One of the common feelings amongst environmentalists is that most of the work being done toward building a more sustainable future, is initiated by the local community or actors that have what is sometimes described as ‘a limited impact’ on global climate, although this is very much arguable but we’ll keep this for another time. Such a feeling can be discouraging and overwhelming but it’s important to note that things are changing and that big stakeholders are now engaging in the fight against climate change.
I decided to talk about what can be seen as a boring subject, the decarbonization of the economy, following the One Planet Summit that took place in Paris a month ago. This summit has the goal to facilitate a change in public money investments to go from a big contributor to climate change to a helpful resource to fight against it.
For those wondering how finance and climate change are linked the short answer is that the financial world (public and private) invests in a large number of projects to develop the economy of countries or their own companies and such projects have an impact on the environment. If we take for example a pipeline that would be built through a public/private financing partnership, the result will be an increase of greenhouse gas emission.
The potential role that institutional investors can play in addressing climate change, goes far beyond the issue of infrastructure finance. Institutional investors are more than infrastructure financiers: they are owners and creditors of large segments of the global economy.
These actors invest in the stock market can boost companies value and encourage them to grow. If that company has a main sector of activity that releases greenhouse gas then buying stocks from them is most likely going to result in an increase of greenhouse gas emission from this company.
Most of the investments made in the past were made without any consideration of the trickle down effect it will have on the environment. But things are changing!
During the One Planet Summit, the World Bank has announced a few measures that show the shift in the paradigm. They have for example declared that there will be no more financing of projects for purpose the exploration and exploitation of hydrocarbons. They also announced that they will publish a document gathering the yearly emissions of the projects being financed and generalize the consideration of the internal cost of carbon emissions in their future investments.
The One Planet Summit took place in a favourable context following the Paris agreement that has an important portion focusing on the role of the financial world in the fight against climate change. Numerous investor commitments in the lead-up to and during the Paris talks showed that there is a strong and growing momentum towards this shift. Here are examples of investors reinforcing their commitment towards a low-carbon economy:
– Caisse des Dépôts, French financial institutions and long-term investors, committed to dedicate €15 billion to direct green investments until 2017. It committed to a 20 % decarbonization target, covering the totality of its listed shares portfolio, amounting to €55 billion.
– ABP, the main Dutch pension fund commits to decarbonize the totality of its listed shares portfolio amounting to €100 billion by 25% in 2020.
– The New York Common Retirement Fund (CRF), the third-biggest pension fund in the United States announced that it will apply a new risk controlled, low carbon emissions index to an initial portfolio of $2 billion.
– The European Bank for Reconstruction and Development (EBRD) presented an innovative programme, supported by the Global Environment Facility (GEF), for scaling up energy efficiency financing through local private commercial banks of emerging or developing countries. Through this program, up to $25 billion could be provided for energy efficiency with estimated carbon emissions reductions of 62 million tons per year.
For those that are skeptical as I was about the actual willingness of this sector of the economy to fight against climate change, there is one thing to remember: climate change presents both major risks to the global financial system and an opportunity for investors.
Many businesses recognize that climate change could derail their operations, from the physical risks that could threaten their processes, to regulatory challenges that could impact their bottom line. On the flip-side, according to Way, tackling climate change is a significant business opportunity: the low-carbon economy was valued at $5.5trn in 2011-12 and is growing at an over three percent clip every year.
As bad as our economic system has been for the environment, we can see that a shift in the paradigm, even if only motivated by the potential financial reward, brings an opportunity to seriously reduce the impact of carbonized investments and reduce the impact on climate change.
If you’re interested, here are a few examples of change in the paradigm.
Can our economic system be the motor of a revolution?