Keesa: [00:00:00] Welcome to the LSEG Sustainable Growth podcast. I'm Keesa Schreane. Last season we debuted a new segment called The Green Room to bring you insights from the latest research and insights on sustainable finance, investing and sustainability. As you hear, this COP 27 will be in its second week. So, for today's edition of The Green Room, we wanted to get a global picture of how the race to net zero is going. So, we sat down with Jaakko Karooshy, who's Global Head of Sustainable Investment Research at FTSE Russell, to hear about their latest report, The Net Zero Atlas. Jaakko, thank you so much for joining us.
Jaakko: [00:00:48] Glad to be here.
Keesa: [00:00:49] So tell us, first of all, a bit about yourself and your work.
Jaakko: [00:00:53] So I'm the Global Head of Sustainable Investment Research. I head up a team of sustainability and research professionals. We're a mix of data scientists and subject matter experts, and we publish reports like the Net Zero Atlas that we're discussing today. We also engage with clients in various investor initiatives, such as the Transition Pathway Initiative for Climate Action 100 plus. And we also prototype new data sets and tools and work them with other teams to turn them into products.
Keesa: [00:01:26] Great. And you're well positioned to really set the scene for us. Let's talk a bit about COP for those who are not familiar with it, just a bit of historical background and then some scene setting for what we can expect for this COP.
Jaakko: [00:01:39] So COP stands for Conference of the Parties, and the parties refers here to the parties to the United Nations Framework Convention on Climate Change, UNFCCC. So that's something that came that was created in 1992. So, since 1992, the Earth Conference in Rio, the parties to the UNFCCC regularly meeting, and this is the 27th meeting that is now happening next week in Sharm el Sheikh in Egypt. And that's why it's referred to more commonly as COP 27.
Keesa: [00:02:15] Great. So, with that scene setting, let's dive into the Net Zero Atlas. Tell us about that and just give us general insight of what the expectations and desired outcomes are.
Jaakko: [00:02:26] So the conference of the parties are basically there to keep track of the progress in global climate negotiations, and you get various milestones on that journey. So, the 1997 Kyoto Protocols, then the failure in Copenhagen in 2009 to come to a comprehensive climate agreement, and then eventually the success to, in the creation of the Paris Agreement in 2015 in Paris, and we had COP 26 last year in Glasgow, I attended that and there was a lot of focus on that from world leaders. And so now we are at COP 27 in Sharm el Sheikh in Egypt. Basically, what governments do there is keep track of the progress in terms of the mitigation and adaptation efforts. So, when we're talking about mitigation, it is effectively about the efforts to reduce emissions. And so, our Net Zero Atlas keeps track of that, and it does that by looking at the G20 countries, the largest and most powerful countries in the world, that together account for about 85% of global emissions. And it looks at the targets that these countries have set, and it translates those targets into an implied temperature rise. So basically, that means what would be the degree of global warming if every country set a target at a similar ambition level? And that's very important because countries have different sizes, there are different stages of development, they have different levels of per capita emissions. And so, you need that common yardstick in order to be able to compare, let's say, what India is promising for 2050 versus what the US is promising for 2030. And so that is really what we do in the transition risk section of our Net Zero Atlas. And so, what we find there is that overall the targets are not ambitious enough yet to meet the targets of the Paris Agreement, which is to keep the global temperature rise by 2100 to well below two degrees and 1.5 degrees, if feasible.
Keesa: [00:04:44] So Jaakko, you talked a bit about transition risks. I know the report details transition risks and physical risks. Could you give us a bit more of a deep dive into what those two are, what the differences are and how they work together?
Jaakko: [00:04:58] Transition risk is basically the risk that comes from the transformation of the global economy that we need to see in order to get us to net zero emissions. And that means changing the way that we generate power, how we store it, how we use it. It means changing our transport systems, materials, buildings, really the industrial makeup of our society. And so, as we progress on that journey, that creates a lot of risks for companies, for countries that rely on, let's say, outdated business models based on the consumption of fossil fuels. Physical risks refer to the risks that come from a changing climate as climate change progresses. And you see an interesting inverse relationship. So, the more successful we are in the transition and so the faster the transition progresses, in many ways, the higher the transition risk that companies or countries will face. But at the same time, that is something that lowers the physical risk because overall we will experience less climate change. At the same time, if we're less successful in a transition that reduces transition risk for companies and governments, but at the same time it increases the physical risk because we're going to experience higher global warming. In the report, we look at both of those aspects. So, we look at the one hand how fast the transition is progressing. And what we're finding here is that if we're looking at the 2030 targets, the nationally determined contributions, as they're called in the language of the Paris Agreement, on average for G20 countries, that equates to about 2.7 degrees of warming, so well above the target of the Paris Agreement. If you look at the 2050 targets that are a little bit further out, they are more ambitious. So, we see the mid-century targets aligning to roughly 2.1 degrees in warming, but we see this ambition gap between what countries are promising for 2050 and what they're promising for 2030. We've seen a little bit of progress over the last year with some of the countries making new commitments for 2030 and for 2050, but that's still not enough to get us where we really need to get to in terms of reaching the goals of the Paris Agreement.
Keesa: [00:07:27] So that's interesting. This transition gap as you term it, I'm wondering if there is a gap, then how are the countries who are promising one thing for 2050, but then there's a gap between 2030. How are they going to get there if there is that gap in the numbers?
Jaakko: [00:07:45] So that is really at the heart of the design of the Paris Agreement. And so, to understand the Paris Agreement, you need to understand the context in which that was agreed. So, you come out of 2009 in Copenhagen, where effectively countries are unable to agree to a framework of mandatory reductions. So, what the Paris Agreement effectively says is that we agree that something needs to be done, but we can't agree on a division of labour. So, every country is going to come with their own nationally determined contributions or NDCs. Every country will decide on its own terms how much and how fast it will reduce its emissions. And so, there's another important element of that Paris agreement, which is a pledge and review process. So effectively, countries pledge these targets and then in regular intervals, those pledges are reviewed and with the hope that countries will continue to increase their ambitions over time. And so, we have seen that process. Indeed, countries have been setting new targets and have been making their existing targets more ambitious over time. But that process hasn't worked really fast enough yet. So, we really need to see countries stepping up further, particularly with the nearer term targets, so the 2030 targets, but also in terms of the current policies to ensure that they actually reach those targets that they have set for 2030 and beyond.
Keesa: [00:09:21] Wow. This is great. So, thanks for clarifying that review process. And I'm wondering in terms of the key takeaways out of the Atlas, because you share that with us and how it connects back to what we're talking about here.
Jaakko: [00:09:32] So we're seeing an interesting pattern here. So, for advanced economies, many of them have quite ambitious 2030 targets, but the current policies are still quite considerably behind those targets. And so, in order for these advanced economies to hit those targets by 2030, they really have to accelerate climate action today. What we see for many of the emerging economies is that the current policies are on track to deliver more ambitious savings than what they are promising for 2030. And so, you can use this framework and this data to really systematically assess the pledges of these different countries to track progress. And that's what we're doing with this new Net Zero Atlas. We can compare that to what countries were the last way around. And it also allows us to understand how big the gap still is to reaching the goals of the Paris Agreement and who is ahead and who is who is behind the pack.
Keesa: [00:10:37] Well, definitely clarity there around measuring in terms of who can is driving ahead and also really getting an understanding of the targets are ambitious, but the policies that are needed may not be as, maybe a little further behind the targets. Great to understand that. And lastly, Jaakko, could you give us a single data point that you think is the most compelling from your findings?
Jaakko: [00:11:00] I don't have a single data point for you. There's a lot of data points in the report. I think for me, the most interesting part of the report and also the new part of our assessment is really on the physical risk side. So physical risk is is something that people often think that that is something that will happen in developing countries or small island states. And really the point that we're making is that physical risk are already material today for G20 countries. You just have to think about the wildfires in Australia or California or the floods in Germany. And we also make the point that they will continue to escalate without rapid emissions reductions. And so, if you look at the picture overall, by 2050, the physical impacts of climate change on G20 countries are likely to be large and they are likely to pose a significant economic and policy challenge for governments. And we spend a lot of time in the report to understand the different types of hazards. So, whether it's flooding of rivers or on the coast, whether it's heatwaves or droughts. And what we find is that different countries will be impacted in very different ways. And often it's actually at the subnational level, some regions will really struggle with certain types of hazards. But if we're looking across the G20, there is really impacts across the board. And so that just emphasizes the importance to redouble the efforts to limit the CO2 emissions, to meet the goals of the Paris Agreement to avoid some of these most debilitating impacts of climate change.
Keesa: [00:12:49] And I have to say that was one of the most compelling points for me to when we talked about or the report talks about just the U.S. itself and then the Mediterranean weather that we have in California. And that's quite different from the weather that Florida is experiencing. And just to think within a country how the physical climate and the risks behind the climate can be so different.
Jaakko: [00:13:10] Absolutely. I think we don't spend enough time thinking about these risks and what we need to do about it so that what is called the adaptation challenge, even in a 1.5-degree world, we will see a degree of physical risk challenging us. And I think we have seen now more and more examples of the complex knock-on effects that we can see from supply chain disruptions to migration waves to political instability. And so, this really highlights the urgency of getting to grips with climate change, reducing emissions, reaching the goals of the Paris Agreement. And so that's where we see the contribution of this Net Zero Atlas really data led scorecard helping investors, governments to understand where we are today and where we need to get to.
Keesa: [00:14:03] Great information. Jaakoo coming from the COP 27 Net zero Atlas, thank you so much for joining us today.
Jaakko: [00:14:08] Thank you.
Keesa: [00:14:11] That's it for this week's episode of the LSEG Sustainable Growth Podcast. If you're not already following us, give us a follow and rate us on Spotify, Apple Podcasts, or wherever you get your podcasts. If you have questions, comments or someone you want us to talk to next, drop us a line at fmt@lseg.com. Today's show was produced by Lauren Riley and Joel Leeman. Production and Engineering by Russ Goldsmith and Leon Radschinski-Gorman at Audere Communications. Special thanks to Clair Cheap, Oliver Mann and Rohan Shams. I'm Keesa Schreane Stream. Thanks for listening and I’ll see you next week.
