G7 agreement shows benefits of engaging policymakers

Fiona Reynolds, managing director at the Principles for Responsible Investment (PRI) discusses why it’s in everyone’s interests for more investor voices to be heard between now and November before the world’s nations converge at COP21 in Paris.

The announcement that the G7 leading industrial nations have agreed to cut greenhouse gases by phasing out the use of fossil fuels by 2100 has been welcomed by climate campaigners and policymakers as an historic move.

In a 17-page communique issued after the summit under the slogan Think Ahead, Act Together, the leaders also agreed to back IPCC recommendations, to reduce global greenhouse gas emissions at the upper end of a range of 40 to 70 per cent by 2050, using 2010 as the baseline.

The G7 also announced that they were committed to raising $100 billion in annual climate financing by 2020 from public and private sources.

While announcement of the goals to cut carbon emissions and be carbon free by 2100 is non-binding, for long term institutional investors it is a signal among many that climate and carbon risks can’t be ignored.

Institutional investors must not let the 85-year window for eliminating fossil fuels blind us to the fact that action is needed now.

As Christiana Figueres, executive secretary of the United Nations Framework Convention on Climate Change, noted at last year’s PRI in Person in Montreal, we cannot let Paris become another Copenhagen.

If we lose this year’s opportunity at COP 21 to get an agreement on climate change, we may never get another one.

We also need to be mindful that the commitment of these seven industrialised nations isn’t the only thing that needs to happen in order to prevent a temperature increase past 2°C and the volatile effects of climate change that the scenarios forecast will come with it.

Combined, the United States, France, Canada, Germany, Japan, and Great Britain emit roughly the same amount of carbon per year as China does, according to data from the World Bank.

That’s why, regardless of the G7’s commitment, efforts to slow then stabilise emissions growth in in China and India — another major emitter — will be essential to transitioning to a low carbon world.

An historic agreement reached last year between China and the US to cooperate on emission reduction was another development in bringing a closer alignment between the world’s two biggest polluters President Obama pledged to cut US greenhouse gas emissions 26-28 per cent below 2005 levels by 2025 while President Xi announced targets to peak carbon dioxide emissions around 2030—with the intention to peak sooner—and to increase China’s non-fossil fuel share of energy to around 20 percent by 2030.

Policymakers are feeling increased pressure to act on climate change.

Financial regulators have begun to think through the potential impact of stranded assets. Finance ministers are being questioned over the extensive cost of fossil fuel subsidies following IMF reports that pre-tax consumer and produce subsidies totalled $541 billion in 2013.

And economic studies continue to point to the transformational opportunities offered by carbon and other environmental taxes that price negative externalities.

Several sovereign wealth funds are becoming increasingly sensitive not just to the financial risks posed by exposure to fossil fuel investments, but also to the potential behind offered by increased exposure to clean energy, clean technology and seeking sustainability innovations up and down supply chains.

Slowly but increasingly central bankers, finance ministers, regulators and some long-term investors are beginning to understand that incorporating measures designed to tackle climate change into their thinking is a core part of their collective responsibility to ensure a stable and robust global financial system.

But more still needs to be done.

Investor voices must be louder in supporting basic reform measures like carbon pricing and in challenging the political and corporate roadblocks still in place.

Governments and policy makers must be both urged and then actively supported in putting in place the new global frameworks and resisting the intense lobby efforts in support of the status quo.

Recently, the PRI, in collaboration with the IIGCC, Asia Investors Group on Climate Change, Investor Group on Climate Change and Investor Network on Climate Risk coordinated correspondence to G7 finance ministers, calling on them to support:

1. A long-term global emissions reduction goal in the Paris agreement;
2. The submission of short to medium-term national emissions pledges and country level action plans.

The letter was signed by more than 100 asset owners and investment managers including CalPERS, CalSTRS, Calvert Investments, AustralianSuper, Boston Common Asset Management, Harvard Management Company, the University of California, Robeco, and the Wellcome Trust and LAPF to name a few.

PRI will continue working with international climate groups to put pressure on policymakers to take decisive action on climate in the run-up to COP 21 in Paris.

As set out in our guidance paper The case for investor engagement in policy investors have a key role to play to commit, construct, clarify, collaborate and communicate on key policy issues.

It’s in all our interests for more investor voices to be heard between now and November before the world’s nations converge at COP21 in Paris.

Martin Skancke, chair of PRI advisory council and chair of the expert group on investments in coal and petroleum companies, appointed by the Norwegian Ministry of Finance will be among the panellists talking about climate change and institutional investors at the Fiduciary Investors Symposium at Chicago Booth School of Business from October 18-20.