Donald MacDonald is chair of the Institutional Investors Group on Climate Change (IIGCC), the Europe-focused group with 120 members representing nearly €13trn, and a Trustee Director at the British Telecom Pension Scheme.
Speaking to Responsible Investor as the dust settles on the COP21 climate change agreement, MacDonald reckons it is a “really serious wake-up call” for investors.
“There are some investors looking at how climate change is going to impact their portfolios – but many have simply not done that,” he said. Given the media attention and events such as Michael Bloomberg’s taking the chair at the Financial Stability Board’s new climate disclosure taskforce, no investor could now claim to not be aware of the issues, he says.
“There’s been so much on finance and climate change at this COP that it simply cannot be ignored.” The agreement means that “everyone now clearly has a responsibility that may not have been apparent previously”.
“From a fiduciary point of view, no one in the investment world can now be unaware that they do have a fiduciary responsibility to look at and consider the impact of climate change on their portfolio and their long-term investments.”
But how can investors take the Paris text forward? “We need to look at what the opportunities are that depend on scale and whether or not you’ve got the research.
“And the advisors need to take a much more leading role in all this now, so the investment advisors need to get involved, look at the opportunities but also work with their clients to determine where the weaknesses are in the portfolio.”
MacDonald, founding chair of the Principles for Responsible Investment, reckons the debate has been helped by two things: the 2005 Freshfields report looking at fiduciary duty, ESG and institutional investors; and the work by the Climate Tracker Initiative.
“Both of those issues have come together to help frame the outcome of this and helped to frame how investors and financial institutions are going to move this forward,” he said.
The investor climate bodies such as the European focused IIGCC and its fellow groups, the Australasian IIGC and the North America INCR had significant presence at the talks: “The Australians, the North Americans and ourselves I think, made a big impact. I think we’ve helped to frame the outcome.”Asked about carbon pricing, MacDonald believes the outcome will be that the various regional carbon trading schemes will develop in terms of “content, depth and effectiveness”.
“The strengthened ambitions in terms of greenhouse gas emissions absolutely necessitates much more attention to putting a price on carbon,” he says. “The mechanisms are open for discussion.”
Paris means that the country-level ‘Intended’ Nationally Determined Contributions (INDC) climate plans now become ‘NDCs’ and MacDonald sees a role for investors here too.
“Part of our job is to discuss with the member states how those NDCs are going to be implemented. We want to get involved in the planning and we want to look at the projects we can become involved in.” The five-year review period – which investors had called for – allows the ratcheting up of ambitions “because if the outcomes don’t meet the targets, it then means we need to readdress the mechanisms”.
What this means is that it gives institutional investors the “opportunity to engage on a consistent basis” with policy makers to get the right methodology to achieve the transition to a low carbon economy. MacDonald thinks this channel between large investors (‘non-state actors’ in the jargon) and policy makers is inevitable as it’s “absolutely obvious” that public finance can’t do it on its own.
But what will be key from now on is the road from Paris: “What do we do after Paris? That’s going to be critical. We’ve got a lot of work to do with the state actors!”
On the agenda for the IIGCC are topics like reporting and improving transparency (it has been running carbon footprinting seminars). “One of the issues that has come out of this, is that there are different methodologies,” he says. “You can measure carbon in different ways. I think there will be a lot more discussion on how do we get standard reporting because we when ask corporates, when we ask our own institutions, what they’re doing in terms of carbon, there’s no point in having huge amounts of data from different sources because investors and fund managers just won’t have the time to go through all that if everything’s in unique detail.
“So I think what we need to do is try to move towards fairly standardised reporting mechanisms, which are robust and which stand up to scrutiny.
“We need to learn the lessons of the EU carbon trading allowances system and the VW diesel emissions issue: we need to make sure that the methodology is robust, stands up and is actually worth something.”