FTSE Russell Research: COP26 Net Zero Atlas

Provide a short overview of the research innovation being proposed for the award, including how it is innovative.

Coinciding with COP26, FTSE Russell’s inaugural Net Zero Atlas surveys countries’ climate targets and mitigation strategies.

Building on our work on sovereign asset climate risk in fixed income markets, we calculated the Implied Temperature Rise (ITR) associated with individual national climate goals, providing a consistent (if highly stylised) metric to assess alignment with different global warming trajectories. The ITR also helped us systematically compare climate commitments across countries and time.

We applied this methodology to the climate commitments of G20 countries for 2050 based on their net-zero targets, and for 2030 both for their nationally determined contributions (NDCs) and for their current policies.

With multiple policies, targets, and ambitions being formulated and revised by countries at different stages of economic development, taking stock of global mitigation efforts has become a daunting exercise.

Our first Net Zero Atlas attempts to answer several important questions:

• Who is leading and who is lagging?
• Are existing net-zero targets consistent with the Paris Agreement?
• In turn, are revised NDCs consistent with net-zero targets?
• And finally, are countries’ current policies really on track to achieve their 2030 commitments and 2050 goals?

 

Provide a description of why you decided to undertake this approach.

To achieve the goals of the Paris Agreement and limit global warming to 1.5°C above pre-industrial levels, success at COP26 was critical.

The financial system has a crucial part to play in achieving economy-wide decarbonisation and transitioning to a net-zero economy. This requires rapid innovation, creating tools for investors to measure and manage climate risk in their portfolios, as well as to help steer capital flows towards a Paris-aligned trajectory.

In this first FTSE Russell Net Zero Atlas, with the valuable input and analysis of researchers at IIASA and NewClimate Institute, we leverage our analytical tools – originally developed to assess climate risk for sovereign assets in fixed income markets – to evaluate the temperature alignment of national climate commitments for G20 countries in a systematic, rigorous manner.

Our analysis highlights that, while much progress has been made since Paris, national commitments in aggregate still fall short of the scale and pace of change required, with countries’ current policies aligning with a 3°C global warming trajectory, clearly overshooting the Paris Agreement target (which aims to simply maintain acceptable living conditions in most countries).

This has major implications for investors, because portfolio alignment is currently one of the main areas of interest in ESG research. It also underlines once again the urgency of redoubling global climate efforts and the importance of the COP negotiation process for safeguarding the wellbeing and prosperity of future generations.

 

Provide an outline as to:

1. The value this approach has provided or a summary of the key conclusions.
2. What you have learned from this approach or report that can be applied more broadly.

Methodologies and datasets used in this report provided an innovative and robust framework to assess the alignment of sovereign issuers with the Paris Agreement:

• The CLAIM methodology, a unique tool to calculate countries’ emissions trajectories compatible with a global 1.5/2°C objective.
• Exhaustive inventory and statistical treatment of countries’ climate targets.
• Partnership with IIASA and NewClimate Institute to build emissions trajectories based on effective policies implemented by countries.

Our key conclusions

1. Net-zero targets are not necessarily Paris-aligned. Those announced ahead of COP26 on average lead to a global temperature rise of 2.1°C based on our estimates, well above a 1.5°C trajectory. Among G20 countries, Saudi Arabia had the least ambitious target, aligned with 2.9°C, and several countries had not set net-zero targets – including Mexico and Russia.

2. There is an ambition gap between 2050 targets and 2030 NDCs. On average, NDCs imply a temperature rise 0.7°C higher than their corresponding net-zero pledges. The EU, the UK, and India (due to low per capita emissions) are the only major emitters with 2030 targets in line with the Paris Agreement. The NDCs of Saudi Arabia, Russia, and Australia are aligned to a 4°C+ warming trajectory; while those of China, South Korea, and Canada are aligned with a 3°C+ trajectory.

3. Like the NDCs, the current policies of G20 countries are not yet aligned with the Paris Agreement – in aggregate, we estimate a 3.0°C warming trajectory based on current policies versus 2.8°C for the NDCs. However, we found significant variability across countries in the relationship between existing policies and NDCs.

4. Existing policies for several advanced economies appear significantly off track when measured against their more ambitious NDCs. Most pronounced are the US and Canada, where current policies are tracking towards a 4°C+ trajectory (1°C+ higher than implied by NDCs). South Korea and Germany have temperature pathways that are higher by 0.5-0.6°C for current policies, than what their NDCs imply.

5. By contrast, several emerging economies’ current policies are on track to deliver significantly greater emissions reductions than pledged in their NDCs. These include Russia (current policies aligning to a 0.7°C lower trajectory than NDCs), Turkey (0.6°C) and China (0.3°C), which appear well-positioned to increase their NDC commitments’ ambition.

   Our approach deployed a three-step assessment to assess the consistency between mid- (2030) and long-term (2050) climate targets, and the actions required to meet them. We built this framework based on our “fair burden-sharing” CLAIM model.

As reporting progresses in the carbon emissions space, we believe there would be considerable value in deploying this holistic framework in the corporate sector. This would deliver an assessment of corporate climate ambition and progress through the following three components:

1. A model that shares carbon budgets between companies (and other economic actors).
2. An inventory of all medium- and long-term commitments by corporates.
3. An assessment testing whether corporate climate actions (e.g., concrete strategic plans, CapEx reallocation) are aligned with corporate climate targets.

Authors

Nicolas Lancesseur, Senior Research Lead, Sovereign Climate

Colin Subtil, Senior Analyst, SI Research

Camille Cros, Intern, Research and Analysis

Jaakko Kooroshy, Global Head of SI Research