‘A persistent misallocation of global capital’: Market reacts to IPCC report

Companies must be held to account for lobbying, while investors should not rely on carbon capture, say market participants.

Market participants have welcomed findings by the Intergovernmental Panel on Climate Change in its latest report on climate change mitigation, but criticised its emphasis on carbon capture. The IPPC said that the world can still be on track for 1.5C by 2030 if radical action is taken but warned that investors need to hold companies to account for their lobbying.

The report, the sixth to be released by the influential UN body, covers efforts to mitigate the effects of climate change. It criticises the pace of investor progress on aligning investments with low emission pathways and describes a “persistent misallocation of global capital”, driven by policy misalignment and the perceived risk-return profile of fossil fuel investments. Investors are sacrificing returns when they refrain from investing in green infrastructure and industry due to perceived high risks, it added. Irene Heemskerk, head of the climate change centre at the European Central Bank, said on LinkedIn that the report was “alarming” and called for cooperation on climate change mitigation.

The main finding for investors is that financial flows are currently three to six times lower than the level needed by 2030 to limit global warming to below 2C. While there is sufficient capital to close investment gaps, increasing flows relies on clear signalling from governments, the report said.

Shelagh Whitley, chief sustainability officer at the Principles for Responsible Investor, said that new investments in fossil fuels should stop, and flows to low carbon assets should be increased. Investors have a leading role to play in decarbonisation, she added, but parts of the investment industry are still greatly underestimating climate-related financial risk.

Richard Lum, co-chief investment officer at energy infrastructure investor Victory Hill Capital, said that while the report found it was not too late to limit global warming to 1.5C, “optimism should not be confused with success”. He added that Victory Hill was optimistic about the potential for carbon capture (which the report recommends be increased in scale), and the falling cost of solar and ongoing progress in energy storage, but said “we must translate good ideas into immediate action if we are to succeed”.

However, Gerben Hieminga, senior sector economist at ING, warned that the world should not rely on carbon capture. Such technology “buys the world extra time” and carbon capture can remove emissions that exceed the carbon budget. But he warned that questions remained over the reliability of carbon capture technologies, and that global coordination would be needed to effectively employ it.

This was echoed by Nikki Reisch, climate and energy programme director at the Centre for international Environmental Law. “Only a rapid and equitable phaseout of fossil fuels can avoid overshooting 1.5C,” she said. “Relying on speculative technologies that prolong the use of fossil fuels and purport to deliver emissions reductions… will cost lives and inflict further irreversible harm. Carbon capture and storage cannot make coal clean, turn gas green or render oil carbon-free.”

Reisch blamed the emphasis on carbon capture on “politicised negotiations”. The Financial Times wrote that negotiations on the report’s policy summary delayed publication, and led to figures for low carbon investment in developing countries being removed from the summary.

Sean Kidney, CEO of the Climate Bonds Initiative, said the report’s finding that 10 percent of global energy came from renewables was “an extraordinary win” given the levels of renewable generation 20 years ago. But he emphasised that the pace of mitigation needed to increase: “We have to run, not walk.”

The report said that while green bond and sustainable finance markets have grown, concerns over greenwashing and the limited application of green bonds to emerging markets remain.

The report also criticises climate lobbying efforts, referring to “entrenched power relations dominated by vested interests” who benefit from the status quo.

Dan Gocher, director of climate and environment at the Australasian Centre for Corporate Responsibility, called on investors to hold companies to account both for their direct lobbying and membership of industry associations. “Companies and industry associations responsible for lobbying against ambitious climate policy must be held to account by their shareholders. This starts with voting against climate plans and the re-election of directors.”