Climate: The Tipping Point


With each new economic cycle, the financial markets find themselves on a tipping point. First, a new investment approach is embraced by pioneering investors. In a second phase, this approach reaches a sufficient level of acceptance to ensure a sustainable future. At the beginning of a new economic cycle, positive impact investments, and more specifically climate change, are at this tipping point.


Despite a historic drop in CO2 emissions in 2020, this year will be remembered as one of the warmest years of our modern era. The year was also characterized by extreme weather events, numerous citizen protests and increased awareness of the fragility of our ecosystem in the context of the Covid pandemic. These factors have pushed companies, governments and investors to react, which is evidenced by ever stronger alignment to the Paris agreements. 
This revolution is genuinely global in its nature. During the COP in Madrid at the end of 2019, the European Union became the first major player to advocate for a zero-emission objective by 2050. Last September, President Xi Ji Ping committed China to a similar zero-emission goal by 2060 in order to fulfill the Chinese dream of having blue skies again. China accounts for almost 30% of the world's CO2 emissions and this new objective is a massive improvement compared to previous flimsy pledges. A concrete action plan is yet to be implemented but the first regulations and investments towards more renewable energies and sustainable mobility are already visible. Finally, on the first day of his presidency, Joe Biden returned the United States to the Paris Agreement and is now trying to establish the country as one of the leaders in the fight against global warming.

The year 2020 also saw a 300% increase in the number of companies committed to aligning with the Paris Agreement through the SBT - Science-Based Target - initiative. Social and environmental responsibility (SER) is now a major ambition for companies and is a cornerstone of corporate strategy. Companies are accelerating the creation of products and solutions that are more suited to the future, more recycled, more sustainable, more responsible and less polluting. Employees themselves are often the main driving force behind this change, encouraging a growing number of companies in becoming proactive participants and in setting ambitious goals with regards to SER. These include, for example, the transparency of reporting on CO2 emissions and access to extra-financial data, which have notably improved.
All economic sectors are affected by this shift and are undergoing transformation: for example, technological change makes it possible to lower the price of electricity from renewable sources to make it as competitive as that from fossil fuels. To reach the Paris targets, the share of renewable energies in our energy mix must be further strengthened, particularly through the greater use of electricity for mobility. Driven by a change in attitudes and despite travel being severely constrained by the health crisis, European sales of electric cars grew by 52% in 2020. It is estimated that by 2030, a third of all cars sold worldwide will be electric. It is also expected that the agricultural sector, who is responsible for 24% of global emissions, will go through significant changes, owing to consumer awareness, the deployment of new technologies and transformation programs. In the construction sector, better thermic insulation and integrated smart sensors will lead to less and less energy consumption. The IT sector is not left out, as the continuous increase in the capacity of computer chips will allow for higher energy efficiency. Finally, waste management, recycling and the circular economy will also be among the winning themes of the next few years.
In this context, the financial world is also changing. From a long-term investment perspective, it is now essential to consider climate risks. Last year, several large pension funds withdrew from the most polluting sectors, such as coal and oil. For these companies, which were previously valued on the basis of estimated reserves of raw materials, it is now generally accepted that these resources will not be extracted from the ground in their entirety. This concept, known as "stranded assets", is changing the way these sectors are valued, effectively taking into account the fight against global warming. Institutional investors are also looking at ways to take climate risks into account when it comes to their asset allocation and to align their portfolios with the objectives set by the Paris agreements. Thus, by modeling the impact of each company, sector, and country along with their individual alignment with the objective of limiting global warming to 1.5 degree, it is now possible to estimate the overall trajectory of a portfolio in relation to a global warming scenario.

With the objective of achieving carbon neutrality by 2050, climate action is now more than just a societal trend, it is also politically anchored for the long term. New stimulus plans, increasingly demanding consumers, as well as technological developments and innovations will bring out the big winners of tomorrow. At Societe Generale Private Banking, we want to be a step ahead by acting on the theme of climate action through investing in the leaders of this transformation, those companies who have the ability of leading their peers towards more renewable energies, sustainable mobility or energy efficiency. Investing in climate action not only aims to ensure better visibility on these positions but also seeks to contribute to a more sustainable future by delivering a positive impact.

Petra BESSON-FENCIKOVA, CFA Head of ESG investments Portfolio Manager