RI Interview: Nicholas Stern – Investors must see the economic growth in fixing climate change

The world renowned climate economist talks to RI about portfolio decarbonisation, stranded assets and green bonds.

The carbon bubble appears to be getting attention from oil majors on the back of successful shareholder resolutions such as Aiming for A that has seen them back further disclosure of CO2 emissions. Less than 10 days after Paris Climate Week, BG Group plc, BP plc, Eni S.p.A., Royal Dutch Shell plc, Statoil ASA and Total SA, today (June 1), called on governments to introduce a global carbon price as part of the United Nations Framework Convention on Climate Change (UNFCCC) and create stable policy frameworks. Notably, the oil companies said carbon pricing would figure in their future engagement with investors.

Nicholas Stern has helped bring many of these issues to the fore. Stern has many titles: Lord (he was made Baron Stern of Brentford in 2007), Professor, Chairman of the Grantham Research Institute on Climate Change and the Environment, President of the British Academy, Fellow of the Royal Society…
But in the investment world, he is probably best known as the former Chief Economist and Senior Vice President at the World Bank and the Head of the Stern Review on the Economics of Climate Change, published in 2006.
Stern spoke with RI at the recent Climate Finance Day in Paris, ahead of the forthcoming update of the annual synthesis report: Better Growth, Better Climate, to be released in September. Stern is part of the heavyweight Global Commission on the Economy and Climate that authors the report. This is made up of 24 former heads of government and finance ministers, and leaders of businesses, cities, international organisations, and research institutions.
It’s noticeable that the Commission weights economic growth equally alongside climate change. Stern, one of the most prominent economists to put an economic price on eco-damage is a strong advocate of positive money solutions to the climate problem, as evidenced in his most recent book: “Why are We Waiting? The Logic, Urgency and Promise of Tackling Climate Change”. He tells RI that investors and the public must understand that there is no trade off between growth and climate fixes: “It is important that investors see the potential in less wasteful land and agriculture use, air pollution solutions, clean and efficient energy: new technology. They can all save money and promote strong growth and emissions reductions, particularly in developing countries.”
Among other headline findings, last year’s Better Growth, Better Climate report said the rapidly falling costs, particularly of wind and solar power, could leadrenewable and other low-carbon energy sources to account for more than half of all new electricity generation over the next 15 years.
“That’s a $6 trillion economic transfer towards renewables, although we still need to get the incentives right for the market move. No investor should be ignoring that.”
On the flip side, Stern points out that while subsidies for clean energy amount to around US$100bn, subsidies to polluting fossil fuels are now estimated at around US$600bn per year. He argues that phasing out fossil fuel subsidies could improve growth and release resources that could be reallocated to benefit people on low incomes.
He applauds the fossil fuel divestment movement for putting the issue firmly in the public eye. But he adds that other initiatives such as investor decarbonisation are equally important: “What we are seeing from investors at the moment is excellent, especially the $100bn commitment made by the Portfolio Decarbonisation Coalition.” Stern is laudatory about the work that AP4, the Swedish state pensions buffer fund has been doing on low carbon indexing: “I think what Mats Andersson (AP4 CEO) is doing is remarkable.”
Stern is equally up with the trend in green bonds: the Grantham Institute is working on a Green Securitisation policy paper in collaboration with the Climate Bonds Initiative.
And he is fulsome in his praise of the Unburnable Carbon reports on C02 budgets and stranded assets produced by Carbon Tracker, the London-based financial NGO, for which he has been banging the drum.
“They are demonstrating what keeping to a 2 degrees climate rise means economically. The research shows that we need to leave two thirds of hydrocarbons in the ground unburned so as not to breach a two-degree temperature rise. We’ve heard today about technology developments such as CCS and the potential for investment. The question is whether we have the wisdom to start putting the incentives in place to hasten their arrival.”
He notes that the discussions to take place at COP21 in Paris in December this year are already predicated on commitments commensurate to a world of a 3.5 degree temperature rise, meaning they need to be a baseline to much greater efforts in areas such as green infrastructure and agriculture investment in the coming 20 years: “Paris is a floor, and the developed world needs to start doing much more low carbon technology transfer to the developing world thereafter.”