An investor’s look ahead to Copenhagen

Between December 7 and December 18, the 15th United Nations Climate Change Conference will take place in Copenhagen, Denmark. Nearly 200 states are to meet to draft the international treaty which will replace the Kyoto Protocol, expiring in 2012. Also, many third-parties, including industrial lobby groups, NGOs, unions, climatologists, etc. will join the debate. The stakes are very high as the new Protocol will determine the world’s objectives in order to mitigate climate change and to decarbonise the world economy. In 1997, while the United States signed the Kyoto Protocol, Bill Clinton’s administration never succeeded in getting the support of the US Congress to ratify it. The following US President, George W Bush, maintained a stance that the protocol would significantly hamper the US economy and that emerging economies should make more efforts. Fortunately, the current US President, Barack Obama, seems to be more favourable towards tackling climate change. The House of Representatives passed an historic American Clean Energy and Security Act in June that plans to reduce the US greenhouse gas (GHG) emissions by 17% below 2005 levels by 2020.
While this is clearly a move in the right direction, these targets are less ambitious compared to other developed economies who have also committed to progress on this issue. For instance, the European Union’s goal is to cut GHG emissions by 20% below 1990 levels by2020 (and by up to 30% if an international agreement is reached). Let’s not forget that developing nations have a large stake in curbing greenhouse gas emissions as well. The emergence of China as an economic powerhouse should not be discarded. The booming Chinese economy has recently overtaken the US as the largest emitter of carbon dioxide in the world. Nonetheless, China, like the majority of developing economies, argues that it has the right to foster its economic development and that the US has historically been a much larger emitter than China. It is clear that tensions between developing countries that feel they have the right to advance their economies and developed nations are a continuing threat to reaching an international climate agreement. One challenge of defining the new Protocol will therefore be to strike the right balance between economic interests and ensuring sufficient action to mitigate climate change. The framework and the incentives the Copenhagen summit should provide are great stimuli to low carbon-future. It is in the interest of all parties and particularly human kind. From an investor’s point of view, climate change is a serious long-term challenge with a material impact on all kinds of business models. The investment community, and particularly the sustainable and responsible investment (SRI) community, has already made some positive steps to promote the integration of climate change in its investment decisions. First, by

encouraging transparency of companies GHG exposure through initiatives such as the Carbon Disclosure Project since 2000. Secondly, by educating corporations through highlighting the sound business case for addressing climate change e.g. through energy cost savings. Now, in order to go further, business and investors need a common playing field with clear long-term rules of the game in terms of GHG. We strongly believe the Copenhagen summit is of importance as public policy needs to create market-based frameworks that promote the integration of externalities linked to climate change challenges into companies’ strategies and investment decisions.

Particularly, we are in favour of, for instance:
– a global agreement based on the latest IPCC (Intergovernmental Panel on Climate Change) study that indicates that developed countries should reduce their emissions by 25–40% by 2020 (against a base year of 1990)
– a global framework for GHG pricing through e.g. a global carbon market
– a global agreement which encourage countries to offer continued incentives for investing in existing low carbon technologies, including those that improve energy efficiency and increase the share of renewableenergy. Also, in terms of strategic allocation, investors should favour two types of investments. On one side, they should invest in funds that systematically include climate change challenges in investment decisions in traditional companies. On the other side, investors need to consider investment in niche green-tech companies offering sustainable and innovative products/services to climate change.

“From an investor’s point of view, climate change is a serious long-term challenge”

Thus, investors can seize market opportunities created by climate change challenges but at the same time provide capital for the development of ever-more needed small emerging green-tech companies. We strongly believe in factoring in climate change into investment decisions and hope that the Copenhagen summit will draw up the necessary framework providing businesses the necessary market incentives to integrate climate change into their long-term strategies and investments.

Gaëtan Herinckx is head of sustainable and responsible investment at Dexia Asset Management