Jane: [00:00:01] Hello and welcome to the LSEG Sustainable Growth Podcast, where we talk to leading experts about sustainability and finance. I'm Jane Goodland, and this week I'm delighted to be talking to Jaakko Kooroshy, who's the global head of sustainable investment research here at LSEG. And we are going to cover a new report that's just out from his team called the Net Zero Atlas, which focuses on how countries are going to be setting climate targets into 2025. So let's get into the conversation. I do hope you enjoy.
Jane: [00:00:32] Well hello, Jaakko. Good to see you. I'm so pleased to have you on the show. I can't wait to get into the conversation because you and your team have just published the fourth Net Zero Atlas, which is basically one of the best reports that we do, I think. And I'd love to talk to you more about it. Let's start with demystifying what we're talking about here, because the report is really focussed on the next round of emissions targets for 2035. And you talk about NDCs 3.0. Tell me more about what do we mean by that?
Jaakko: [00:01:02] Yeah. This is a lovely bit of climate jargon I would say. So NDC stands for Nationally Determined contributions. And that are really the national climate plans under the Paris Agreement. And we're talking now about the version 3.0. So 1.0 was really what countries came to Paris with in 2015. So many countries had already shaped targets when they came to conclude the Paris Agreement. And that's what we refer to as 1.0. If you look at those targets, they plan for 2030 round about a 70% increase of emissions. And the peak was still lying after 2030 at the time. So then we talk about the 2.0 targets. And the 2.0 targets are really the enhancements of these 2030 targets that happened really between today and Paris. So 174 of the 194 parties or countries that have signed the agreement enhanced their NDCs after Paris. And so when you look at the latest version of those 2.0 targets, it's actually only a 50% increase in emissions on 1990. And critically, it also implies a peak before 2030. Now, the 3.0 targets that countries are talking about now they are for the first time looking at 2035 targets. So what happens actually after 2030. And countries are meant to set these between Cop 29, which is just kicking off in Baku, and Cop 30 in Belém in Brazil. So the UN has said they want to see those targets around February. We may not see all of those targets by February, but somewhere between Cop 29 and Cop 30, we will see those, those targets coming in.
Jane: [00:02:56] Good. Okay. So that's really clear. And it gives us something to look forward to in the spring time next year. Let's look at the G20, because obviously this is where a lot of the focus will be in terms of those targets and emissions. What are we expecting from that group of countries?
Jaakko: [00:03:13] Well, Jane, I think at the moment we don't know. And that's what actually makes these targets so important. So countries haven't actually told us much about what they're going to do post 2030. They have set net zero targets for 2050 or 2060 in the future, but we don't actually know how they're going to get from those 2030 targets to those net zero targets. And of course we got the first data point last week with the US presidential elections. We don't know what the Trump administration is going to do on climate. What are they going to pull out of the Paris Agreement again? But it seems quite likely that the US will not set an NDC 3.0 under the under the incoming administration. We also have some ideas on what's going to happen in the EU. So in the spring, the EU Commission actually proposed a 90% emissions reduction target for 2040. So that's versus the current 55% reduction target for 2030. Now, that leaves a little bit of leeway on where the 2035 data point will really come in. But it looks like a relatively ambitious NDC that's coming there in the UK as well. Ed Miliband has asked the climate change committee. So the expert committee in the UK to propose what level the new NDC should be set at. And they just came back a few weeks ago to say 81% reduction versus 1990 versus the 68% reduction that's currently pencilled in for 2030. So again, ambitious targets. But there's a lot of countries where the playing field is still quite wide open. So think about China. China's emissions will peak sometime this decade. And so we will expect that China will, for the first time in this NDC, set an absolute emissions reduction targets. But we don't know whether that is going to be 5% or 10% or 25%, perhaps. So understanding that will be critical. India, India's emissions will not peak as quickly as China's. But the 2035 target probably gives us a good indication how the Indian government thinks about that transition pathway into the emissions peak, if you will.
Jane: [00:05:33] Okay. So that's taking us through kind of a high level at a government country level. I'm curious to know and I'm sure our listeners would be keen to understand. So what does all this mean for kind of an investor? So why does any of this matter to an investor? And how might we see some of the decisions that play out over the coming months affect portfolios?
Jaakko: [00:05:54] So I think investors often are calling on governments to give clearer signals on climate. Well, this is going to be that clearer signal. First of all, it gives us a lot of indications on transition risk, right? So we will start understanding how much more renewables we will see, how many more electric vehicles we will see and where. And that will have implications for demand say for electric power, coal consumption, oil, gas, but also things like lithium or cobalt. In advanced economies where the decarbonisation of the power sector and the transport sector is already quite advanced, these targets might indicate what other sectors the government wants to move into in terms of emissions reductions. So what does this mean for shipping, for real estate, steel, cement, agriculture, airlines. So there's a huge amount at play there. Now we won't get detailed numbers on each of those sectors from all of the governments. But it will give us some ballpark indications of where policymakers see this going. And one way that we like to think about that, It's a little bit like the Fed's dot plot, where we understand what are inflation expectations, what are interest rate expectations. It works a little bit in the same way. So that's why we are watching this so closely. So the other thing that we're going to learn much more about is, well, what does this mean for the global emission curves. Because we can start adding up What individual countries are proposing, and that gives us the global emissions trajectory, and that gives us an understanding about how much global warming we will see and how much physical risk we are going to experience.
Jane: [00:07:37] Yeah, and I think that's something I'd like to come on to as well, because the Atlas uses the sovereign climate assessment framework that your team uses to be able to come up with scenarios. So possible future scenarios which presumably are informed by some of these NDCs. I'm curious to know a bit more about those scenarios and how they help you to determine what sort of physical or transition risk we might be facing, depending on those scenarios.
Jaakko: [00:08:06] So there's a huge amount of complexity and uncertainty here. And what we're trying to do with these scenarios is to say in very simple terms, where could different countries set these targets? Now we start from the point of saying, okay, well, what are the 2030 targets that they have set? How ambitious are they? And what would a target look like if they set it roughly in line with that 2030 targets? We then have another scenario where we're saying let's focus on what they have promised for 2050. And assuming that they do what they said they're going to do in 2030. Well, where do we need to get with that 2035 target if we want to stay on track for what we've promised for 2050 or 2060? And then the third scenario that we're exploring is to say well what if governments focus on staying well below two degrees? So trying to meet the goals of the Paris Agreement and work backwards from there and set those 2035 targets in that way. So that gives us some quite different scenarios. And we can then start to understand well what is happening to emissions in those scenarios. What is happening to transition risk in those scenarios? What is happening to physical risk in those scenarios? And actually the picture is quite different. So if we're going for a NDC 2.0 scenario. So stay with the kind of similar ambition levels to what we've seen for 2030. We see emissions declining over the 2030s by around 2% per annum. If you want to go get on track for those long term net zero targets, that speed actually doubles to around 3 to 4%. If we want to then go to a Paris ambition keeping emissions well below two degrees, we would have to cut emissions much faster over the 2030s, different speeds in different regions. But you would have to look at 9 to 10% per annum for the US and the EU and mid-single digits for large emerging countries like China or India.
Jane: [00:10:11] So investors can look at this type of information that you've published to be able to start really sort of thinking through the implications for their portfolio, be it regional or global, and depending on which asset class. And that starts kind of informing perhaps decisions that they might make about strategic asset allocation or stock selection, that type of thing, right? So actually these types of scenarios are helpful for that that kind of perspective. Looking at another perspective, one of the things I really found fascinating in the report was looking about physical impacts and specifically how some of the major G20 cities are likely to be affected by some of these physical events like floods and heat waves and cyclones, etc. water stress between now and 2050. And I think this is when it gets real. I think one of the issues, I suppose, that I find with climate change is sometimes it's not very tangible when you're talking about emissions and temperatures and particularly very long range forecasts. I think it becomes much more tangible when you talk about cities that people can relate to and they've been to and all that sort of stuff. I think there's some shocking numbers in there actually about some of the impacts on cities. So tell us more about that part of the research.
Jaakko: [00:11:34] Yeah. So for now at least we are on track for a well above two degrees world rather than a well below two degrees world. And that has huge implications for physical risk. Now, when the Paris Agreement was negotiated or when I started working on climate change. Physical risk was really something that was going to happen in the future. We now are at around about 1.3 degrees global warming today. And we can really start seeing those physical impacts come in. Think about what happened in Spain just a few weeks ago or the hurricane season in the US or for example, the droughts that we're seeing currently in the Amazon basin, where for two years water levels have been lower than we've ever measured them over the last century. So we're trying to understand, in the physical risk part of this net zero atlas. We're trying to understand how that interacts with cities. So we have in previous editions of the Atlas looked at, okay, how does this matter for G20 economies? What kind of adaptation plans have they put in place? Here, we're really focussed on cities and I just want to explain a little bit why cities are important so physical climate risk can materialise in all kinds of places, in all kinds of different ways. Like you can have floods or heat waves or droughts or storms, but cities are really those places where you have that huge concentration of assets, economic activities, infrastructure, human lives, and where we see those climate hazards start materialising in cities. That's where you can see some of these really big impacts on economies. And that's why we think of cities as a critical vector for physical climate risk as we go forward.
Jane: [00:13:28] Okay, so that makes sense to me. Have you got any numbers that you could help us kind of size the problem or what's the size of the impact that's potentially out there.
Jaakko: [00:13:36] So for this Atlas, we partnered actually with SAS global, which is a Start-Up that is focussed on modelling climate hazards in very granular ways across the globe. And so what we find is that climate risk for cities will really start ramping up. So if we're looking at the major cities across the G20 we see that cities with high risk exposure will increase from 1 in 5 to 1 in 2, so from 18% to 47%. So that's a huge increase. And so we can think about the different hazards and the different hazard profiles. So if we're looking at extreme heat, we going from an average of 14 days per year today to 36 days per year by 2050. And in the same way we see water stress increasing cyclone risk going up. Now, the important thing here to understand is that what climate change will do is it will amplify the existing risk landscape so we won't suddenly see necessarily storms show up in cities that are not necessarily exposed to them. But what we will see is that where you have existing risks, those will become much more frequent and much more intense.
Jane: [00:14:53] And are there any examples of a particular city to make it even more real?
Jaakko: [00:14:58] Again I think we need to look at individual cities, and I think it's the risk profile, but it's also the resilience part of it. So for example, we will see cities in Japan having much higher cyclone risk than what they're facing today. They are already used to dealing with typhoons, but these typhoons are going to become more frequent and more violent. But I think the resilience side is very important. So one city that came up in the data with the team was, well Amsterdam. And you see kind of flood risk increasing in Amsterdam quite significantly. Now I used to live in Amsterdam. And the interesting thing about the Netherlands and Amsterdam is that they're actually very used to dealing with flooding risk on a huge scale, and they have invested over long time frames in improving their flood defences. And they have very concrete plans in place today on how to improve on that resilience and deal with those new climate extremes. Other cities, we see less of that. If we're thinking about real estate in places like Hong Kong or New York where flooding risks will increase if you think about heat impacts, particularly in cities in Southeast Asia or the Middle East, we don't look quite as prepared. And that's where we see some of the challenges.
Jane: [00:16:18] And the costs associated with these events are going to be massive. So have you done any modelling around kind of the financial impacts?
Jaakko: [00:16:26] So I don't think we are quite there yet, right? So in terms of our understanding of physical risk, we're really where we were ten years ago with transition risk. We knew it was important. We knew it would matter. But we don't really understand in great amount of detail that you could call it the topography of risk around the globe and across investor portfolios. So if you think about it, we know we have an understanding that this will matter for things like the insurance industry or the real estate sector or agricultural supply chains, but there is a huge amount that we don't understand about these risks yet. And so that's why there is a lot of research going on to model these risks better and start understanding the impacts. And so think about the comparison with transition risk. So ten years ago we knew that transition risk would matter. But we thought it is particularly impactful for things like the oil and gas sector. We didn't fully understand at the time that this will impact the auto sector long before it will impact oil and gas companies. So we have a similar picture around physical risk, where we really need to start modelling and understanding in much more granular ways where these risks are materialising. And in the same way, we need to start thinking about adaptation finance in the same way that we think about transition finance, right? And it's really a challenge across the economy. It's really a challenge at every level. It's a challenge for individual companies. It is a challenge for investor portfolios. It is a challenge for cities. But it's also a challenge for national economies. So thinking through how we how we get those levers moving and start investing into climate resilience is really one of the big tasks in climate over the next coming years.
Jane: [00:18:11] So, the financial impacts of the physical risks of climate change could be absolutely enormous. When you start thinking about it in the context of the impacts on individual cities and how that stacks up globally. Have you looked at kind of the financial modelling side of this yet, or is that still territory yet to be explored?
Jaakko: [00:18:33] I think we are globally still at the beginning of trying to wrap our head around the scale of this. But we are certainly talking about numbers in the trillions. So just looking at Hurricanes Helene and Milton in the US in October, the estimate for the damages is in excess of 100 billion. And that is two extreme climate events. So we see currently in a country like Ecuador, we see rolling blackouts because water levels in the reservoirs, because of drought are so low that they cannot generate power anymore. So you start seeing these kind of big impacts that also start impacting the macro economy in many places.
Jane: [00:19:18] I guess the costs need to be thought of holistically. So it's not really just about kind of rebuilding after, for example, the impact of a cyclone, but it's also about all the financial investment required to adapt and kind of build resilience into those city infrastructures. So yeah, big task at hand to really think through the enormity potentially of the financial side of things. And actually that's not to mention even the sort of the other thing about the impact on human health and human lives. And that's often something that perhaps doesn't get as much attention in the climate change debate, in my opinion.
Jane: [00:19:58] Okay, I think we're running out of time, but I do want to ask you one last question, which is really from your perspective and the research you've done, where do you see the greatest risks lying in terms of map of the world? So where should we be most concerned?
Jaakko: [00:20:09] So we see the biggest risk often when these climate hazards overlap with other challenges. Stretch public finances, rapid urban growth, informal settlements and that’s where we see not only the physical risk side but also that resilience piece that is so vital to this question.
Jane: [00:20:28] Yeah, that's a really good point, actually. And it brings us back to really thinking at that country level. So why it's really important for us to be aware of what the countries are setting in terms of their NDC 3.0. So lots to watch out for as we go into next year and obviously through into the Cop programme for 2025. We'll leave it there. It's been a fascinating conversation. Thank you so much for sharing your insights and expertise. And also we would encourage people to have a look at the net zero Atlas. It's the fourth one in the series, so please do check that out online. Thanks again for your time.
Jaakko: [00:21:05] Thanks, Jane. That was great.
Jane: [00:21:06] So that's it for this episode of the LSEG Sustainable Growth Podcast. I hope you enjoyed the conversation with Jaakko. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at fmt@lseg.com. And if you want to check out the net zero atlas, you can find that on lseg.com. That's all from me, but watch out for the next episode very soon.
