With Paul Simpson of the CDP calling the Paris climate change agreement over the weekend “our new north star” and the Church Commissioners hailing a new era of responsible investment – what exactly does the long-awaited accord mean for investors? Responsible Investor gauges the market reaction from pension investors, sustainable fund managers, investment banks, climate NGOs and trade associations.
The pension fund
Peter Damgaard Jensen, CEO at Danish pension service provider PKA, had this response: “PKA has for many years now wanted clear and secure political guidelines for making climate investments – and that wish has the politicians delivered on now. But it’s important that politicians, companies and investors takes concrete measurements to actively make the agreement to reality.”
The environmental data body
Paul Simpson, CEO of CDP, welcoming what he called a “new compass for business” called the agreement “the low-carbon, investment-grade accord that the world needs”. He welcomed carbon pricing, as acknowledged in the text, as key to unleashing the trillions of dollars for energy infrastructure investment. It would provide an incentive to reduce emissions, alongside a mechanism for trading emissions units. “This agreement should bring greater confidence that prices on carbon will continue to rise.”
The investment banks
Barclays pointed out the agreement reflects that climate policy will be tighter as the costs of renewable energy continues to fall. It pointed to the new carbon-credit mechanism (Article 6, Paragraph 4) in the text, one of whose aims is to “incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities”. The bank also highlighted the Financial Stability Board’s plans to launch a Task Force on Climate-related Financial Disclosures, saying it thinks it will lead to increased pressure on companies to monitor and disclose their carbon risks, and to “greater awareness of and attention to” companies carbon intensity by investors. It also pointed to the investor momentum on portfolio decarbonisation. In a research note(‘COP Till You Drop’) it updated its own analysis and finds that a 2˚ world would put $33.1trn of revenues at risk to 2040 for the fossil-fuel industry in total.
Separately, HSBC said that as a result of COP21 investors would try to better understand how climate change affects their portfolios and what they need to do to “capture the risks and opportunities associated with climate change.”
The supranational body
International Monetary Fund MD Christine Lagarde said her key message is to “to price carbon right and to do it now”. She maintains that charging for the emissions of fossil fuels puts in place the needed incentives for low-carbon investments; it also provides revenues to safeguard the poor, reduce debt, and lower the burden of other taxes on households and businesses.Asset managers
Seb Beloe at WHEB Asset Management rejected claims from some NGOs the deal is a ‘toothless farce’: “There are two ways to look at it. What was the most we could get with 195 countries? It’s still not enough to achieve what we need. It’s not finished but there is a momentum for racheting and corralling companies in same direction. Two degrees is within the touching distance. I’m optimistic.”
Those saying it was meaningless without it being legally binding were “missing the point”. Beloe said: “It’s political ambition. The narrative is on the same page. It will be legally binding at member state level never globally. Kyoto tried it. This approach is more sophisticated. The objective of a carbon price was never really feasible. I was sceptical about oil companies saying they want a carbon price.” Beloe noted how visible and assertive the investment community was in helping to get an agreement. The FSB climate disclosure task force demonstrated this. While the ‘mood music’ was shifting, it was too early to say if it’s the end of the fossil fuel era.
Mike Fox, Head of Sustainable Funds at Royal London Asset Management, said: “Investors need to consider how this new agreement changes their investment portfolios. He said that as governments seek to implement the agreement it was likely the penalties for poor environmental practices will only increase and corporates will have to adjust to making climate change a core principle in how they set strategy. “Investors should look out for innovative companies providing products and services with lower carbon intensity. These companies may well become as important as those created in the early stages of the Internet.”
According to Swiss asset manager Swisscanto, the Paris accord will boost sustainable investment products as well as those funds that enable investors to lower their carbon footprint. However, Swisscanto was also critical of the accord, pointing out that it did not set a global price on CO2 emissions and was too reliant on voluntary efforts.
The climate NGO
Anthony Hobley, CEO at Carbon Tracker: “What institutional investors have to understand is that this is not an agreement in a vacuum. There is a lot around these INDCs underpinned by bottom –up plans for 195 countries. It’s not an aspirational target, they are already doing it, albeit it doesn’t add up to the 2 degrees target and there is more to do.
“A lot will look to institutional investors as sources of capital. It’s important for them to understand that.”
“Have we called time on fossil fuel industry? If yes, we have enough time for an orderly transition. Institutional investors should be thinking and asking ‘how can we play our part?’ How we do the transition and avoid capital destruction.”
Hobley also highlighted the FSB climate taskforce, saying: “Expect to see a lot more focus on financial transparency around climate risk and translating climate risk into financial risk.”
As for any clear indications supporting carbon price mechanisms, Hobley said: “There is a hook in Article 6 that allows transfers of units between countries and honestly Kyoto had something similar. There was a very short article in Kyoto. Protocol basis of international emissions trading. It’s certainly in there. Article six has international transfer mitigation option.” As for support for green investment, across asset classes, Hobley said players will increasingly want to understand risk in fossil companies. “Expect momentum in money flowing towards green tech, green bonds, expect the agreement to create more confidence for those instruments and investments.”
He made a telling point about the impact on investment banks, saying their largest clients are fossil fuel firms moving from growth to ex-growth: “The deal flow of investment banks could change.”
He expected more pressure such as the new energy transition law in France. The key difference, he reckons, between Paris and previous COPs is the renewables’ cost and technology: “The technology has improved and the cost has fallen. Technology is as much driving this as policy signal from Paris agreement.”
The Principles for Responsible Investment
PRI MD Fiona Reynolds called the Paris agreement “the turning point that investors have been seeking”. Said investors are already taking action to measure their carbon exposure through the Montreal Carbon Pledge. She also mentioned the launched of the new Green Infrastructure Coalition at COP21.The family office
Dieter Wermuth, Head of Research at German family office Wermuth Asset Management, said it would “not be so easy anymore to justify burning oil, coal and gas for electricity generation and mobility”. He went on: “For financial investors, carbon assets have become even more risky while the future belongs to firms with a focus on alternative energy and resource efficiency, which will drive the new industrial revolution.
The climate trade association
The Climate Markets and Investment Association said the text included a “strong signal” from governments to the financial sector on their commitment to develop low-carbon investment plans and promote investments that will help limit global temperature to well below 2C. Finance and investment have been out in force at a COP as never seen before, CMIA said.
The UN corporate sustainability organisation
Lise Kingo, Executive Director of the UN Global Compact said the accord “sends the right market signals” to “provide predictability, unlock capital, drive innovation and reward responsible business”. She called for “100% participation” by the private sector.
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