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Special Report

Impact investing


Copenhagen – will it matter?

Conclusive climate change strategies probably won't emerge in Copenhagen but investors must start planning for them as the clever money needs to think ahead, says Nina Röhrbein

The spotlight will be on Copenhagen in December when the UN's fifteenth Conference of Parties (COP15) and the fifth Conference of the Parties serving as the Meeting of the Parties (CMP5) take place.

As COP15 has been widely assumed to be the event at which decisions are made on climate change policies and emission targets post 2012, when the Kyoto protocol expires, expectations have been high.

But how likely are these hopes to be fulfilled? In the wake of Obama's US presidential election win earlier this year, expectations for the Copenhagen summit were raised to stratospheric levels, according to Steve Waygood, head of sustainability research and engagement at Aviva Investors and chair of the UK's Sustainable Investment and Finance association (UKSIF).

"Since then, there has been a reality check on his healthcare reform attempts as well on his ability to deliver on the US approach to climate change," he says.

Barbara Evans, sustainability research analyst at RCM, the equity company of Allianz Global Investors, agrees. "Expectations are currently mixed or even bearish," she says. "Many people now expect a watered-down framework coming out of Copenhagen, with a sticking point remaining the relationship between China and the US."

Waygood says: "A question mark still hangs over the ability of the US to sign up to an international treaty at Copenhagen when the Senate has yet to pass its own domestic climate change legislation, the Waxman-Markey Bill. With regard to the US, the first bellwether for Copenhagen is the passing of the Waxman-Markey Bill and the second the attendance of Obama.

"But with so much still open for debate the most we can hope for is a clear commitment from the US, China, India and Russia to have a more detailed accord ready by the next COP, which could be brought forward to April or May. It is those particular details that will be of most interest to investors and therefore fund managers will need to continue to watch that space."

The Copenhagen summit is just one in a number of UN climate meetings, Carlos Joly, president of Natixis Asset Management's climate change committee, points out. "There have been 14 other COPS beforehand," he says. "So even though this particular meeting is singled out, the process is a continuing one. Most important at COP15 is that both developed economies and emerging markets seem to understand that commitments must be made on both sides in order to reduce carbon emissions."

According to Joly, for CO2 concentrations in the atmosphere to remain at less than 450 parts per million to avoid global warming exceeding more than two degrees Celsius by the end of the century, the industrialised countries would have to start cutting emissions now by 5% a year, with China needing to start from 2025 and the other developing countries from 2035.

"There is already general agreement that all of the potential measures such as cap-and-trade systems, emissions standards, the transfer of monies for adaptation purposes in emerging economies, efforts in afforestation and carbon capture and storage (CCS) technologies are necessary," he adds.

But, says Vicki Bakhshi, associate director at the governance and sustainable investment team at F&C Investments and climate change adviser to its Global Climate Opportunities fund, what matters most to investors is what countries do nationally.

"There needs to be an umbrella agreement, but what happens in Copenhagen is more of a catalyst for national action rather than the answer to climate change in itself," she explains. "The Copenhagen deadline has already pushed a number of developed countries to make significant commitments in terms of emissions cuts, such as the EU, Japan and Australia. And even China has recently shifted its attitude on emissions targets."

Michael Riley, industrials equity analyst and climate change theme head at Swiss-based SAM, says. "A lot of countries may be waiting for the last round of negotiations to lay their cards on the table so there certainly is some potential for surprises there."

So while Copenhagen essentially follows in the footsteps of Kyoto, it certainly seems to be more challenging, with more attention being paid to the implementation of emissions targets.

"Kyoto was driven primarily by the UN and to some extent lacked the variety of grassroots interests that are present now," says Evans. "Therefore Copenhagen could be much stronger than Kyoto - but it also presents a bigger challenge. The support of the financial industry will be important in order to achieve the emissions reduction targets."

What will COP15 mean for climate-conscious investors that are invested in the green space? A deal of any shape or form in Copenhagen is expected to be positive for investor sentiment on renewable energy or climate-change-related infrastructure projects although exactly which companies are likely to benefit from an agreement will only become clear once details emerge.

However, the investment community has to react to climate change regardless of the outcome of the summit, according to Joly. "Climate change presents a real threat to infrastructure and investments and any investor worth his salt needs to realise that it is not yet integrated in the price of assets," he says. "But it will be reflected in due course and the matter, as in all investment conduct, is to be anticipatory."

Riley says: "An astute investor will remember that this is a very long term trend the world is going to have to deal with and would have already been positioning his investments to take that into account. He would not focus as much on the short-term fluctuations relating to the news flow in Copenhagen but focus much more on the fact that the summit should accelerate the momentum towards the de-carbonisation of the global economy."

Joly adds: "What is important is the fact that Copenhagen is getting a lot of attention and from a political point of view cannot be seen to fail. The impacts of climate change are already here, such as changing weather patterns, which affect productivity, commodity prices and transportation. The value of collateral can disappear because of floods or storms, not only for agricultural but also for industrial activity. And that means that long-term investors who take climate change into account will have better financial performance than those that do not, other things being equal."

Riley says: "And while we might see some overvaluation in specific areas at specific times, such as solar or wind, the variety and the magnitude of opportunities within the green space assures some high potential investments at a good price."

Investor money certainly seems crucial to Copenhagen, as clarification is needed on how a post-Kyoto agreement will be financed.

"The 2009 Investor Statement on the Urgent Need for a Global Agreement on Climate Change signed by 181 investors sends the very powerful message to politicians that plenty of investors are looking to allocate capital in order to combat climate change but are looking for clarity on the policy environment before they can do so," says Waygood. "So far, investors have had to be speculative when it comes to the climate change policy environment. "Once we have a sufficiently detailed global agreement, we are likely to see much more certain investor behaviour and more significant flows of capital into carbon mitigation and adaptation businesses as well as carbon trading."

A reform that would allow larger-scale financial inflows, for example, into carbon markets, is necessary according to Bakhshi.

"One of the key issues at Copenhagen is how much public finance the developed world is going to contribute towards mitigation and adaptation in the developing world," she says. "The European Commission has put forward a proposal on this but it is an area where negotiations are slow and there is likely to be a big gap in expectations.

"We believe that part of that gap can be bridged if the public finance that is on offer can be used to leverage private money. That means, for example, rather than spending money directly on emission reductions projects it can be used to fund mechanisms such as policy insurance or loan guarantees, which can shift the economics on emissions reduction projects from being unprofitable to being profitable, as private money will flow into those, of which there is no shortage."

Bakhshi concludes: "However, the perception is that some of these projects carry excessive risk, particularly when you take into account the risks that policies may change. We think public money can play a role in overcoming some of the risks by providing greater assurance to investors."



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