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Special Report

Impact investing


COP21 and Investors: What will Paris deliver?

One month away from the Paris climate change talks, Jonathan Williams asks how likely are investors to be faced with a repeat of the failed summit in Copenhagen. Will failure to reach a global agreement still stifle the growth of the low-carbon economy?

At a glance

• The UN Climate Change Conference first convened in Berlin in 1995, with successive talks leading to drafting the 1997 Kyoto Protocol, an agreement to reduce carbon emissions by up to 8% below 1990 levels.
• The Paris summit, COP21, was agreed as the place to negotiate a binding replacement for the Kyoto agreement, after previous attempts in 2009 failed. 
• The Copenhagen summit of 2009 was widely criticised for failing to achieve a legally binding agreement, amid complaints from developing nations that they were being asked to shoulder the cost of climate change mitigation without regard for the responsibility of developed nations for the high level of CO2 emissions.
• Institutional investors gathered at the 2014 UN Climate Summit in New York to outline the kinds of incentives and frameworks they would require to finance the shift to a low-carbon economy.

In December, Paris will host heads of government from almost every nation, meeting to agree a binding replacement for the Kyoto Protocol, governing the reduction of carbon emissions. The UN Climate Change Conference (UNCCC), also known as COP21, will be crucial from a number of perspectives, both in offering up tangible and binding reductions to carbon emissions, but also setting out how this shift to a low-carbon economy can be achieved and funded.

Pressure will be on governments to agree concrete steps to prevent global warming in excess of the 2°C viewed as dangerous by scientists on the Intergovernmental Panel on Climate Change (IPCC). But similar pressures were building ahead of the 2009 UNCCC in Copenhagen. In its wake, the summit was widely regarded as a failure, amid recriminations resulting from the perceived unwillingness by developed nations to pay for the changes expected of emerging market countries that have yet to industrialise fully.


The crucial matter of carbon reduction targets has been dealt with more proactively in the run-up to Paris, and has featured on the agendas of governments in Europe, Asia and North America. China’s announcement in June of its intention to cut its CO2 by two-thirds per unit of gross domestic product relative to 2005 levels still allows for the country to base growth on carbon-intensive industries, but is nevertheless a strong signal from the economic giant that it takes the upcoming negotiations seriously. More recently, India followed with a similar target of a 35% cut by 2030, measured against its 2005 levels. The US has set itself a goal of 32% – lower than some might have liked, but notable from a country that refused to ratify the 1997 Kyoto protocol. EU member states will aim for a 40% cut by 2030. 

This greater level of transparency is also helped by the intention of most countries to have leaders attend the first day-and-a-half of the summit, turning detailed negotiations over to those with a grasp of the detail. Unlike Copenhagen, where leaders entered the fray at the end, this should allow any political deadlock to be addressed head-on, turning the latter half of the summit over to no-less-important, but much more technical, matters.

The risk is that COP21 could be the last chance to achieve meaningful global consensus. Not because action delayed until after Paris would come as too little, too late – although that risk exists – but because of the end of global agreements and the decline in importance of multilateral bodies launched after 1945, argues Georg Kell, founding executive director of the UN Global Compact. 

“We have to accept that we live in a fragmenting world,” he says. “The old paradigm, like we had under trade negotiations, for example, where in some blue room decisions were made by two powers and then rolled out globally [is over].”

Kell, who left the Global Compact after 15 years and is now vice-chairman designate of the sustainability-focused asset manager Arabesque Partners, thinks “fiercely independent” rising middle income countries will instead lead a shift towards regional and bilateral deals, agreed between like-minded governments. 

In an attempt to attract the independently minded, newly affluent emerging market nations to the negotiating table, the Green Climate Fund was established in the wake of a 2010 summit. Meant to bridge the cost of the low-carbon transition for emerging countries, it was set an ambitious target of $100bn (€89bn) a year in financing by 2020 but, as of June, had only attracted government commitments worth one-tenth of its planned annual expenditure. 

This raises the real possibility that emerging markets, despite positive signs from leaders China and India, will baulk at being asked to cut carbon after a century of growth in Western nations built on coal-fuelled power, despite the fund being launched to avoid the problems of Copenhagen.

Equally important, and perhaps even more so when agreement hinges on hundreds of countries ratifying carbon reductions that may not be in their short-term electoral interest, is the impact of global companies and investors. Fergus Moffatt, head of public policy at the UK Sustainable Investment and Finance Association, is hopeful that COP21 will produce a viable deal that also points towards the introduction of regulatory frameworks helpful to investors. “We need that regulatory underpinning to give at least more certainty, or reduce uncertainty as much as possible.”

George Kell

“The key is how investors will be inspired by Paris,” Kell agrees. Furthermore, the Montreal Carbon Pledge of the UN-backed Principles for Responsible Investment (PRI) and the similarly investor-led Portfolio Decarbonisation Coalition suggest that asset owners are trying to lead, rather than follow, governments. Work undertaken by the PRI, the Institutional Investor Group on Climate Change (IIGCC) and allied organisations points to a pension and asset owner sector eager to see carbon pricing and other regulatory measures that allow them to invest in a way that boosts the growth of low-carbon industries.

In the COP21 draft agreement circulated in early October, the section on financing urged that all funds flow towards creating so-called climate-resilient societies, and noted that this would be helped by building “domestic enabling environments”, or regulatory environments that allow for a steady flow of money.

Moffatt says that countries crucial to the success of COP21 now seem to offer backing that was not in place during the failed 2009 attempt. Political will, coupled with concrete, affordable and viable ways to finance a low-carbon future, offer the chance of an effective deal. But even if talks stall, enough work has been done in the past six years that investors and companies interested in, and aware of, the risks posed by climate change beyond the regulatory hurdles can focus their attention on mitigation. 

About 1,000 companies are already operating a shadow carbon price as a way of assessing the impact of a carbon tax, a fixed payment as used by a number of Canadian provinces or an Emissions Trading Scheme (ETS), as used across the EU and now proposed in China. Energy companies such as Shell and BP are now bound, following investor action, to look towards a low-carbon future and assess what impact this has on their business models. As part of this, investors have been asking companies to justify membership in lobby groups that, in private, may be pushing policies that contradict their public utterances. As a result, Shell recently left the American Legislative Exchange Council, widely regarded as climate-sceptic in its policies. Sweden’s AP4 was one of the institutions to challenge companies on the double standard. “We would encourage companies to withdraw from associations that have lobbied in ways which seem inconsistent with the companies’ own statements on climate action,” says Arne Lööw, AP4’s head of corporate governance. 

Pension investors have also added renewable investments to their infrastructure portfolios, and regulation has seen energy efficiency of buildings become a selling point to prospective tenants, and a way of increasing yield for those looking to invest. 

The private sector does not necessarily have to wait on governments to come up with an iron-clad agreement at Paris or successive summits, says Kell. “They themselves can be critical actors,” he insists. But he maintains that the only way to properly address climate risk, and other matters of sustainability, is through a multilateral approach: “The air doesn’t respect national sovereignty.”

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