It’s vital institutional investors are included for financing a low carbon future

With Europe and the US striving to avert the most severe economic downturn in decades, reform which stimulates investment in climate change solutions and transforms energy provision could be a key component in providing the basis for long-term sustainable growth.
Earlier this month the largest-ever group of investors, including a large number of pension funds, called for political leadership on climate and energy policy in order to progress the transition to a low carbon future.
The 285 investors who signed the 2011 Global Investor Statement on Climate Change, a group with combined assets under management of $20 trillion, said that investment grade climate and energy policy will not only lower the long-term climate –related risks to the global economy, but will help to yield substantial economic benefits, including the creation of new jobs, businesses and innovation.
It has been clear for some time now that without supportive policy frameworks which help shift the risk/return balance in favour of low-carbon technologies, governments will fail to attract investment at the scale required to meet the internationally agreed 2 degree temperature rise target.
The investment need is substantial. The International Energy Agency estimates that some $500bn per year in cleaner energy investment and spending, in addition to the commitments that have already been made by governments, will be needed to meet the climate challenge and avert the worst effects of climate change.Other estimates have suggested the private sector will need to provide by far the largest share of this capital at around 85%
The clean energy investment gap is leading to missed opportunities to improve energy security, create jobs and stimulate of innovation. While this gap reflects the relative immaturity of climate change policy frameworks in some countries and the limitations in the design and implementation of these policies, it also, in part, reflects the lack of attention paid to the needs and interests of institutional investors when designing and implementing climate change policy. For private investors, financing climate change solutions cannot be an exercise in altruism. The universe of products and assets competing for investor capital is extensive and policy frameworks must create clear incentives for investment and minimise long-term policy risks.
Policy risk is commonly identified by investors as the major factor in determining low-carbon investments in the energy sector. Countries that have attracted the most investment in low-carbon technologies, renewable energy and energy efficiency have been those that have provided long-term regulatory certainty and targeted incentives associated with those investments. This underscores the critical nature of well-designed and sustainable policy frameworks which shift price signals in favour of investment in low-carbon assets and away from fossil-fuel intensive investment. To be successful and stimulate investment in the right areas, these

frameworks should take into account the long-term and often illiquid nature of investments in areas such as infrastructure and power generation, and provide appropriate price signals. Conversely, changing policy once it has been agreed is highly damaging. The chilling effect on investor activity when the rules of the game are suddenly changed has been evident in a number of cases recently. Retroactive policy changes have caused many investors to put on hold, in some cases indefinitely, their review of clean energy investment opportunities. When retroactive policy changes occur, investors are inclined to review clean energy investment plans, not just in the country where changes have occurred, but across the board.
Whilst credible domestic and regional legislation is the key determinant of investment flows into clean energy, investors also want to see progress at international level. With many commitments made by governments contingent on similar action in other countries, a rules-based international climate regime would increase investor confidence that policymakers are serious about their domestic commitments. Any international agreement should support the development of robust carbon markets and a strong, sustained carbon price. Assigning a relatively high price to carbon sends a clear signal to companies and investors that reducing greenhouse gas emissions is a policy priority. Carbonmarkets also offer opportunities for companies to identify the most cost-efficient options to meet emissions reduction targets.

While some progress has been made on establishing carbon markets, with Australia recently introducing a carbon levy and China reportedly indicating that they are considering an emissions trading scheme, many developing nations have not developed a plan to manage carbon output, and are unlikely to act unilaterally, or even on a regional basis. An international agreement could help to bring developing economies within a carbon pricing scheme.
Ahead of the next round of climate negotiations in Durban, South Africa, in December, the investment community will be looking for signs of progress on binding targets, climate finance and trading mechanisms that includes all major emitters and sets short, mid, and long-term greenhouse gas emission reduction targets.
The record number of signatories to the 2011 Statement suggests that far from losing momentum, climate and energy policy is still a key concern for many investors. The right policy frameworks could boost private investment in renewable technologies which help the transition to a low-carbon economy, while providing a robust foundation for economic recovery.
Stephanie Pfeifer is Executive Director of the Institutional Investors Group on Climate Change (IIGCC)