RI interview, Donald Macdonald: the IIGCC steps up on C02 price and green infrastructure

The former PRI chair talks to RI about the challenges ahead for institutional environmental investing.

Signatories to the UN-backed PRI will recall that its former chair, Donald Macdonald is a big guy. His broad shoulders will be vital for his latest challenge as Chairman of the Institutional Investors Group on Climate Change (IIGCC). Macdonald took over late last year from Ole Beier Sørensen, Chief of Strategy and Research at ATP, the Danish pensions giant, who had been in the role since May 2009. The IIGCC lobbies on environmental investment issues for 75 members, including some of the largest pension funds and asset managers in Europe, representing around €7.5 trillion in assets. Environmental investing currently faces both a huge challenge from rock-bottom C02 prices and a significant opportunity as governments step forward to corral more private investment into green infrastructure. Both issues require deft representation in the policy sphere.
On the former, Macdonald notes that IIGCC has been lobbying hard for the European Commission to tighten up credits available under the EU Emissions Trading Scheme (EU ETS), which it says is not producing the outcomes originally envisaged and needs fixing. At just under €7 per tonne at the time of writing (up from a record low of €5.99 per tonne in early April), the IIGCC has told EU ministers that the carbon price is not even high enough to support a switch from coal to gas and that long-term investors are not seeing strong enough conditions to allocate capital to low carbon energy sources. It has called for the EU to demonstrate realambition to meet its 2020 emissions target by tightening EU ETS allocations and removing oversupply from the system. Its work will be cut out. Last week, analysts at Barclays cut their second-half 2012 price outlook for European Union carbon by 28% to €6.5 per tonne ($8.13) down from a previous estimate of €9 per tonne, citing a growing supply glut and prospects of further deterioration in the EU economy. Macdonald says: “A sensible price for carbon is vital. It’s not for organisations like IIGCC to be selecting or promoting technologies, but we do need to work on the policy framework such as getting the EU to look at the need to raise the carbon floor price and get a level playing field with the subsidies given to fossil fuels, etc.”
On the latter opportunity for infrastructure investment, Macdonald is involved in discussions with the UK government Department on Energy and Climate Change (DECC) via the Capital Markets Climate Initiative (CMCI). The government-sponsored initiative, on which Greg Barker, UK Minister of State for Energy and Climate Change sits, is the platform for working with pension funds on low carbon issues. Says Macdonald: “The UK government is keen to find out what the barriers are for institutional investment in green finance. One issue, for example has been energy unbundling between power generation and infrastructure, which has made it hard to invest across both. This was done for competition reasons, but the law of unintended consequences has
made it difficult to invest profitably along the energy chain, so to speak, as you can in some countries.” Via the CMCI, Macdonald says the IIGCC has also built a relationship with Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC), who is involved with the group and is, according to Macdonald, “extremely keen” to get involved with organisations like IIGCC as a representative of the institutional investors. In Europe, the IIGCC is also working closely with the OECD, which is examining blockages to long-term, capital-intensive investment in areas such as green energy:
Link to RI article
Macdonald says one hurdle being examined is whether the proposed Solvency II EU Directive on the levels of asset security necessary for insurance and pension providers could end up limiting investment potential in long-term, illiquid projects. Conversely, he notes that some governments are trying to direct pensions money into certain financing during these austere times: “We have to avoid being pushed into specific asset classes or have investment profiles being interpreted by regulation. What we really need is a proper investment rationale for these green allocations to work for pension funds.”
Just how much is being invested by institutional investors will be tallied up in June with the publication of the second annual global survey by the threeregional climate change investor groups (European Institutional Investors Group on Climate Change [IIGCC], the North American Investor Network on Climate Risk [INCR] and the Australia/New Zealand Investor Group on Climate Change [IGCC]) as well as signatory investors of the Carbon Disclosure Project (CDP).
The groups say that new for this year will be a comprehensive assessment of low-carbon investments, including allocations to carbon markets, energy and water infrastructure, energy efficient assets (including real estate assets) and technologies, and sustainable agriculture/forestry and emission sequestration.
Macdonald says there could be potential for the regional organisations to work more closely together: “Personally, I think there is a lot of sense in pooling resources, particularly as there’s also been the launch recently of the new Asia Investor Group on Climate Change (AIGCC).” For the moment though, he says his main internal missions are to increase IIGCC membership and push the organisation to set the climate investment agenda rather than be reactive. A strategic review later this year, he says, should help it fine-tune this work: “We have an excellent membership that is working on key climate issues that have market impact. We’ll continue to co-ordinate and promote this work and I hope to be able to use my contacts from the PRI and the pension fund world to drive it out further among institutional investors.”