US President Joe Biden has announced that his country will rejoin the Paris Agreement, the international treaty to combat climate change, sending a strong signal that sustainability investing is irreversible and happening at lightning speed. Investors and corporates may choose to ignore this signal at their own peril.
For Asian investors, Biden’s move, coming in the wake of Covid-19, puts greater pressure on them to transition their portfolios quickly to sustainable assets. For Asian corporates, it means increased urgency to reduced their carbon footprints not only in their operations but also in their investments and financing as well. And this is not a short-term trend.
“Following Covid-19, significant public and private spending related to modernizing the global economy in addressing climate and sustainability issues will comprise one of the foremost drivers of markets in the post- pandemic business cycle,” says Eli Lee, head of investment strategy at Bank of Singapore.
Biden’s climate agenda, characterized as “highly ambitious” by Lee, comprises 10 key decarbonization pledges:
- US$2 trillion spending related to climate and sustainability priorities in his first term;
- Net-zero emissions by 2050;
- Invest US$400 billion in clean energy and deliver a zero-carbon power sector by 2035;
- Transition to clean transportation: zero-emission vehicles, restoring electric-vehicle tax credit, 500,000 public charging stations by 2030, and clean rail and aircraft fuel;
- Improve energy efficiency of buildings and reduce building sector emissions by 50% by 2025;
- Drive cost of green hydrogen down;
- Ban new oil and gas permits on public lands and waters;
- Enhance reforestation, protect biodiversity by protecting 30% of US land and water by 2030;
- Advance agri-tech; and
- Impose adjustment feeds and quotas on carbon-intensive goods.
In terms of investments, Biden’s climate plan will open up opportunities in major sectors such as infrastructure, industrials, energy, materials, and autos. In particular, 35% and 28% of greenhouse gases emitted in the US are currently attributed to the electricity generation and transportation sectors, respectively.
“Assuming that the Biden-Harris administration will endure two terms, the sustainability theme would have significant legs for the most of the next decade,” Lee says.
The US move to rejoin the Paris Agreement also follows increasing awareness in Asian financial markets of the potential for risks in transition financing as the region’s economies rush to achieve net zero emissions. Under the Paris Agreement, China has committed to reach carbon neutrality by 2060 while Hong Kong, Japan and Korea aim to achieve the goal by 2050.
Recent research indicates that the world’s climate finance market structure (CFMS) must grow at an unprecedented scale of US$3-5 trillion per year globally in order to meet the Paris agreement target of limiting the global temperature rise to below 2 degrees Celsius. China alone would need to have 130 trillion yuan (US$20.1 trillion) invested in low-carbon projects in the next three decades to achieve its carbon neutrality targets.