Keesa Schreane [00:00:00] Welcome to the Refinitiv Sustainability Perspectives podcast, where our goal is to engage and inform our audience. From investors, to asset managers and portfolio managers, to sustainability leaders and those involved in ESG and sustainable finance. This is Keesa Schreane.
Keesa Schreane [00:00:20] A Biden presidency is a potential game changer for the outlook for the global climate. In fact, I think it's already changing the game. But what steps and efforts are required to truly move the US to a path consistent with net zero goals? To talk about the expectations around the climate program of the new Biden, Harris administration, and the factors required to achieve the desired results. Here with us is Brian Davidson, Head of Climate Economics at Fathom Consulting. Brian, thank you for joining us.
Brian Davidson [00:00:53] Hi, Keesa, and hi, everybody, and thank you for having me.
Keesa Schreane [00:00:58] So, Brian, let's just jump into it. What are the key items in Biden's climate action plan for those of us who have seen them but really want to just understand what they can be from a bullet point perspective? What are those items?
Brian Davidson [00:01:12] Well, first and foremost, he has signed up to the Paris agreement again. And the objective of that agreement is to limit global warming to one and a half degrees above pre-industrial levels. And to do that, there's widespread recognition that greenhouse gas emissions need to come down to zero on a net basis by the middle of the century. So that essentially, I mean, there's a whole string of actions and things that are needed in order to achieve that. So that's the starting point, and that's his objective. There's a string of things he can and should do. He's made a good start. He's done a lot of executive actions which will not only reduce the US emissions, they can nudge private sector players to reduce their emissions.
Keesa Schreane [00:02:02] So let's talk a bit about border taxes in terms of influencing countries to make changes, cut emissions and also protecting federal land. Those are things that we've heard about quite a bit. What is your insight on that, Brian?
Brian Davidson [00:02:17] Well, the border tax is an interesting issue. So the idea of a border taxes, if you are taxing your domestic producers for the amount of carbon they emit, then in order not to have leakage, i.e. a company goes and produces things in another country and export that to the US in that other country, having lower environmental standards. So to prevent that from happening, you want a carbon border tax. And this could be very useful in the global effort to reduce carbon emissions with the US being such a big economy, many people exporting to it. If the US has a tax on carbon imports, then those countries have an economic incentive to reduce their emissions, too. But of course, for such a policy to be fair, to be lawful and to be effective in the long run, the US would need a domestic carbon tax as well. And of course, here this is a slightly more contentious issue. So I guess talking about carbon border taxes is slightly putting the cart before the horse until there's a US domestic carbon tax in place.
Keesa Schreane [00:03:27] And also, there's been a lot of talk about postponing drilling, I think the term postponing and canceling have been used interchangeably in the discussion. So we have the protecting federal land as well as the drilling permits, pipeline construction. How does this play into climate change?
Brian Davidson [00:03:45] They are quite symbolic. Well, of course, it has an effect. If you don't have a pipeline linking a region which produces oil to get it to port, then that oil is not going to be extracted or shipped. So it will have an immediate effect on reducing emissions. But it also will give a lot of fossil fuel producers pause for thought in terms of planning future projects. You know, I mean, the bottom line is that in order to get to net zero, which is ultimately Joe Biden's stated goal in the stated goals of the Paris agreement, fossil fuel consumption needs to come down drastically and renewable energy generation needs to increase significantly. So by putting bans on drilling on federal lands or blocking the construction of oil pipelines, it sets a precedent, it sets a tone, and it does facilitate a shift towards investments in more climate friendly areas.
Keesa Schreane [00:04:48] So in talking about that shift towards investments, that's really a good segway. And looking at some of these plans, as a portfolio manager or as an ESG investor, what am I to think about in terms of how achievable those plans are?And if I should really think about using some of these through a lens through which I view my investments, are these really achievable? And should the ESG investor really start using some of these points as a lens through which they view their investments?
Brian Davidson [00:05:21] Well, of course, policy credibilities is a fundamental consideration for all investors. So the policy outlook in the US is slightly uncertain. I think in order to actually achieve Joe Biden's goals, he will need bipartisan support and that would include a domestic carbon tax. It would also require bipartisan support for spending on climate related infrastructure, for R&D into climate solutions. So all of those things should be considered by investors. But aside from government regulation, if an investor wants to be ESG friendly, it's not just about looking at ESG scores or E scores. It's about developing a framework in which considerations of how to get to net zero are a core part of that framework. So where are the emissions coming from today? What is the expected path of those emissions reductions? And essentially, if you're an investor and you want to be ESG friendly, are you investing in companies that are facilitating that effort or not? So it is quite simple, really. If if you take a step back and look at it at the big picture, what needs to happen? Is this company doing something to assist that process? That's the way I would look at it.
Keesa Schreane [00:06:42] And how can these investors influence these outcomes, right? So you have the policies that we talked about, but in terms of really influencing the outcomes and ensuring that these policies are really having the hoped for impact, what can an investor do? Is it as simple as having conversations with the C Suite, with engaging the senior members of these companies?
Brian Davidson [00:07:05] I think there's several things they can do. Of course those conversations are important. There are regulations. There is the task force for climate related financial disclosures. Those are a set of guidelines for climate related reporting. So in order to report properly on the climate, you need to understand what those issues are. So I think there is an awareness issue. There are question marks about how do you measure these things. But I think sort of underpinning all that, there is a framework. But I guess to answer your question, well, what else can investors do? They can have those conversations. They will need to report the risks. And there are risks both ways. So if the world collectively does not do what is required to reduce the path of emissions, global warming will continue to occur and that has a set of economic risks. So the new disclosure requirements, which are soon to be mandated by law in Europe, and I, I would guess they would in the near future be mandated by law in the United States by acknowledging identifying those risks, both from global warming or climate change and the risks that are associated with the transition to try and prevent that happening. Disclosure of those issues are important from a company point of view. And investors could also insist, corporates could insist that their suppliers are taking actions to identify these risks and to mitigate those risks. So I think throughout the whole supply chain, there's a series of recognitions and conversations to be had.
Keesa Schreane [00:08:48] Absolutely. Supply chain, always a really important topic as we talk about some of the issues that corporates are dealing with and how to really ensure that their supply chains are moving forward in the same direction. So, Brian, if there are a few top obstacles, say top three obstacles, that would really need to be vetted, that we need to overcome from this perspective to move things forward and move some of these policies forward, what are those obstacles and how would you recommend that they could be overcome?
Brian Davidson [00:09:23] Well, there are obstacles at a global level and with respect to the US, which clearly is an important global player in this in this whole question of climate change, the first obstacle, I would say is agreeing on a carbon tax. I think a carbon tax is a really important part of the toolkit because essentially the carbon is increasing the cost of the negative externalities. It's charging for those externalities. So agreeing to that carbon tax is one issue. Policy clarity is important as well for planning. So, you know, while the Biden administration has taken a lot of efforts to take in some executive actions and so on, there will be elections further down the line and then you could have a president unwinding those actions in future. So I think there really does need to be a bipartisan sort of consensus in some of these issues to give that policy clarity to investors. The next hurdle, I think is well, and I'm pretty optimistic that actually identifying the risks, the transition risks, the actual climate, the risk from climate change itself, those are really key. They're not quite in place at the moment. But I think with there is a big push to to get there. So I'm a little bit more optimistic on that one. The third main challenge that would probably be convincing fast growing emerging markets or other countries in general, you could put into that category countries whose economies are very reliance on fossil fuels to reduce their carbon emissions. But to get back to my first point, if the US can agree on a domestic carbon tax, then it could and most probably would be imposing carbon border taxes. And of course, you've got Europe, you've got the U.K., you've got other major economies, Japan, South Korea, even China has made a net zero commitment. That's by 2060. And they do have a domestic carbon market. So if you have these big economies all moving in the same direction, then I think some of the other countries that don't have such ambitious environmental plans, they will fall, they will fall into line. And that could be done through a question of diplomacy or that kind of using the stick of a carbon border tax, which provides a financial incentive for them to to increase their greenhouse gas reduction targets.
Keesa Schreane [00:12:04] Wow. So just proving the point that no one is an island, that we are really in this together globally in terms of influencing. So, Brian, some great points here. Talking about the Biden, Harris climate agenda. Ambitious but doable, and just some things that can happen from an investor level. Institutional investors can have conversations with corporations, obviously need to continue to report on risk. But those conversations and understanding the policies can definitely influence, as well as corporations having conversations with their supply chains. Ensuring those supply chains have policies in place and agreeing to those policies. Supply chains are very important clearly, as we have this discussion. Also, some of the key areas that you pointed out, agreeing on the carbon tax could be something that could drive the conversation forward. Also, policy, clarity and bipartisan consensus, very important here. And really identifying those risks from climate change and convincing emerging market countries whose economies rely on carbon fuels, really having those discussions and influencing from reducing carbon from that perspective in those areas as well. Very interesting information. And you know what? We have a lot to come. It's just February and there's a lot coming down the pipeline. So I hope you come back and join us and chat about what we've seen so far after the next few months Brian.
Brian Davidson [00:13:29] Absolutely. Absolutely. I look forward to that and look forward to to monitoring the progress of the administration in this in this area. But more than just the administration, monitoring how the private sector deals with these issues and the solutions they provide. And maybe just to add on a slightly more positive note, this is not all about government. There are sort of underlying economic factors at play here. So, for example, the cost of renewable energy is falling and in some cases a cheaper than energy produced by traditional fossil fuels. Also, the price of electric cars is falling. And, you know, filling up your tank with an electric car is a lot cheaper than filling up your tank with petrol or gas, as you guys say. So there are those economic incentives.
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