The world is warming at an unprecedented rate. Earth's temperature has risen by an average of 0.11 degrees Fahrenheit per decade since 1850, totaling about 2 degrees overall. Since 1982, that rate has more than tripled to 0.36 degrees per decade.
The implications extend far beyond rising thermometers. Water supplies, shorelines, ocean ecosystems, food security and countless species face existential threats. In Mexico, howler monkeys have been found dead beneath trees, victims of brutal heat waves. The data tells a compelling story: 2023 marked the warmest year since global records began in 1850, sitting 2.12 degrees above the 20th century average. The 10 warmest years on record have all occurred in the past decade.
Recognition of climate threats dates back to the 1987 Montreal Protocol, a landmark environmental accord that united every nation in phasing out ozone-depleting substances like chlorofluorocarbons. The protocol succeeded in eliminating 99% of these harmful compounds.
The 2016 Kigali Amendment expanded this framework to target hydrofluorocarbons, powerful greenhouse gases contributing to global warming. These efforts laid groundwork for broader climate agreements including the Kyoto Protocol and the Paris Agreement.
Adopted in 1997 and entering force in 2005, the Kyoto Protocol focuses on mitigating greenhouse gas emissions. As of 2016, 192 parties had joined the agreement.
The 2015 Paris Agreement requires all countries to set emissions reduction pledges, with government targets aimed at preventing global average temperatures from rising 3.6 degrees Fahrenheit. The Group of 20, representing nations responsible for 80% of global greenhouse gas pollution, has pledged to stop financing new coal-fired power plants abroad and agreed to triple renewable energy capacity by decade's end. However, G20 governments have yet to set a firm deadline for phasing out fossil fuels.
The United States withdrew from the Paris Agreement under former President Donald Trump in November 2020 but rejoined under President Joe Biden during his first months in office. Iran, Libya and Yemen remain the only countries that have not formally approved the agreement.
Even supporters acknowledge the Paris Agreement's limitations. Council on Foreign Relations senior fellow Alice C. Hill noted that the agreement was recognized as insufficient even during negotiations, serving merely as a first step with expectations that countries would return with greater ambition over time.
The protocols' effects on investment portfolios remain unclear. While previous studies have examined economic consequences of climate agreements, few have analyzed environmental and economic impacts within the same framework, a gap that makes evaluating the most effective international environmental policies challenging.
One study investigated both dimensions of the Kyoto Protocol's impact. The research found positive effects on carbon dioxide emission reductions but negative effects on GDP.
However, J.P. Morgan's analysis of nearly 2,200 projects under the Kyoto Protocol's clean development mechanism revealed encouraging trends. Projects delivering more co-benefits to local communities attracted higher investment premiums from investors, suggesting that climate investment priorities can extend well beyond simple emissions mitigation.
The analysis showed investors demonstrate increased willingness to spend in certain locations, particularly African countries facing escalating climate threats ranging from human health and food security to water availability and socioeconomic development. Climate finance targeting these regions can create opportunities for sustainable growth while reducing local emissions.
Policymakers and community leaders can capitalize on these findings by prioritizing co-benefits as critical components of attracting additional financing. Yet limitations remain. While the private sector must provide the bulk of trillions of dollars required in climate finance, public funding still drives most investment trends.
Green technological innovation presents a promising option for improving environmental sustainability while reducing economic burdens on individual countries. The Porter hypothesis suggests that both environmental and economic benefits can be achieved simultaneously through innovation that eliminates inefficiencies and reduces environmental impacts.
Stringent but flexible environmental policies can stimulate green innovation, helping minimize pollutant emissions and optimize treatment efficiency while lightening the economic load for participating nations.
The sustainable investing landscape grows more complex by the quarter, yet sustainable investing remains an important driver of industry change. An increasingly diverse range of opportunities awaits investors with sustainability goals.
While investor impacts and profitability of protocol compliance remain uncertain, opportunity clearly exists in the climate investment space.
How will investors respond to these evolving challenges and opportunities?
The larger question looms: Can investors alone save the planet?
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References:
“It’s So Hot in Mexico that Howler Monkeys are Falling Dead from Trees,” Mark Stevenson, Associated Press, 5/22/24 https://apnews.com/article/mexico-heat-wave-howler-monkeys-dying-b99e0570dfb53a2fb7ebe663acecde78
“Climate Change: Global Temperature,” Rebecca Lindsey and Luann Dahlman, 1/18/24, Climate.gov https://www.climate.gov/news-features/understanding-climate/climate-change-global-temperature
“Environmental and economic effectiveness of the Kyoto Prorotol,” National Library of Medicine – National Center for Biotechnology Information, Stefan Cristian Gherghina, Editor July 21, 2020 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7373286/
Ibid.
“Blog: Prioritizing Local Benefits in Climate Projects Yields Higher Investment,” University of Maryland School of Public Policy, Center for Global Sustainability, Jiehong Lou, Nathan Hultman, and Shannon Kennedy, 6/17,22. https://cgs.umd.edu/news/blog-prioritizing-local-benefits-climate-projects-yields-higher-investment
Global Climate Agreements: Successes and Failures, Lindsey Maizland, Council on Foreign Relations, 12/5/23 https://www.cfr.org/backgrounder/paris-global-climate-change-agreements
“Environmental and Economic Effectiveness of the Kyoto Protocol,” National Library of Medicine – National Center for Biotechnology Information. Stefan Cristian Gherghina, Editor July 21, 2020 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7373286/
“Sustainable Investing in 2024: Pulling Back or Pushing Forward,” Jennifer Wu, J.P. Morgan, 2/2024 https://am.jpmorgan.com/us/en/asset-management/institutional/investment-strategies/sustainable-investing/sustainable-investing-trends-and-insights-2024/