Philippe Desfossés, ERAFP: COP21: “The Times They Are A-Changin’”

Is the Paris COP21 accord a good agreement for investors? The head of one of Europe’s biggest pension funds says ‘oui’.

After months of preparation followed by two weeks of discussions and negotiations in Paris, an agreement was signed by the parties involved in COP21.
Is it a good agreement? The question is legitimate in light of previous experience and the participants’ high expectations.
First of all, everyone agreed to commit to a common aim, i.e. striving to reduce the share of global warming attributable to human activity. This time, the largest greenhouse gas emitters signed a “binding” agreement, which was made possible by recognising the need for a differentiated approach and accepting an obligation to mobilise at least $100bn worth of financing every year for the benefit of emerging countries.
The other main reason for satisfaction is the desire shown by those present to push beyond the target of an increase of no more than 2 degrees, and to pursue their best efforts to limit it to 1.5 degrees.
As the undertakings given by the signatories are not sufficient at this stage to meet the initial target, it was agreed that further meetings should be held at regular intervals (once every 5 years) with a view to ensuring that the undertakings given or renewed, or the progress made both by virtue of the policies adopted and of the technology implemented, will enable us to stay on the right path.
Needless to say, some people will say that this is not enough…more needs to be done!
If we look at the fact that no carbon-pricing deal has yet been agreed, we can only agree with the position expressed by US President Barack Obama in his press conference: “It is a perfect example of market failure”. On the other hand, while it is true that carbon-pricing will be a major factor in redirecting investment flows towards a “low-carbon” economy and thus speeding up the transition, it is equally true that COP21 was never intended to fix such a price. Consequently, we can only express delight at the highly incentivising nature of the reference to carbon pricing in point 137 of the agreement, which “also recognises the important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing”. We should note too that in his COP21 closing speech, French President François Hollande “[promised] to form a coalition to secure a carbon price that will ensure that investments can be redirected.”
Likewise, we hope that governments will make sure that they reduce the subsidies that continue to underpin fossil fuel consumption instead of just encouraging a switch to renewable energies, wherever this goal can be achieved under reasonable economic conditions.
In particular, COP21 sceptics must appreciate the fact that if we only look at what is happening on the surface, then we miss the point. The main thing is that businesses and institutional investors have already embarked on the transition. It may not yet be apparent but the change hasbegun. Even if it is beneath the surface, it is nonetheless very powerful, and nothing will stop it now.
A great many companies have already adopted an in-house carbon price. The most far-sighted of them can clearly see that the transition is also an opportunity to be grasped. Many of them are reconsidering their business model with a view to enhancing their energy efficiency and even switching to the economics of functionality (selling the function of the product rather than the product itself).
Times are changing for institutional investors too. Since the publication last year of the Risky Business Report, signed jointly by Michael Bloomberg, Hank Paulson and Tom Steyer, nobody can claim any longer to be unaware of the fact that climate change poses a risk to the value of their assets. If only for the purpose of abiding by their fiduciary duty, institutional investors must now measure this risk. It was this finding that prompted ERAFP to calculate the carbon footprint of its own shares portfolio for the first time, two years ago. And this same conviction that “you can’t manage what you can’t measure” prompted the French Parliament to adopt the Law on Energy Transition to Promote Environmentally-Friendly Growth (law n° 2015-992 of 17 August 2015). Article 173 of this law calls upon investors and businesses to publish information so that an evaluation can be made of the extent of their exposure to climate change, and of their strategy for managing its impact on their activity. Similarly, the initiative embarked upon by the Governor of the Bank of England, Mark Carney to bring in Bloomberg to chair the Financial Stability Board’s (FSB) new industry-led disclosure taskforce on climate-related financial risk will increase the transparency levels linked to companies’ performance in the area of carbon emissions.
In conclusion, COP21 marks a turning point. As a member of the Institutional Investors Group on Climate Change, a group of 120 institutional investors, mostly pension funds, in charge of €13trn in assets, ERAFP can confirm that institutional investors welcome the agreement. The framework is being put in place. It is now up to everyone who forms part of this framework to do everything in their power, and in many cases as part of their fiduciary duty, to ensure that it is properly implemented and achieves its full impact. ERAFP will pursue and intensify its own efforts with determination. In association with ShareAction, ERAFP has just launched the RE100 initiative for companies to change over to 100% renewable energy within as short a timeframe as possible. The signatories include several heavyweights: Procter & Gamble, Google, Microsoft, BMW and La Poste [the French Post Office]. Let us hope that many more companies will join them.
If they still harbour any doubts, they would do well to reflect on Al Gore’s words: “Change takes more time to happen than you think but then happens much faster than you thought”.
Philippe Desfossés is CEO at ERAFP, the €20bn Paris-based French Public Service Additional Pension Scheme.