Ole Beier Sørensen, chief of research and strategy at DKR355bn (€48bn) Danish public pension giant ATP, and chairman of the Institutional Investors Group on Climate Change (IIGCC), a group of 68 investors with combined assets of around €5trn, is upbeat as he arrives in Cancún, Mexico for the COP16 international conference on climate change. He believes the event could be the moment when the potential role of institutional investors in financing climate change solutions becomes a serious and practical discussion topic. A delegation from the IIGCC, the European investor lobby group, which includes representatives from the UK’s Universities Superannuation Scheme and fund manager, Climate Change Capital, will meet on a bilateral basis with a number of government representatives. Sorensen himself has been invited to speak at a number of forums at Cancún. And the IIGCC chair thinks Cancún will be different to last year’s disappointing COP15 in his home city of Copenhagen.“There is going to be a smaller turnout, a lower level of expectation and less frenzy. The Mexican government appears to have learnt some lessons from Copenhagen where it seemed like there was an attempt to get a fast and glorious agreement. There’s a limit to how fast governments can move ahead of their populations. It also became obvious in Copenhagen that we were seeing the arrival of a new world order of developing countries being much more integral to global
agreement and I think the Mexicans have done a great job in seeing the reality of that. If we can come out of Cancún without any serious set-backs to the steps that have already been taken as well as forward momentum on areas like forestry protection and reform of the Carbon Development Mechanism, that would be good.”Ahead of Cancún, the IIGCC, which includes some of the world’s most prominent institutional investors such as APG Asset Management, PGGM Investments, Generation Investment Management, BlackRock, Hermes, Robeco, Schroders as well as numerous UK public sector funds, joined forces with US group, the Investor Network on Climate Risk, the Australia/New Zealand group, the Investor Group on Climate Change, and the United Nations Environment Programme Finance Initiative, to bring together 259 investors with combined assets of more than $15trn (€11.1trn) in a call for policies to “unlock the vast potential” of low carbon markets. It was the biggest ever investor statement on climate change policy, and in a notable addition to the standard request for long-term policy, the investor statement called for multilateral development banks and other development finance institutions to apply “risk-reducing finance tools” to assist market development and scale up private investment. Sørensen says: “Among all the huge numbers banded around that will be needed for climate change solutions, the one major figure we retain is that 80-90% of investment will likely be private capital. Institutional investors are not charities and we can only invest for market returns. Therefore our involvement is heavily dependent on policy. But we believe there is progress on that front.” He says that prior to Cop15 institutional investors were still at the stage of “internal discussion” about what could be done: “We were trying to call on policy makers, but maybe our call wasn’t clear enough. And policy makers at the time were preoccupied with public policy and public finance solutions. There is now a sense that we are moving in a different direction and the Mexican government is promoting better dialogue on this theme.
Earlier this year, Ban Ki-moon, Secretary-General of the United Nations established the high-level Advisory Group on Climate Change Financing (AGF) in February 2010, including figures such as Lord Stern. It recently reported on the goal of mobilizing US$100 billion per year for emerging markets investment by 2020: Link to report
Says Sørensen “We are now starting to see policy makers start to want to engage with us on that. While the AGF report is not part of the COP process, it looks like it will be brought into it. There is a need for a plan on how this financial package can be unfolded, and it is important that institutional investors are part of this.” He believes the Cancún talks are likely to focus on realistic city-level and regional initiatives that can lead by example. He says the broader example for such localised projects includes Indian support for wind power in 2003 and Spain’s support of solar in 2006. While acknowledging that both had issues, he notes that they were well structured and ambitious: “You can get a whole industry off the ground with these kinds of subsidies and feed-in tariffs. We believe that the greater involvement of long-term institutional investors could also go some way to mitigating some of the previous problems, for example, in Spain, with tariff reductions. To date we’ve been a bit absent in these debates. But when policy looks at private capital, it is not very nuanced as to the nature of that capital. You need to understand the different risk appetites of private capital, between long and short-term investors.”He says institutional investors also need to see that government policy supports the ‘mainstreaming’ of climate change initiatives, not niche activities.
So what are institutional investors looking for in practice from a policy-driven investment structure?
Sørensen says their first priority is risk mitigation: “Without this the price of capital to finance these activities will be over the top, whereas we need to bring it down. We are inclined to look at all kinds attempts to mitigate non-financial risk, such as policy change, or the use of conglomerates of equity investors with their skin in the game. It is also vital that transnational investors like the International Finance Corporation and the World Bank are investing alongside us, and that we have proper local management.” He said investors would also like to see the use of mechanisms such as Export Credit Guarantees to act as insurance policies that could help them gauge the level of risk they need to protect themselves. Perhaps for the first time then, institutional investors believe they are ready to engage in constructive discussion about how assets can be deployed, and on what terms.
Sørensen concludes: “We’re here to make sure the institutional investor voice is taken on board and that we get the right kind of policy signals in order to play the crucial role that we can on climate change.”
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