Cover story: Frozen at 2 degrees

Published: February 3, 2016

After 12 days of intense debate world leaders succeeded in agreeing a new accord to tackle climate change. 

If there is one true measure of the success of the climate summit in Paris for investors and businesses, it is whether they are now more likely to make money from a fuel cell or a solar farm than from a diesel engine or a coalmine.

The goal of moving from a high carbon world based on fossil fuel production to one where economic growth is based on clean, renewable energy and low carbon emissions will only happen if companies and financiers are prepared to risk their money on low carbon ventures.

Policymakers, investors and innovators who gathered at the Sustainable Investment Forum (SIF) held a mile from the summit venue of Le Bourget, were cautiously optimistic that the world was moving towards a tipping point for a low carbon future.

Achim Steiner, executive director of UNEP, the United Nations’ green arm, said there was a fundamental shift going on. “Over the next 10 years the world’s financial system will be significantly changed,” he said.

“Not by the traditional centres of financial transactions such as the London and New York stock exchanges but by a rethinking of how financial systems will work.”

While these predictions have long been made even as trillions of dollars continue to pour into high carbon investments, there are signs of movement.

The Chinese central bank has embarked on a review of green finance to meet a goal of the US$300bn a year needed to fund a transformation to low carbon of which only 15%-20% will come from public finance, Steiner said.

“This is why China has initiated one of the most systematic, ambitious efforts to rethink how capital markets can be incentivised to accelerate the scaling up of green finance facilities.”

UNEP itself has seen its collaboration with investors, the Portfolio Decarbonisation Coalition, which aimed to mobilise US$100bn by the time of Paris had already surpassed US$270bn and was on track to hit US$350bn by year-end. “We are looking at a world economy that is shifting quickly in the energy, finance and mobility sector.”

At the other end of the spectrum investors are starting to move funds out of fossil fuels amid mounting concern over the assets they hold that will be left “stranded” if climate regulations bite (see story on page 28).

Investment shift

But the amount of money specifically devoted to what investment managers call environmental, social and governance (ESG) activities is still small.

Deutsche Bank estimates total financial assets are worth US$294tr. The wealth held by banks alone amounts to US$135tr while financial investors hold some US$100tr. The sustainable investment market is now worth some US$21.4tr. 

Worryingly, analysis by the 2°Investing Initiative shows that the MSCI world equity index is overinvested by more than 11% each in engine vehicles, gas supply and oil supply if the 2° target is to be hit, and is under-invested in renewables by 35%.

Fund manager Northern Trust has US$55.5bn of ESG funds under management out of a total portfolio of US$886bn. Its green portfolio has tripled in size over the last four years. “ESG is becoming mainstream,” said Mamadou-Abou Sarr, Northern Trust’s Global Head of ESG.

While most is held in index funds, a portion is made up of portfolios of listed equities that must pass both a quality and an ESG screen. It targets returns of 200-300 basis points annualised (2%-3%) above the benchmark MCSI world index.

“The way investors measure success in the ESG field is slightly different,” said Sarr. “We are trying to achieve a double bottom line — to do good, and do well. If it is a low carbon fund, investors will ask about carbon mitigation and also about performance so you have two sets of conversations.

“But they should not be decoupled. You should be able to provide investors with tools that provide a great portfolio from an investment standpoint that is also mindful of ESG issues.”

He was upbeat about the outlook for investment saying a legally binding agreement would give a push but that the pull was already coming from asset managers regardless of the outcome. 

There is no shortage of innovative ideas becoming commercial reality. On display at SIF15 were Taiwanese Gogoro’s battery-powered Smartscooter, a plant-based burger from Impossible Foods of the US and the breathtaking SkyMining concept by CarbonWealth of Sweden that aims to mine pure carbon straight out of the atmosphere and turn it into a clean and renewable fuel.

A new of doing things

Back on terra firma, there are also growing hopes that developing countries can leapfrog high carbon technologies which may provide some of the most positive investment opportunities and contributions to emissions reduction.
The population of Africa is forecast to grow from 1 billion now to 2 billion in 2050, which has fuelled fears of a surge in demand for energy and in economic growth that will bust any given carbon budget.

However, as UNEP’s Steiner pointed out, half of Kenya’s electricity needs are already met by geothermal energy while 120MW wind farms are being built in Ethiopia.

“We are talking about technologies that are available in the market place and, yes, they face a steep cost curve and the challenge of moving from the opportunity of electrical sustainability to making a mass market product.”

Kenya, which pioneered mobile money transmission through the success of M-Pesa, is now at the forefront of the challenge of powering the growing number of phones.

A new business model has emerged that is making solar products affordable to low-income households on a pay-per-use instalment plan for customers who are not on the electricity grid.

Households buy the solar panel from a company called M-Kopa, pay a small deposit and then purchase daily usage “credits” for $0.45 via M-Pesa, or less than the price of traditional kerosene lighting. After a year of payments customers own their solar systems outright.

Pundits and participants at the SIF and COP21 agree that the best policy innovation that could come out of Paris is for rich countries to talk to their poorer counterparts.

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