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Hugh Wheelan, Responsible Investor: Christiana, earlier this year in New York you called on investors to move out of high-carbon assets and into assets built on renewable energy, energy efficiency and more sustainable ways of business that green global supply chains. Why do you think this is not yet happening, and what can be done to lever this capital?
Christiana Figueres: I think it’s happening but not quickly enough. Why? I think there is a perception that fossil fuel investments continue to be more profitable and less risky than clean technology. That I think is rapidly being proved wrong. The launch today of the new Carbon Tracker Report shows that in the oil industry there are projects intended for large capital investment that are actually becoming far too expensive because of geographical/physical location constraints and a regulatory environment that is seriously impacting profit margins. Another issue is the underestimation of the power and the speed of policy development. I think there is a perception that policy is moving at a very slow pace. I wish it were moving faster, but the direction of movement is very clear: governments have been steadily progressing towards a low carbon agreement over the past three to four years, and will come to a draft agreement ‘THIS YEAR’ in December, and next year a full agreement! We are not talking about ten years from now. I think people need to be much more realistic about international policy. In addition to that, I think there is a total ignorance of national policy development where we already have 500 climate change laws in 60% of countries covering 80% of emissions… so this is actually happening!
To date, many investors have been hiding their heads in the sand, but they won’t be able to in the very near future.Hugh Wheelan: Isn’t it the case that investors know when policy is impacting on pricing…but they don’t believe the regulation is tough enough at present, or that the politicians will get serious.
Christiana Figueres: Investors are not taking this seriously enough at present, for sure. But, it is telling that all of the oil and gas companies in their internal planning do have a shadow price for carbon. If that were not the case then one would say they have absolutely no knowledge of impending policy changes. But the point is that they do, and it’s anywhere between €60-80 per tonne: way above the current market price! So they are at least implicitly recognizing that either policy or physics is going to catch up with them, and it’ll most likely be both that will determine a major shift in investment!
Hugh Wheelan: How have the findings of this week’s US National Climate Assessment helped push forward the debate
Christiana Figueres: Actually in the past week we’ve had three major announcements coming out of the US. One was the government’s National Climate Assessment saying that ‘all’ areas of the US are being affected by climate change. Then, last week we had the US Supreme Court ruling that the government can regulate emissions from coal-fired power stations, and the Environmental Protection Agency (EPA) is on track to do so. And Stanford University has just announced that its $18.7bn endowment won’t make any more direct investments in coal mining companies and will sell off its existing holdings. That’s three major developments coming out of the US from three different sources, but which actually have a lot to do with each other.
Hugh Wheelan: What is your view on the Fossil Free divestment campaign?
Christiana Figueres: It’s helpful because it is sending out a broad message. It’ s not going to change the whole of mainstream investment if it is only on the part of universities, colleges and religious organisations. But what I actually do think that is starting to influence mainstream investors are developments like FTSE creating a fossil fuel free index, with Blackrock. These are traditional, financial organisations realizing that a new day is dawning. There are also examples of pension funds like PensionDanmark divesting from fossil fuels in favor of renewables, although they are investing exclusively in Danish assets, which are pretty secure because of the support from the Danish government. Perhaps, more significant is the work of the Swedish AP government pension funds coming out recently to say that they have classified a large chunk of their investment portfolio a high, medium and low carbon, and they are taking out all the high carbon companies across the world.
Hugh Wheelan: What’s your message for investors who are not very confident about the financial prospects in clean energy/renewables, etc, and who may have lost money in the past?
Christiana Figueres: I appreciate the testing of the ground that has been done by some investors and those that were willing to be pioneers. I don’t think this is pioneering ground any more. This is rapidly becoming mainstream and in fact those that are not going to move forward are going to be the disadvantaged. The investment environment is rapidly changing now and we are getting to the point where this is going to tip over and investors should be joining the bandwagon. The reports and data that we have seen on clean tech shares have shown them tipping back up again, indicating that maybe the shake out is coming to an end.
Hugh Wheelan: Can you talk about how the Green Climate Fund (whose private sector advisory board includes Torben Moger Pedersen, CEO, of PensionDanmark) could start to lever private capital alongside public climate change commitments.
Christiana Figueres: It’s in the process of being formed. May 18-21 are the dates for the next board meeting in Seoul, Korea. The board is scheduled to discuss and adopt the final design issues that are still pending for the fund to become operational.The expectation is that once that occurs then the initial capitalization can start, and there are many who are looking to the Secretary General’s summit on September 23 in New York for the first pledges of capital. That fund will play a critical role in two respects:
1. It has become the political testing role of confidence between developed and developing countries on both sides. For developing countries it is that industrialised countries will make capital available, and for developed countries that the capital is allocated to high impact opportunities with a lot of transparency.
2. From a financial perspective, it’s a very interesting instrument because it will channel a great part of the public funding that will become available from now until 2020, which has a target of $100bn per annum starting in 2020.
Most of this will go through the Green Climate Fund (GCF), but not all of it. Public funding will have to play two roles: one is allocating to market failures where private capital will simply never be able to reach, such as some adaptation measures. The second is that it will also have to be strategically used to leverage or to de-risk much higher levels of private funding; somewhat like the CIF funds of the World Bank, the private capital funds that are currently levering a 1-7 ratio of public (multi-lateral money)/private capital.
That’s an exciting role for the GCF to shift major sources of capital into clean technology: structured vehicle mezzanine financing are the kinds of ways they are looking at this.
Hugh Wheelan: You made a major speech this week at St Paul’s Cathedral in London on morality, finance and climate change. How do those issues hang together for you?
Christiana Figueres: The absolutely brilliant thing about addressing climate change is that it brings so many benefits together. From a financial point of view it brings long-term financial stability. From an economic point of view it brings long-term development possibilities. From an environmental point of view it protects the planet. From a human development perspective it allows people in the developing world to have the right to truly continue their development without it being wiped out. From a technology point of view it opens up the potential for a huge number of new businesses, jobs and growth. Therefore, if all of this is understood, and on top of that you overlay the understanding that this is the right thing to do vis-a-vis our children, grandchildren and the most vulnerable populations in the world, then quite frankly what’s not to like about this? It’s a fantastic opportunity.