What’s shifting in investment, climate policy, global finance and energy technology
If you’re living through the rainy deluge in California or Western Australia, a snowless winter in Europe or weirdly balmy weather in New England, we probably don’t need to remind you that extreme weather is now the norm, and it comes at a cost. Fires, floods, heat waves and storms fueled by climate change cost the U.S. alone $165 billion in 2022 — that is a little less than the total war damage in Ukraine.
On the brighter side, new investment in renewable energy is exploding — hitting $380 billion in China in 2021, followed by the EU ($260 billion) and the U.S. ($215 billion). And that does not count a massive round of new spending and incentives to clean energy and infrastructure under new U.S. laws in 2022.
All that energy and more will keep trending in 2023. Around the globe, the IEA estimates the world will install 2,400 gigawatts of renewable capacity by 2027, equal to all power capacity installed in China today and 30% more renewable capacity than the IEA projected just one year ago.
With those freight trains in motion, we look ahead to other changes we anticipate on the climate front in 2023. Perhaps the biggest is the global response to climate coordination and financing.
Global climate leadership is getting upended, with the sad carbon capture of the UN climate COP process but also the exciting rise of firebrands in the Caribbean who are advocating for gobsmacking proposals to shake up the staid multilateral world of the World Bank and the IMF. Other, smaller, but important trends include the crackdown on greenwashing and bogus ESG investment products, and climate circles finally joining with advocates for biodiversity and sustainable farming in a more unified approach.
One revolutionary trend — not about climate change, per se but sure to swamp the world in 2023 — is the rise of artificial intelligence in analyzing and writing. Since AI is with us, and not going away, the CCM team is offering a glimpse of how it works (amazingly well, with caveats).
It was bad enough that last year’s COP sold its premier sponsorship to Coca-Cola, the world’s largest plastic bottle polluter. This year’s COP28 is slated to become a Potemkin expo of petrostate potentates and corporate greenwashers.
What follows are opinions and analysis of climate trends for 2023 from the Climate & Capital team, followed by sections edited or rewritten from research and drafts by the app ChatGPT. At its simplest, ChatGPT goes beyond Google search and can develop coherent, researched narratives in a matter of seconds. See what you think…
Trend: COP 28 is captured by Big Oil
Analysis by Climate & Capital team:
Once a place to be seen, the United Nations’ climate conference is on its way to becoming the biggest UN embarrassment since Kurt Waldheim, who is alleged to have enabled Nazi war crimes, became UN Secretary General in the 1980s. It was bad enough that last year’s COP sold its premier sponsorship to Coca-Cola, the world’s largest plastic bottle polluter. This year’s COP28 is slated to become a Potemkin expo of petrostate potentates and corporate greenwashers. This week, the UN announced the appointment of Sultan al-Jaber, head of state oil giant Abu Dhabi National Oil Company (ADNOC) as President of COP28 to be held next November in the United Arab Emirates. This is the first time a fossil fuel CEO has been tapped to lead the UN’s premier climate conference. The new chairman will definitely bring a new perspective to fighting climate change, asserting that global energy security will “require oil and gas to remain a significant part of the mix for decades to come.”
What ChatGPT came up with:
The appointment of a fossil fuel CEO to lead the UN’s climate conference, COP28, has generated controversy and criticism. Some argue that this appointment undermines the credibility of the conference and the UN’s efforts to combat climate change, as it appears to be in conflict with the goal of reducing fossil fuel use and emissions. Others, however, argue that it is important to have representation from all sectors, including the fossil fuel industry, in order to find solutions that are both effective and realistic. It is also worth noting that COP28, as well as any UN Climate Conferences, is a political process, where countries and key players in different sectors negotiate and agree on actions to tackle climate change. Therefore, the role of the COP President is to facilitate this process and to ensure that all voices are heard, rather than to set the agenda or to dictate the outcome.
Trend: Oil messages will dominate COP
Climate & Capital team:
We have peered into our magic ball, and seen these key (and, deeply self-serving) messages coming from the COP28 Secretariat:
- Unplugging the current energy system puts both economic and climate progress at risk.
- We need an inclusive approach that leverages the experience of all sectors of society and, critically, does not exclude the energy sector.
- The message for governments should be clear: Policies aimed at divesting from hydrocarbons too soon, without adequate viable alternatives, are self-defeating.
- What’s needed is a realistic new strategy that is practical, pro-growth, and pro-climate.
- While renewable-energy investment globally exceeded $365 billion last year, combined investment in energy storage, carbon capture, and the hydrogen value chain was only $12 billion. That is not nearly enough.
- Energy transitions take time.
How do we really know? They all come from the new President of COP, Sultan al-Jaber.
Here’s ChatGPT’s interpretation:
The above statements suggests that a sudden and complete transition away from hydrocarbon energy sources, such as oil and gas, would be harmful to both the economy and efforts to combat climate change. Instead, the messages advocate for an inclusive approach that involves all sectors of society, including the energy sector, in finding solutions. It argues that policies that focus solely on divesting from hydrocarbons without providing viable alternatives could be detrimental. The statement also emphasizes the importance of investing in new technologies such as energy storage, carbon capture, and hydrogen production as a necessary step in transitioning to a more sustainable energy system. It also acknowledges that energy transitions take time and that a realistic and practical approach is needed.
Trend: The surging influence of “Global South” leader Mia Mottley, Prime Minister of Barbados
Climate & Capital team:
The world’s most influential climate powerbroker is not Sultan al-Jaber or UN climate finance envoy Mark Carney. It is Mia Mottley, prime minister of the tiny Caribbean nation of Barbados. In less than two years, she and a group of Caribbean leaders have seized the global stage. They are driving a movement to radically reshape the role of the World Bank and the IMF, and overhaul a global financial system designed to address the problems of post-World War II, not climate change. “The World Bank of the 20th century, with the crises of the 20th century, cannot be the World Bank of the 21st century,” says Mottley.
The world’s most influential climate powerbroker is not Sultan al-Jaber or UN climate finance envoy Mark Carney. It is Mia Mottley, prime minister of the tiny Caribbean nation of Barbados.
Two years ago such talk would have been politely dismissed. Not anymore. This spring, the World Bank will decide on crucial Mottley initiatives including:
- How to restructure the World Bank to better integrate and scale lending to support developing nations.
- How to significantly increase the amount of money it lends as mandated by the G20.
- How to seek cheaper finance, faster approvals, more flexible borrowing limits, and longer maturities for the money that it and the world’s largest banks lend.
What ChatGPT drafted
Mia Mottley, the prime minister of Barbados, has emerged as one of the world’s most influential figures in the fight against climate change. In less than two years, she and a group of Caribbean leaders have taken center stage and are driving a movement to fundamentally change the role of the World Bank, the International Monetary Fund and the global financial system. They want to shift the way money is allocated between the developed countries of the Global North and the developing countries of the Global South.
Such statements would have been met with skepticism just a few years ago, but today they are taken seriously. This spring, the World Bank will decide on key initiatives that Mottley has been advocating for, including restructuring the World Bank to better support developing nations, increasing the amount of money it lends as mandated by the G20, and seeking cheaper finance, faster approvals, more flexible borrowing limits, and longer maturities for the money it and the world’s largest banks lend.
Trend: The gap between U.S. and European climate policies will widen
Climate & Capital:
The EU will continue to wield its “stick” to regulate and advance its rules-based climate “taxonomy,” while the U.S. dangles President Biden’s “all carrot” approach to decarbonization by offering incentives, tax breaks, low-interest loans, and outright government funding to spur development of everything from domestic electric vehicles and battery storage, to new power grids, to “re-shoring” semiconductor manufacturing.
What ChatGPT thinks:
The regulatory divergence between the United States and Europe will grow for a number of reasons.
- Political: Climate change has been a more contentious issue in the U. S., with the issue often becoming politicized and polarized. In contrast, climate change is widely accepted as a serious issue in Europe, and there is generally greater political consensus on the need for action. This has led to more cohesive and ambitious climate policies in Europe, while the U.S. has struggled to pass comprehensive climate legislation.
- Economic: The U.S. has a larger and more diversified economy than Europe, and the country has historically been heavily reliant on fossil fuels, particularly coal, oil, and natural gas, for energy production. As a result, the U.S. has a larger fossil fuel industry, which has been able to exert more political influence on climate policy than in Europe.
- Cultural: Climate change is seen as a more pressing issue in Europe, where environmentalism has a longer history and stronger cultural roots. In contrast, the U.S. has a more individualistic culture and a stronger tradition of deregulation, which has led to a more laissez-faire approach to environmental regulation.
- Governance: The U.S. has a federal system of government, with power divided between the national government and the states. This has led to a patchwork of climate policies, with some states implementing ambitious climate policies, while others have been less active. In contrast, the EU operates on a supranational level, with a unified approach to climate policy.
Trend: ESG investing claims will be come the microscope
Climate & Capital team:
As assets in ESG-based investments are surging, with more than $41 trillion in assets under management, according to Bloomberg Intelligence, so will new regulations. For Wall Street, the golden era of self-reported data and marketing-driven labels for “green” financial products will soon come to an end. The once wild frontier of environmental, social and governance; impact; and sustainable investing is about to be fenced in. In 2023, federal agencies plan to define, quantify and regulate all areas of green finance, including indexes, mutual funds and green bonds. Greenwashing, or making false or misleading claims about the environmental benefits of a product or company, will become a riskier proposition. As billions flow into the sector, investors increasingly want verifiable assurances of impact and outcomes.
What ChatGPT said:
ESG investing has been proliferating in recent years, and there is increasing demand for more transparent and reliable information about investments’ environmental and social impact. This has led to calls for greater regulation and standardization of ESG investing to ensure investors get what they are paying for.
Secondly, there is a growing concern about greenwashing when companies or financial products make false or misleading claims about their environmental or social impact. Greater regulation can help to prevent greenwashing and ensure that investors are not misled.
Finally, regulators are becoming more aware of the risks and opportunities associated with ESG investing, and many have started to take action to promote sustainable finance. For example, the EU has established a taxonomy for sustainable activities and a classification system for sustainable financial products and services.
Trend: Green hydrogen developments will continue to outpace skeptics
Climate & Capital:
It will be challenging to keep up with the news of breakthroughs, partnerships, and deals in green hydrogen. Countries worldwide are vying to crack the code to this potential means of decarbonizing heavy industry and long-haul transport, such as shipping and aviation.
Europe, the U.S., and China will battle to develop electrolyzers, storage, safe transport, and enough renewable energy to make hydrogen “green.” The U.S. Innovation Reduction Act includes $9.5 billion for hydrogen hubs. The EU has upped its green hydrogen production target to 20 million tons yearly from 5 million. China’s fuel cell cluster program targets 50,000 hydrogen vehicles by 2025 and 1 million by 2040. The world’s biggest champion, Australian billionaire Andrew “Twiggy” Forrest, will continue to pour money, self-interest and resources into turning green hydrogen into reality.
What ChatGPT suggested:
Governments are competing on green hydrogen for a few reasons. One is to meet their emissions reduction targets set under the Paris Agreement and to comply with other environmental regulations. Producing hydrogen using renewable energy sources, instead of fossil fuels, significantly reduces greenhouse gas emissions and other pollutants. Additionally, green hydrogen has the potential to create jobs and stimulate economic growth in the clean energy industry.
Another reason is that green hydrogen can play a key role in achieving energy security and reducing dependence on fossil fuels. As more countries transition to renewable energy sources, green hydrogen can be used as a way to store excess energy and balance the grid.
Finally, many countries see the development and use of green hydrogen as a way to gain a competitive advantage in the global market for hydrogen, which is projected to grow significantly in the coming years.
Therefore, governments are investing and providing incentives for companies to develop technology and infrastructure necessary for the production, storage, transportation and use of green hydrogen.
Trend: Adoption and financing of biodiversity and regenerative agriculture will accelerate
Climate & Capital team:
Biodiversity, the need to preserve natural ecosystems — and to overhaul our food production systems — will continue to grow in popularity as integral parts of the climate change puzzle. For the poorest countries, rising temperatures, drought, flooding and fire make the need to adapt a matter of survival and food security. And given that the Institute for Economics and Peace (IEP) has forecast more than a billion climate refugees by 2050, it’s in the interest of richer countries to improve lives everywhere.
Among signs of a shift was a new 4-year plan rolled out at the most recent COP climate summit to vastly accelerate financial support to transform agriculture. That effort will run in tandem with a landmark biodiversity initiative signed by 190 countries that aims to preserve 30% of all natural areas, land and water, by 2030.
The goal is to prevent the mass extinction of plant and animal species, and destruction of indigenous communities — and to preserve the carbon capturing benefits of these natural ecosystems. Also in the crosshairs is the factory farm system that produces most food in wealthy countries, polluting water, stripping soil of nutrients and generating greenhouse gasses including methane and nitrous oxide. That will call for change by Big Ag, which is a lot like taking on Big Oil. Prepare for pushback.
What ChatGPT cooked up:
- Increasing recognition of the importance of biodiversity for human well-being and sustainable development. Biodiversity is essential for providing ecosystem services, such as food, water and medicine, as well as for regulating the Earth’s climate, and maintaining the planet’s resilience and stability.
- Growing concern about the loss of biodiversity and the decline in the health of ecosystems. This loss is caused by human activities such as habitat destruction, pollution, over-exploitation of resources and climate change.
- Increasing efforts to protect and restore biodiversity through conservation and sustainable management practices. This includes the establishment of protected areas, the implementation of conservation and management plans, the restoration of degraded ecosystems, and the development of sustainable land use practices.
- Investment in biodiversity-related research and monitoring to better understand the status and trends of biodiversity, and the impacts of human activities.
- The use of new technologies, such as remote sensing, GIS, big data and Artificial Intelligence, to enhance conservation and management practices, and to monitor and measure the impacts of human activities on biodiversity.
- The integration of biodiversity considerations into policies and decision-making processes across sectors, such as agriculture, forestry, fisheries, and energy.
- The growing participation and engagement of local communities, indigenous peoples, and the private sector in conservation and sustainable management of biodiversity.
- The emergence of new economic incentives and mechanisms such as payment for ecosystem services, conservation finance and biodiversity offsetting to support conservation and sustainable management of biodiversity.
Trend: Climate investment goes clubbing
Climate & Capital team:
Blackstone President Jon Gray recently told a group of investors and managers that clean-tech is the biggest investment opportunity of the next several years. Nearly two thirds of EU ETF investments went into ESG in 2022, and a Merrill Lynch executive said nearly a third of new investments are going into ESG. That interest is spawning new green funds and investment clubs. A quick Google search of climate-, sustainability- and impact-focused-investment clubs or funds now turn up multiple pages of options despite growing criticism of ESG ratings.
Portfolia, a group of funds “designed for women,” for example, recently launched its first Green and Sustainability Fund. Jason Calacanis, the billionaire founder of The Syndicate investment club, plans his first climate fund in 2023. The Unreasonable Group has formed a new investment club focused on achieving the UN Sustainability Goals. E8, a nonprofit that’s brought together clean-tech angel investors since 2006, launched its latest fund, the Decarbon8 ag-tech fund late last year.
Trend: Climate litigation risk will surge
Climate & Capital team:
Climate change-related litigation will escalate, with significant new cases emerging, alongside tougher regulation and enforcement around emissions reporting and accountability, says The LSE’s Grantham Research Institute on Climate Change and the Environment and The Centre for Climate Change and Economics and Policy. Businesses and their executives will come under growing pressure to integrate and conscientiously monitor regulatory requirements targeted at environmental impact. Here are some of the legal and regulatory challenges ahead:
- Direct actions seeking compensation for and/or forcing reduction of greenhouse gasses
Since the Hague District Court’s decision in May 2021 ordering Shell to reduce its emissions by 45% by 2030, cases against companies seeking direct change (of policies or projects) have gained steam and we expect that to continue.
Among the big names in these suits to date are Mercedes-Benz, BMW and Volkswagen, under a challenge by a German environmental group to stop producing internal combustion engine cars by the end of the decade. In a suit launched in July, four inhabitants of the low-lying Indonesian island Pari are seeking both to force a Swiss building material company to dramatically reduce its CO2 emissions by 2030 and to get compensation for climate-related damage and the cost of adaptation to sea level rise.
- Suits that seek to hold decision-makers personally to account
Expect more legal efforts to hold corporate leaders personally liable for contributions to climate change and/or failures to adequately manage climate risk. A prime example of this approach was launched in the UK last year, when ClientEarth announced its intention to bring action against the Board of Directors of Shell. ClientEarth argues that the directors failed to put in place a climate strategy that aligns with the Paris Agreement goals, and that as a result they are breaching provisions of the UK Companies Act, which requires that they act to promote the company’s success, and exercise reasonable care, skill and diligence.
- Arguments based on human rights
Among the cases pending before the European Court of Human Rights is Greenpeace Nordic and Others v. Norway seeking an order against Norway’s licensing of more Arctic drilling. The suit argues that continued drilling perpetuates climate change and violates the human rights of Norwegian citizens. In Australia, in the case Youth V. Waratah Coal 6, a court ruled in November that a coal project should not go forward on the basis of environmental impact and human rights.
- Litigation and regulatory action around financial disclosures
Increasingly stringent requirements on businesses to provide detailed financial disclosures about their climate strategies, together with regulators’ increasingly clear mandates to take enforcement action, are reasons to expect a growing number of challenges to businesses ahead.
One only has to look at the SEC’s $1.5 million fine of BNY Mellon in May 2022, for misstatements about ESG relating to certain funds, to get the idea here.
In 2023, the SEC plans to finalize rules requiring detailed climate reporting by public companies. The hottest debate is over whether that should include Scope 3 emissions. In 2021, the SEC warned that it would examine climate-related disclosures and that “material misstatement and omission can form the basis for an SEC civil action.”
More signs of regulation to come: In the UK, the Financial Conduct Authority (FCA) has beefed up its regulatory framework with its new ESG sourcebook, focused on climate disclosures. The first reports under the sourcebook are due in June. The FCA is also consulting on sustainability investment labeling and consumer-facing disclosures with new rules expected in the first half of 2023.
As regulators and law enforcement agencies take more robust action on “climate-washing” claims, we expect to see that include climate-related financial disclosures that don’t stand up to scrutiny.