With the dust settling after the UN Climate Summit it is time to assess what was achieved and what it means for investors.
Firstly, one thing is clear: the climate summit was a success. The Secretary General Ban Ki-moon should be commended for his vision and ability to convene so many presidents, prime ministers, ministers, and CEOs. And for ensuring that the New York climate march, which attracted around 400,000 people, was a vital contribution to the proceedings, not in opposition to the discussions being held by business and politicians. There was sense that we are all truly in this together.
And the sense of urgency was palpable, with many speakers reiterating that procrastination is not an option. Contributions and pledges from governments and the private sector ranged from $10m to $1bn. For the financial sector, the announcement of an initiative to publish the carbon footprint of $500bn of assets and to decarbonize $100bn assets should be heralded as significant.
All this said, one cannot help feel a little bit worried. The government pledges to capitalize funds and deliver financing brought on a strange feeling of “déjà vu.”
How will governments that are already short on cash finance those commitments? Will they simply recycle existing credits, which means no new money? Or will they really be able to beef up their current effort? Bearing in mind that recycling is not inherently ineffective if the money is being reallocated more sensibly. In any case, even if public accounts were in better shape, it is questionable how much money governments could realistically mobilize.
But there is real money waiting to be put to work to finance the transition towards a less carbon intensive economy. And this money is managed by pension funds. Pension fund money is by definition long-term money, and long-term money is what the climate challenge needs. And as long-term money, it is surely wise to identify, assess and mitigate the long-term risks that could hamper your ability to pay the benefits you promised to pay.
If carbon is a risk, which seems hard to deny, how can we as responsible investors of pension fund capital respect our fiduciary duty if we don’t take the necessary steps to reduce that risk? And then, having measured the risk, we don’t communicate it to our stakeholders?Making a start by asking public sector pension funds to communicate the carbon footprint of their investments would be a significant first step, and reflect the determination of public bodies to lead by example.
Which is why ERAFP has signed the Montreal Pledge, which commits pension fund signatories to measure and communicate their carbon footprint.
Once portfolio carbon footprints have been published, other funds will find it more difficult to justify inaction. Will they be able, beyond the short term, to claim that carbon is not a risk? Or that it is a risk that does not justify communicating to beneficiaries?
But a carbon footprint is only a start. The subsequent challenge is to tilt portfolios to reduce their carbon intensity.
This is why ERAFP has announced that it will begin decarbonising a $1bn European stocks mandate currently run by Amundi. And in order to speed up the process to extend this tilt to our whole stocks portfolio and further to other asset classes, ERAFP will be taking a number of other steps. These include developing cooperation with like-minded pension funds such as AP4 which has been a pioneer in this space, joining the Carbon Pricing Leadership Coalition launched under the umbrella of the World Bank, and participating in IIGCC working groups.
The investor voice on climate has been heard clearly in recent weeks. It is crucial that this momentum continues and the pension fund community continues to step up and make real progress on carbon and climate risk.
And there are opportunities for real progress. The development of benchmarks which are consistent with a 2 degree maximum temperature rise by 2050 is an opportunity for owners and managers alike. Joining organisations like IIGCC, which facilitate learning, best practice and policy engagement can also make a real difference. And getting policy right is critical. Only by establishing the right framework, including a price on carbon, binding targets for emission reductions, energy efficiency and renewable energy, will pension funds be able to make a full contribution to investment in a low carbon economy.
Philippe Desfossés is CEO at ERAFP, the €20bn Paris-based French Public Service Additional Pension Scheme.