Climate expert Lord Stern backs AP4-style de-carbonisation but rejects straight divestment

Leading economist presents to Bank of England seminar

Leading climate economist Professor Lord Nicholas Stern has backed Swedish buffer fund AP4’s de-carbonization strategy but sees straight fossil fuel divestment as a “blunderbuss”.

Stern is Chair of the Grantham Research Institute at the London School of Economics and was adviser to the UK Government on the Economics of Climate Change and Development, where he was Head of the Stern Review on the Economics of Climate Change.

He was speaking at Bank of England research event, in a session on climate change. The central bank was unveiling its new One Bank Research Agenda – an ambitious project aimed at transforming the central bank’s research process.

The BoE has developed five core themes to guide its research, one of which is the central bank’s response to fundamental technological; institutional; societal and environmental change such as ageing populations; crypto-currencies and climate change.

During questions, Stern was asked about the burgeoning green bond market. In his answer, he referred to Swedish buffer fund AP4, which is developing a low-carbon strategy for its portfolio, and criticized straight divestment.

AP4 (Fjärde AP-fonden) has developed a strategy where it underweights high carbon assets. “It’s an intelligent way of motivating behavior than directly divesting out of oil,” said Lord Stern. “Divesting out of oil is a bit like a blunderbuss, it doesn’t give any incentives for companies.

“With the AP4 way you get incentives from companies in industry to perform better. AP4 has found that performance has improved in straight vanilla finance.”There were opportunities in following AP4 if it was designed “wisely and in the right way”; there were “ways to do it that gives incentives to firms.”

Each theme was discussed at the event yesterday, with a specific focus on the sub-theme of climate change tackled by Lord Stern. He warned the audience that if the world were to keep global temperatures under 2 degrees alongside a rising, more city-based population in the future, then investment was necessary to make emerging cities’ infrastructure less congested and polluted.

“How can we mobilize finance to make it easier to do clean investments?” he asked. “We can’t get investments through public investment, we have to look at the role of development banks and the private sector being enhanced through well-defined research questions.”

Lord Stern was the World Bank chief economist in 2000-2003 and noted he had a good knowledge of development banks. He said their involvement with the private sector in infrastructure investment lowered risk.

Lord Stern also said pension funds should see interest in this area as a long-term investment in infrastructure matched their liabilities, saying: “There is scope for central banks to explore those who help foster ways to help the investment structure I’ve described.”

Lord Stern also praised Bank of England Governor Mark Carney for his letter last summer to Joan Walley MP, chair of the UK’s environmental audit committee, in which he promised to “deepen and widen” the inquiry into the topic of stranded assets. Link to archived BoE webcast.