Climate agreement marks turning point

Days of intense negotiations at the long-awaited COP21 meeting in Paris have seen a definitive agreement emerge on climate change. Delegates from almost 200 countries voted to endorse the first universal, legally binding effort to tackle global warming. Fiona Reynolds, managing director of PRI, was there.

The deal commits countries to try to keep global temperature rises “well below” 2 degrees Centigrade, the level that is necessary in order to mitigate the most devastating effects of climate change. It also requires developed nations to continue providing funding for poorer countries as they struggle to create new low emission intensity growth paths.

While we hail the new climate agreement as a breakthrough that many people have been working towards, we need to remember that it’s a beginning and not an end in itself.

But the deal must be seen as a foundation for action; that is, a signal to global financial markets, triggering a transition from investment in coal, oil and gas as primary energy sources to zero-carbon energy sources like wind, solar and nuclear.

The agreement requires countries to reconvene every five years starting in 2020 to publicly report on their progress in cutting emissions compared with their original plans. The investor voice must support this process.

The PRI welcomed the general recognition by all stakeholders of the pivotal role of private finance in achieving INDCs (country-level plans) and emissions reduction goals. This acknowledgment will give additional encouragement to institutional investors, both asset owners and managers.

One factor that made this year’s COP21 different was investors finding their voice earlier in 2015 and seizing the initiative on climate issues. The Global Investor Statement on Climate Change was signed by over 400 investors representing $24 trillion AUM. A coalition of 25 institutional investors with over £45 billion ($67 billion) AUM called on nine publicly listed companies to review their membership of lobbying groups that seek to undermine EU climate policy.

BHP Billiton, BP, EDF, Glencore, Johnson Matthey, Proctor and Gamble, Rio Tinto, Statoil and Total are companies whose professed climate policies are undermined in the eyes of some investors by their membership of lobby groups with a track record of obstruction on climate-change policy. The post-Paris spotlight is now firmly on those boards to publicly resolve this fundamental contradiction.

While the agreement places commitments on governments and sets further timetables, investors are not passively waiting for 2020. They are already taking action to measure their carbon exposure through the PRI Montreal Carbon Pledge, signed by over 120 investors, as well as taking steps to decarbonise their portfolios.

Investors are also making commitments to low-carbon, climate-resilient and green investment opportunities.

Leading PRI signatories are actively engaging with companies on business planning around the transition to a low-carbon economy, future investment opportunities and full transparency around political and climate lobbying activities.

Many of our signatories, including Allianz, AXA, Caisse des Depots, CalPERS, Old Mutual and HESTA pension fund, have already taken a stance on climate finance and carbon risk issues. The PRI is working across its membership base to deepen investor awareness and understanding of climate issues and to formulate responses to key climate finance questions. To that end, the PRI, together with other organisations, has launched a new Green Infrastructure Coalition to mobilise capital to meet the growing need for climate-resilient infrastructure development that supports INDCs and global targets. The Paris Climate Agreement now gives investors further impetus to act.

Clearly, the finance community has emerged as a formidable partner in the climate-change dialogue. In addition to highlighting the threats from climate changes, investors also have a chance to take the new commercial opportunities that climate change presents, from clean energy initiatives to new infrastructure and advanced technologies to help mitigate pollution, build resiliency and limit human impact on the environment – all the while creating new markets, jobs and export opportunities. Investors that think long term will benefit from these new initiatives.

Finally, PRI congratulates the various parties, and in particular the French Government, the UN and the UNFCCC led by Executive Secretary Christiana Figueres, on their leadership and commitment to a successful COP21 outcome. Well done.

It is now up to asset owners and managers, the universal investors, to work with governments and other stakeholders and ensure that the agreement becomes a reality in the coming years and that the next agreement is even stronger.