The Paris agreement sets ambitious targets for carbon emission reductions at the global level, but it doesn’t say much about how those efforts should be shared among nations. High-income countries (HICs) represent a disproportionate part of global emissions, and should be expected to reduce them faster. The good news is that many HICs have already started this process. It would be unreasonable to expect Low- and Middle-Income countries (LMICs) to make equally big efforts. They are responsible for a much lower share of historic emissions and also, as carbon emissions correlate partly with income levels, they have a much smaller footprint.
This regional disparity is significant. The average person in North America and Western Europe is emitting respectively 22.5 and 13.1 tonnes of CO2 every year . This represents 3.6 times and 2.1 times the global average respectively, which itself is almost 5 times what is currently estimated as the sustainable level. In Africa, the average person is emitting 1.9 tonnes of CO2, 30% of the global average and “only” 1.5 times the estimated sustainability level. This discrepancy explains why some studies have estimated that the richest 10% are responsible for 49% of all global emissions.
Should we then conclude that the carbon-reduction effort will only fall on HICs?
It’s true that there is much that can be achieved from rich countries drastically reducing their emissions. However, unlike the HICs, low-income countries typically have growing populations (and hence carbon emissions). Furthermore, the disparity lies not just between HICs and LMICs, but within them. Urban areas in some developing countries have footprints to rival the USA. Our solution to the carbon problem must therefore be more nuanced and as investors, we must adapt our criteria depending on the circumstances.
This is particularly relevant for those investors using the Sustainable Development Goal (SDG) framework. In developed markets, carbon stability should be the minimum threshold to invest in a project that does not target the climate issue directly. For example, a company developing a proprietary plastic recycling technology that could make an important contribution to the circular economy (SDG 11, 14 & 15). However, it is a vital part of the investment thesis that this technology is itself low-emission and that, in its effort to support the circular economy, the company is contributing to carbon reduction through its revenue streams.
In emerging markets, the same strict approach cannot be applied as emissions will increase in some countries or areas as they develop further, in some sectors, mitigation efforts should be prioritised over outright reduction. As a contrasting example, one can consider investing in companies which lend to communities with low access to credit in rural India. Some of those lenders offer asset-backed loans, and the asset pledged is almost always a fossil fuel vehicle. The carbon impact of such an activity is undoubtedly negative. But it supports economic growth in communities whose carbon footprint is a fraction of the global average. We estimate that they emit, at most, 20% of the global average emissions per capita, and a lot of progress is still to be made in those communities on other SDGs such as poverty or inequality reduction. All in all, such companies have a net positive impact.
There are other examples that would test the limits of this approach. What applies to Indian farmers does not necessarily apply to richer countries or segments of populations. Should we encourage a similar business model for Chinese urban working classes? (We think not.) Should rural areas benefit from the same lenience in Chile, South Africa or South Korea? (In a nutshell: no, yes and no.) As impact investing develops globally, we will surely encounter many similar dilemmas, for which different institutions will have different answers. For now, we think that a differentiated approach on the topic of carbon emissions is essential if we are to achieve societal as well as environmental goals. However, differentiation doesn’t mean an absolution of responsibility.
Investors, countries and companies must recognise that moving to a less carbon-intensive growth model will impact profitability everywhere.
Those that are trying to build a sustainable business should adapt their strategy now.
Victoria Leggett
Head of Impact Investing
Mathieu Nègre
Head of Emerging Equities