Since the failure of world leaders to agree a legally binding climate deal in Copenhagen in 2009, the effectiveness of the United Nations’ climate diplomacy process has often been called into question. However when world leaders, civil society and the private sector convened in New York last week, there was a palpable sense that this time things could be different.
This was attributable to the UN Secretary-General’s explicit departure from the usual diplomats-only process towards a more inclusive approach, bringing in a fuller range of participants. In particular, the Secretary-General wanted to see businesses and investors step up and demonstrate leadership on climate. And this call was largely answered.
A range of actions were announced on the day, not least a call by 350 institutional investors worth $24trn for carbon pricing and an end to fossil fuel subsidies – the largest of its kind to date, but also a $500bn carbon foot-printing and portfolio decarbonisation initiative, a commitment by commercial banks to issue $30bn of green bonds by 2015, and an announcement by three major investors – APG, PensionDanmark and CalSTRS – declaring their ambition to accelerate their investments in low carbon assets to a combined $31bn by 2020.
These actions were bold and grounded in the financial reality of climate change. It is clear that a larger number of investors than ever before understand that climate change will have a material impact on their assets. From physical impacts and insurance costs to energy and resource security, climate change will not spare investor portfolios.
And once an investor has accepted a risk exists, the next step is plotting a response. And the initiatives showcased in New York demonstrated that investors are acting.
Alongside the investor statement organised by the regional investor networks (IIGCC, AIGCC, IGCC and Ceres/INCR) as well as UNEP FI and PRI, a report was published looking at finance sector leadership on climate, which focused on the practical actions investors are already taking.
Examples range from the establishment of dedicated low carbon index funds which tilt portfolios away fromhigh carbon assets, to company engagement initiatives, carbon foot-printing of portfolios to investment in low carbon assets and renewables.
For governments, scaling up this direct investment is the imperative. In a world of constrained public finances, governments are looking to the private sector to provide the bulk of financing for renewables and other low carbon energy infrastructure. The IEA has estimated that an additional $1trn of investment in clean energy is needed every year to transition to a low carbon economy and avoid dangerous climate change.
And there is no shortage of investors who are supporting this transition by financing renewable and low carbon projects. A few examples from Europe include PensionDanmark, which has a large low carbon asset allocation and a goal to increase this to 10%; the Environment Agency Pension Fund, which has a target of a 25% allocation to companies which make a positive contribution to a low carbon economy and Danish pension fund PKA targeting an additional €1.5bn in wind farms by the end of next year alone. Investors are demonstrating that where conditions are right, they are investing.
But investors have always been clear – a scaling up of current investment levels can only happen with strong policy frameworks in place, including a meaningful price on carbon. Get this right and investors can protect and grow their portfolios by expanding their low carbon allocations as well as assist the shift to an economy driven by low carbon energy sources.
The investor initiatives and announcements unveiled in New York were significant. They showed that institutional investors are willing and able to step up and act on climate. The key now is to build on this progress and turn it into mainstream action. By putting the right policies in place and agreeing an ambitious global climate deal in Paris next year, governments can help investors scale up their contributions to a low carbon world.
Stephanie Pfeifer is Chief Executive of the Institutional Investors Group on Climate Change.