance of the ocean. Almost eight per cent of the world’s population depend on them in terms of coastal protection, fisheries resources and tourism.6
Figure 4: 1.5 ºC versus 2 ºC
Ecosphere impacts
Decline in species range
Source: World Resources Institute, October 7, 20187
Government support for fossil fuels in 51 countries worldwide almost doubled in 2021
Despite this, major economies are still increasing support for the production and consumption of coal, oil and natural gas. Many countries are struggling to balance longstanding pledges to phase out inefficient fossil fuel subsidies with efforts to protect households from surging energy prices.
Overall government support for fossil fuels in 51 countries worldwide almost doubled to US$697.2 billion in 2021 from the previous year due to higher fuel prices and energy use (Figure 5).
Figure 5: Fossil fuels subsidies doubled in 2021
Source: OECD, 20228
How are markets reacting?
As a proxy to compare the investment performance of clean and traditional energy companies versus the broader market, we have used three indices – S&P Global Clean Energy, S&P Global 1200 and S&P Global 1200 Energy. The first measures the performance of the 30 largest companies in global clean energy-related companies, the second is a composite of global equities (developed and emerging market) and the third measures the performance of traditional energy stocks.
The S&P Global 1200 Energy has outperformed the other indexes this year
Unsurprisingly, given concerns over energy security and rampant inflation, the S&P Global 1200 Energy has outperformed the other indexes this year, returning an astonishing 46.2 per cent in the first 11 months (Figure 6).
Figure 6: S&P Global 1200 Energy outperformance in 2022
Source: Aviva Investors, Refinitiv. Data as of December 1, 2022
That may be seen as a depressing statistic given the urgent need to move to renewable energy. But perhaps this year will prove an anomaly caused by a particular set of circumstances. The story over a five-year horizon is markedly different, with the S&P Global Clean Energy index generating a staggering return of 135 per cent – well over 100 percentage points more than its global equity and traditional energy counterparts (Figure 7).
