The UN Climate Summit at the United Nations headquarters last Tuesday (September 23), gathered over 100 heads of state and government, many more company executives, and, of course, Leonardo DiCaprio to announce climate goals and policies and impel one another to further action.
But though the summit was perhaps the centerpiece of the week, the dozens of offsite events throughout New York offered another glimpse into the sentiment around climate change and action, one that finds companies and investors well out in front of governments, especially in the transition from a perspective of pure risk-protection to one, increasingly, of creative opportunity-seeking.
The week’s highlights helped tell the story: On Tuesday evening, on the floor of the New York Stock Exchange, CDP—the London-based nonprofit formerly known as the Climate Disclosure Project—released a report on the connection between companies’ climate change planning and their financial performance, where the chief progress officer from Hewlett-Packard and Bank of America’s global environmental executive took to the podium.
On Wednesday morning at Barnard College, insurance giants Swiss Re and AXA shared a panel discussion with representatives from the World Bank Group and others to discuss their involvement in the nascent index insurance market, designed to account for the various types of volatility made more violent by climate change. On Friday morning, the London-based Carbon Tracker Initiative organized discussions targeted to investors about moving capital out of fossil fuels and into greener, more resilient, investments.
But, as at New York Climate Weeks past, complaints over the lack of sufficient action from governments were a common refrain. Many company executives acknowledged that the internal initiatives they have underway pale in the face of the demands of climate challenge.
Yet the whole week was part of a timeline that leads to the UN’s December 2015 gathering of world leaders in Paris to hammer out a global climate agreement. The summit and its periphery events were seen by participants as a way to catalyze early agreements among significant players – and avoid Paris being compared to the ultimate failure of Copenhagen in 2009.The next step in the timeline is a December meeting in Lima, Peru, where governments and negotiators will continue discussions around a shared climate framework. In the first six months of 2015, countries are expected to propose the initiatives that will serve as their own pieces of the final agreement. Then, in Paris, after several more months of negotiation, the hope is that it won’t require much more to sign off on that final agreement.
So, it remains to be seen how adequate a preamble the week was to the crucial 14 months that follow. But while government leaders struggle toward a productive resolution, signs around Climate Week indicate that many in the private sector are improving the sophistication of their approach to the problem—or, more specifically, the business opportunities to be found within it.
On the Wednesday panel at Barnard, the task at hand was the scale-up of the nascent index insurance market, which provides reimbursements for extreme-weather events to business owners (mainly developing-world farmers)—basing payouts not on losses, but on the weather’s deviation from a predetermined index that measures, for example, a region’s average rainfall. Two of the world’s insurance giants—French firm AXA Insurance and reinsurer Swiss Re—are early into the market, and were frank about the bottom-line benefits.
Alexandre Scherer, CEO of AXA Insurance, calls it an “alignment of interests”: AXA is working to build its market share in developing economies like Asia, South America, and Africa, where the new index insurance market is looking to introduce the concept to many first-time insurance clients. Scherer said AXA Insurance is investing heavily in the capabilities necessary to collect and analyze the data that will help form the weather indexes. He adds that a significant perk of index insurance, as the company sees it, is its cost-effectiveness when it comes to determining payouts, since no assessor need travel to determine losses. He believes his company’s upfront investment in data and other market infrastructure will eventually pay off for the company. Another plus, he says, is that the index insurance product can be retailed not just to individual farmers, but to the local banks and cooperatives who will help distribute it.
Two days before the event at Barnard, AXA and the World Bank’s International Finance Corporation (IFC) had announced that they had formed a partnership to boost global insurance coverage. “The partnership with the World Bank will be very helpful in opening doors for us,” Scherer says. Paula Pagniez, senior microinsurance specialist at Swiss Re, also says that her firm’s “aim is to create new markets.” She adds: “We have to reach as many people as possible to make these commercially viable and scalable in the long term.”
The night before, the CDP had released a report reinforcing the case that it behooves businesses to take action on climate change. The report finds that S&P 500 companies taking steps to manage and plan for climate change generate a 67% higher return on equity than peers that do not disclose to the CDP on emissions and other factors. The climate-change-concerned portion of S&P 500 companies also sees 50% lower volatility of earnings than less-concerned peers. CDP has been looking into the link between companies’ climate performance and financial data for the past three years, but this was the organization’s first deep dive into that connection, and its first report dedicated solely to it. Companies scored well if they regularly report their emissions to CDP, and if they have set, and are investing in, emissions-reductions targets.
A glance at the list of companies who scored highest in the CDP’s climate ranking establishes that a few sectors are disproportionately represented, and they’re not the ones typically thought most directly tied to climate change: those in the financial services and information technology spaces. Paul Simpson, CDP’s CEO, acknowledges this.
“The weighting does lead to more IT and financial services—because they really see enormous opportunity for them,” Simpson says. “Of course, it is more challenging for utilities in oil and gas to say, ‘How are we going to transform our business to a low carbon economy?’ It’s a bigger transition for those sectors.”
The other clear message in the CDP report was that investors, too, can expect to benefit from being early movers here: “Currently the market is not putting a price premium on companies that are leading on climate change,” Simpson says, “so there may well be a significant opportunity for them to shift capital now.”Meanwhile, Alex Liftman, Bank of America’s global environmental executive, says that the bank has made two separate commitments to put capital to work in projects leading to a low-carbon economy, for a total of $70bn committed between 2007 through 2023. She adds that the bulk of that capital has been and will continue to be deployed via products that Bank of America has helped to innovate.
The prime example is green bonds, which were launched back in 2007 and, seven years later, comprise their own $20 billion market. In November of last year, BofA was the first U.S. corporate to issue a green bond, and in addition to working with issuers to develop the space, the firm was also one of several financial institutions to help draft the Green Bond Principles, a set of voluntary best practices for the market launched in January of this year. Liftman adds that her firm sees the market reaching $300 billion by the end of the decade—leaving no room for speculation about why the bank is eager to get involved.
“We’re working on a whole host of other products to meet the financing demand [in the clean energy space],” she says, citing ‘yieldcos’, asset securitizations, and others still in progress.
In a set of two Friday morning discussion hosted by Climate Tracker, too, the message for investors was similar: climate warnings and risks come bundled with opportunities. The morning’s event, held in New York University’s School of Law, was called “The Climate Swerve: How to shift capital away from high risk fossil fuel projects.”
While most of the event focused on the case for divesting from fossil fuels and engaging with the worst offenders, Jeremy Leggett, non-executive chairman at Carbon Tracker, offered one of the only voices of the day to focus on the benefits not just of getting out of fossil fuels, but of getting into renewables: “We’re wasting capex on the oil industry when we should be pouncing on opportunities in the renewables space,” Leggett says. “We have the technologies available; it’s all about speed and mobilization. I don’t think it’s a question of whether we can do it anymore.”