Having considered the various potential drivers of an IPR, this paper further considers when the IPR could occur, what policy and technology pathways it might take, and how these pathways would affect the macroeconomy and risk-returns of financial assets.

It forms the basis for further work on an IPR intended research programme.

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The Inevitable Policy Response: When, what and how

September 2018

The PRI is supporting its signatories to encourage governments and policy-makers to close the gap to the Paris Agreement with the urgency that is required. However, the PRI also recognises that the full impact of a delayed, but forceful policy response, such as an IPR outcome, has not been widely debated or understood by many in the institutional investment community. In that context, the goal of this technical paper is to build a better understanding of how the low-carbon transition will impact financial markets in response to an IPR by considering:

  • The timing and key stages of an IPR outcome.
  • What an IPR would entail, to get the world from the current trajectory to 1.5-1.75°C with 50–66% probability, and the multiple permutations of potential policy and technology pathways that will get us there. This includes proven and feasible mitigation policies, as well as policies that facilitate and encourage ‘negative emissions’ technologies.
  • The financial outcomes of the policy and technology scenarios, and the potential implications for SAA and portfolio construction.

The outputs from this analysis will provide the basis for understanding what an IPR pathway will consist of, and how it will impact institutional investment portfolios, as further examined in the companion technical papers, ‘Implications for Strategic Asset Allocation and Portfolio Construction’ and ‘Investors Actions’, including the management of stranded assets.

 

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