Investors hail release of first 1.5°C Paris-aligned scenario from global energy watchdog

The International Energy Agency (IEA), the world’s top energy body, has published a long-term climate scenario, describing the policies, investments and business strategies needed to achieve net zero emissions by 2050, with the aim of limiting global warming to 1.5°C.

The move comes after growing pressure to release such a scenario from investors and stakeholders who see it as a key input to assess the alignment of portfolios to the Paris Agreement. In 2019, the IEA’s most ambitious decarbonisation pathway – known as the Sustainable Development Scenario (SDS) – would have achieved net zero emissions only by 2070 and limited global warming to 1.7°C.

Commenting on the release Natasha Landell-Mills, Head of Stewardship at Sarasin & Partners, said that it was now up to investors and regulators “to ensure that the scenario is widely used across the market”.

“The IEA has done its job, which is to provide the market with information on how to align investments with the Paris Agreement,” she told RI. “Investors now have a benchmark to refer to when looking at a company’s accounts and business plans, whereas we didn’t have one previously.”

Odd Arild Grefstad, CEO of Norwegian financial services group Storebrand, agreed that “high ambition scenarios are key to unlocking success of the Paris Agreement”.

He said to RI: “The IEA’s annual scenarios have historically fallen short on ambition needed to meet the goals in the Paris Agreement. The year 2020 marks a turning point – the year when we either grasp the challenges and opportunities before us or continue delaying the low-carbon transformation.”

According to Ingrid Holmes, Head of International Policy and Advocacy at Federated Hermes, many investors are already “locked in” to the IEA’s models.

“As much as we might like some of the alternative scenarios now available,” she said, referring to the PRI’s Inevitable Policy Response, launched last year, and scenarios from the Intergovernmental Panel on Climate Change, “there is no means to practically integrate them into how we look at investment risk from a top down perspective or think about investment risk from the bottom up”.

“Currently, the most widely used scenario analysis tools such as PACTA [a free tool by the 2 Degree Investing Initiative] or those from Carbon Delta and Trucost are all based on the IEA’s SDS, so we are kind of locked in to the IEA’s models which is why it’s really important for investors to understand their limitations,” she continued. 

Federated Hermes, Sarasin & Partners and Storebrand were among the signatories of two joint letters sent to the IEA over the past year requesting the inclusion of a 1.5°C pathway in its annual outlook.

Despite the IEA’s turnaround, it continued to face criticism over the central scenario contained in its annual World Energy Outlook (WEO) report, which has been characterised as overly fossil-fuel friendly. The scenario, which maps future energy demand based on existing government commitments – rather than likely future commitments – is seen as the ‘gold standard’ for business planning and shapes expectations over the future use of coal, oil and gas.

Andrew Higham, Chief Executive of Mission 2020, the climate change campaign group which previously coordinated investor statements to the IEA, said: “The WEO is much more than a mirror, it's a beacon. Its influence is obvious when you look at how the WEO is used to justify some of the most reckless and carbon intensive projects in the world, from Australian coal production to Canadian tar sands expansion.

“The WEO 2020 takes an important first step in the right direction with a mini 1.5°C scenario. But until the IEA puts the 1.5°C scenario at the centre of its WEO, it will remain a threat to climate safety.”

Tim Buckley, an analyst at the Sydney-based Institute for Energy Economics and Financial Analysis think tank, said: “Unfortunately the IEA continues to underestimate the growth of renewables and the pace of technological progress. One of the reasons for this is they have too many incumbent industry producers advising them, usually fossil fuel producers, who continue to suffer from ‘groupthink’.

“For example, the IEA has now acknowledged that coal demand peaked in 2014, while its use in power generation peaked in 2018. Previously, they said the latter wouldn’t happen until 2030. In this year’s WEO, the IEA assumptions for the cost of solar energy in India is a full third higher than the actual cost on the ground today.”