Policy response inevitable, says PRI

Current government action to tackle climate change won’t achieve the commitments made under the Paris Agreement that target limiting warming to 1.5C. Indeed, the market’s assumption appears to be that no further climate-related policies are coming in the near-term. But this will inevitably change as the impact of climate change grows and today, the consequences of those strict policies and regulations coming down the line remains significantly under-priced.

It’s why the PRI has developed an Inevitable Policy Response (IPR) that lays out a realistic forecast of how governments will respond with policy to try and navigate climate risk by 2025. Expect a forceful, abrupt and disorderly response the longer the delay, warned Nathan Fabian, the PRIs’ director of policy speaking to gathered delegates at the PRI in Person conference in Paris.

Launched over a year ago with a cohort of advisors the IPR forecast “works up” a granular analysis that provides a detailed and realistic assessment of policy and technology developments, given the world as it is today. It details what could happen, where the policy will come, and how it will be felt. The aim is to reset investors’ forward-looking policy assumptions, and contrasts to other climate scenarios that are reverse-engineered from a predefined temperature goal. The IPRs latest findings and research, drawn from a realistic assessment of international policy developments, reveals eight key policy levers that will likely disrupt markets by 2025.

The PRI predicts considerably greater disruption than many investors and businesses are prepared for today. And the implications of this mispricing go far beyond the energy sector, rippling throughout the economy. “Our forecast is that investors can expect a disruptive and abrupt policy response. Nations will urgently close the gap between emissions and forecasts; there is not sugar coating,” said Fabian. “A net zero economy can be achieved but we need to stretch out ambitions. There is little choice but to act now; waiting puts more pressure on a severe transition.”

The PRI will progressively release details of its latest IPR analysis in coming weeks. This will be followed by asset level impact pricing in the autumn. From this investors will be able to inform their investment activities with a unique tool for navigating complex, evolving policy and the regulatory landscape. Through it they can enhance portfolio resilience and inform strategic asset allocation. “We aim to work with you to prepare for, and reduce the disruption ahead,” said Fabian.

The probably of an IPR is now glaring, argues the PRI. Analysis of public corporate support for the transition shows that over US$39 trillion of public companies by market capitalisation, representing 72% of the MSCI World Index, have publicly expressed support for the climate transition and – or are – taking related action. This public support plays an important part of “why” a policy response to climate change is likely to emerge within the near term, by giving an economic and market mandate to policy makers for more ambitious action.

“The IPR is what we really think might happen; not what we wish to happen,” added Mark Fulton, founding partner, Energy Transition Advisors, who said the IPR a high conviction policy, based on forecasts rather than definitive answers. “It is about what this would that mean to your portfolio and your businesses. If the science is right, there has to be additional policy.”

Innovation
As well as policy, technology is a key tool to transition, said Fulton, arguing that fundamental changes in consumer preferences, an agricultural revolution and dietary shifts will be in the transition mix. Changes that will all hasten with the next generation. “If you are a politician, they are coming for you,” he said, in reference to today’s youth. He concluded that the levers would be pulled “hard and fast” to ensure a trust transition.