This recurring monthly column is designed to provide financial market participants with the latest analysis, insights, and commentary on all things climate. Each month, you’ll hear from industry leading experts Dr. Maximillian Horster, Managing Director and Head of ISS ESG Climate Solutions, or Viola Lutz, Head of ISS ESG Investor Climate Consulting and recognized among Forbes’s 30-Under-30 in Finance, on the latest climate-related developments affecting capital markets spanning regulation, risks and opportunities relevant for both investors and portfolio companies.
In this month’s commentary, Lutz discusses the challenges associated with addressing systems whose outputs are delayed – whether that may be climate or COVID-19.
What the Second Wave of COVID-19 Has to Do with Climate Action
“There is no time like the present.” You’ve likely heard that phrase aplenty, whether when stalling on a university term paper or procrastinating on a chore. But what does it mean for climate? In fact, everything. When it comes to climate action, time is of the essence. If we were to collectively stop emitting CO2 today, we would experience a statistically significant difference in global temperature only after 2030, according to a recent paper published in Nature Communications. And so we are reminded of that phrase and the fact that emissions reduced today will result in tangible temperature decreases only far into the future because of the inertia of the climate system. So to effect change in the nearer-term, the time to act is now.
Decreasing emissions to zero is a big “if.” But let’s try being a bit more lenient with our aspirations. What about a 5 percent year over year decrease starting, let’s say, today? The effect would be perceivable only after 2040.
The climate system evolves glacially even to fairly drastic action. So lengthy is the delay that we collectively have a hard time grappling with the connection between our actions and impacts and the corresponding reactions within the climate system.
The difficulty of dealing with systems that react with a delay does not only hold true for climate, but it also seems very much the cause for the second wave of coronavirus infections many countries are starting to experience: With infection numbers down after the first wave, people ease on social distancing only for cases to go up again weeks and months later.
Knowing that time is of the essence on climate action – let’s turn toward what is happening. Currently, recovery packages of $11.8 trillion are under way. Roughly one-third of the economic assistance is spent on sectors with a big impact on the environment; think transport, energy and industry. According to a study by Vivid Economics looking at 17 major economies, 14 of the recovery packages include a positive contribution to climate mitigation, albeit in several cases minuscule.
It is, however, not necessarily the sum of money spent on climate that will make or break targets. More importantly, one should worry about the money spent without climate considerations in mind. This money will add to private and public infrastructure with lifetimes ranging in the decades and locking societies into economic systems that do not conform with climate objectives. Clearly a far cry from embarking on emission reductions of 5 percent a year.
With economic and climate systems both showing high degrees of inertia, we need to start breaking old patterns. Since changing the underlying laws of physics governing the climate might be biting off more than humanity can chew, we are left with targeting political decisions on the economy. Countries will have to deal with the effects of COVID-19 on economies for a while to come. So just as we are seeing second waves of infections, new rounds of recovery packages are likewise being passed. These should be seen as an opportunity to think smartly about the type of green economy one wants to foster.
A well-known proverb reads “A stitch in time saves nine.” Acting on climate change mitigation sooner rather than later is key to prevent the need for drastic catch up measures in the future. But given the inertia and lethargy of both the economic and the climate systems, it’s all too easy to act too late.
By Viola Lutz, Head of ISS ESG Investor Climate Consulting
Viola is an active improv theater player and loves the mountains. In the past years she has also unsuccessfully tried to become a proficient kite surfer. Being ever the optimist, she is sure that 2020 is the year that will change.