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Risks, opportunities as UN climate deal entry into force sends 'unequivocal' market signal

The UN climate deal brokered in Paris in December 2015 will enter into force in early November, with both devaluation risk and investment opportunities for pension funds highlighted in reactions to the European Union’s ratification of the agreement.

The Paris Agreement will enter into force on 4 November, being the thirtieth day after it was formally joined by at least 55 parties to the UN climate change convention accounting for at least 55% of total greenhouse gas emissions.

This was achieved last Wednesday, 5 October, with a big step towards this having been the ratification of the agreement by the EU the day before.

Major emitters China and the US had earlier this year already joined the deal, with approval from Canada, Bolivia and Nepal last week leading the agreement over the threshold that triggered its entering into effect.

As of today, 75 of 197 parties to the UN climate change convention have ratified the agreement, which aims to limit the global temperature increase to 2 degrees by 2100.

Stephanie Pfeifer, chief executive at the Institutional Investors Group on Climate Change (IIGCC), which represents nearly 130 EU-based investors with more than €13trn in assets under management, said: “Institutional investors across Europe are delighted the Paris Climate Agreement has now crossed the threshold required to gain the full force of international law before COP22 in Marrakech and so far ahead of all expectations.”

Investors are urging policy-makers to take swift action to implement the agreement, she added.

“As all recent temperature trends have highlighted, there has never been a clearer or more urgent need for robust collective action to secure the low-carbon transition and prevent catastrophic global warming,” said Pfeifer.

In a plenary last Thursday, MEPs said emission reduction pledges submitted so far in relation to the Paris Agreement “[do] not bring the world even close to the two-degree target”.

They passed a resolution calling on all parties to the agreement to raise their commitments, including the EU’s targets for 2030.

The IIGCC’s Pfeifer drew attention to the investment implications of the EU’s approval of the deal a few days earlier, when EU ministers had on 30 September approved the ratification of the Paris Agreement by the EU.

At the time, Pfeifer said the deal “sends an unequivocal market signal that will transform the future direction of the global economy towards an era of huge opportunity for investors in renewable energy, energy efficiency, infrastructure and other areas”.

But others have highlighted risks institutional investors should be tuned into.

Nico Aspinall, chair of the resource and environment board at the UK’s Institute and Faculty of Actuaries, told IPE the EU’s approval would “further raise the prominence of ‘stranded assets’”.

“Ultimately,” he said, “the actions of regulators and civil society in abandoning fossil fuels could cause significant devaluations of insurance companies and pension funds’ investment portfolios if action is not taken to reduce exposure to this sector.”

“Regulators are encouraging insurance companies and pension funds to examine their risk due to climate change, and stranded assets may be one of the largest for many.”

He said the IFoA welcomed the EU ratification of the climate deal and encouraged the UK to put policies in place to meet the Paris Agreement.

The IFoA has made resource and environment issues a key policy priority, Aspinall previously told IPE.

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