Climate policies raise scope for political risk to manifest on several fronts, a latest joint report from sustainable Fitch and Fitch solutions stated.
“Political risk, including polarisation over climate issues and concerns over a just transition, can cause climate policy instability or stalling, the global rating giant .This political landscape could be arduous to navigate for investors, which are increasingly tasked with allocating capital to low-carbon technologies with long lifespans and payback periods” it warned.
Climate change and political risks will mutually reinforce each other as both transition risk, which results from the global shift toward a low-carbon economy, and physical risks rise. Capping temperature rises at well below 2.0° Celsius above pre-industrial levels – aiming for under 1.5°C – as resolved under the Paris Agreement, implies significant societal and economic changes.
The forecast policy scenario, developed by Inevitable Policy Response, sees an accelerated and forceful policy response from the mid-2020s and maps the most likely policies to be implemented. These include cuts to agricultural and land-use emissions, including ending deforestation by 2030 and the sale of combustion-engine vehicles in China, Germany, France, Italy and South Korea by 2035.
The Inevitable policy response estimates that these and other policies will limit global warming to around 1.8°C, but much tougher policies are required to achieve a safer ceiling of 1.5°C.
This analysis – co-authored with the Political Risk team at Fitch Solutions, a Fitch Group company, and using its proprietary political-risk indices to gauge short- and long-term country-level risks – explores the political issues that may arise from the low carbon transition and the implications for the pace of climate policy adoption.
It also stated that the developed markets (DMs) may have greater funding capacity to support a Just Transition, emerging markets (EMs) which will be particularly affected by the direct and indirect impact of climate change – could be unable to provide grants to affected areas and communities, given their fiscal constraints and less favourable access to international capital markets.